Now that the $430 million mega-merger between CB Richard Ellis and Insignia/ESG is complete, the next few months will be a critical test for thebehemoth. The biggest challenge: retaining top brokers as the firms try to integrate operations at a time of double-digit vacancies.
The numbers alone are staggering. CBRE now has more than 250 offices throughout 48 countries, not to mention almost 1 billion sq. ft. of property assignments.
To put that into perspective, if Jones Lang LaSalle and Cushman & Wakefield — the next two largest brokerages after CBRE — were to merge, CBRE would remain the dominant player in flagship markets such as New York City, Boston and Washington, D.C.
What's the payoff? When activity heats up again, these cash-cow markets will drive revenues for the firm. “CB Richard Ellis really wanted to be in New York City, and it paid an enormous price to get there,” says Manhattan-based real estate consultant Peter Pattison. He believes CBRE will have to keep former Insignia brokers in Manhattan happy — or else.
“Look at Insignia's earnings from 2002. The company lost several million dollars, and that's because all of the money goes to their brokers. Brokerages have always been founded by brokers for the benefit of brokers,” Pattison says.
Unlike Insignia, CBRE posted $18.7 million in earnings last year on revenues of $1.17 billion. Insignia realized a loss of $2.5 million on $600 million in revenues (see chart).
|Revenue||$1.17 billion||$600 million|
|Earnings||$18.7 million||-$2.5 million|
|Leasing Activity||300 million sq.ft.||75 million sq.ft.|
|Property Assignments||500 million sq.ft.||200 million sq.ft.|
|Cushman & Wakefield||Jones Lang LaSalle|
|Revenue||$725 million||$862.6 million|
|Leasing Activity||206 million sq. ft.||116 million sq. ft.|
|Property Assignments||325 million sq.ft||735 million sq.ft.|
|Sources: CB Richard Ellis, Cushman &Wakefield, Jones Lang LaSalle|
So far, defections have been limited, but competitors are salivating for any windfall of talent. Out in Seattle, for example, affiliate Kidder Matthews broke ranks with Insignia/ESG on July 3 only days before the merger. With 92 brokers, Kidder Matthews is the largest commercial brokerage in Seattle.
“We wanted to maintain our independence, and CB Richard Ellis already has an office here,” says Jeffrey Lyon, president of GVA Kidder Matthews. CBRE has a strong brokerage arm in Seattle with a total of 70 brokers, so Lyon feared that CBRE would absorb his firm. Lyon's firm joined the GVA Worldwide network only six days after dissolving ties with Insignia.
Although the Kidder Matthews split was largely due to overlap in Seattle, personnel issues could make the integration a thorny task. “Ego is an obstacle. You've got high-producing human beings here, and you cannot retain all of them because they are a fragile bunch. There will be more attrition,” predicts Lawrence Fiedler, a professor at New York University's Real Estate Institute.
With the merger still young, it's hard to predict how many top brokers will leave the new firm. But CBRE management is clearly aware of the possibility: “We've made sure that we retained the best and the brightest,” says Jim Reid, president of CBRE's eastern division.
The merger has already yielded some infrastructure advantages. According to Jeff Hipschman, senior vice president at CBRE, the firm's new CBRE intranet, run by a 26-person research team, boasts 44,000 property records in the New York metro area alone. “Our brokers can go to one place for information, which includes updates on the integration and all media on the merger,” he explains.
The new database is vast, and, according to Hipschman, brokers throughout CBRE's expanded domain are flocking to it. That's goodas the integration proceeds, but only one part of the puzzle, according to CBRE's Reid. “Ten percent of a merger is getting the transaction closed, but 90% is getting it to work.”