Struggling through the weakest investment sales and leasing environment in recent memory, commercial real estate brokerages are capitalizing on the one commodity that's in high supply: distress.

Many brokerages are seeking to provide property management, consulting and other fee-based services to troubled property owners. Some service providers also are launching new businesses.

Brokerages are ultimately trying to fix the problems of their distressed clients, whether it's by selling properties or loans, finding additional capital, or squeezing value out of buildings by enhancing operating efficiency.

How dormant is the property sales market? Some $143.6 billion in properties changed hands last year, down 71% from 2007, according to New York-based Real Capital Analytics, which tracks deals above $5 million.

What's more, the office market experienced negative absorption of nearly 45 million sq. ft. in 2008, a stark contrast from the positive absorption of 51.5 million sq. ft. the year before, according to New York-based Reis, which tracks 79 office markets nationwide.

“The players that have diversified revenue streams are better positioned to weather this storm,” says Will Marks, a brokerage analyst with JMP Securities in San Francisco. “But even those companies are cutting costs.”

Some brokerages, including heavyweight CB Richard Ellis, have even gone so far as to reduce commission splits for agents, say Marks and other industry experts. When that occurs, a brokerage house receives a bigger slice of the revenue pie on transactions while the individual brokers receive less.

Branching out

The depressed commercial property cycle and various cost-cutting measures have prompted brokers to bounce from firm to firm. Companies also are seizing the opportunity to expand their business. For example, New York-based Studley in March hired a 13-person retail team from Colliers International.

The move marks a definitive departure for Studley, which for years toiled exclusively in the office and industrial markets. The new division, which is primarily focused on Southern California, will represent retail landlords as well as tenants, and it will broker investment sales and offer development services.

The decision to launch a retail division stems from a contrarian philosophy by which Studley generally operates, says Michael Colacino, president of Studley. It's easier to attract good workers in tough times than in boom times.

The widespread distress in the retail sector also played a role in the decision, Colacino adds. As an increasing number of retailers go bankrupt and restructure, a slew of transactions and work is emerging.

Among other services, Studley intends to advise bankrupt operators on which leases to keep and renegotiate the terms for those leases. It also will work with retailers who may swoop in and buy a bankrupt competitor.

“If our competitors are slashing commissions and cutting their workforce, we're going to improve our talent pool,” says Colacino, who aims to expand the retail division into Washington, D.C., Chicago, and New York this year. “The question was where we should do it? Retail was hit first and hardest, so that's what we hit first.”

Targeting distress

Studley isn't alone in its efforts to shake up business in the gloomy climate. Increasingly brokerages are aiming to provide property management, consultation and other services to landlords and lenders under duress.

Essentially the brokerages are establishing one-stop shops that will help distressed property owners or lenders maximize asset value and execute a reasonable exit strategy.

Moreover, real estate service providers hope to win permanent property management, leasing and other real estate assignments with the eventual owners of the distressed assets.

“By being in a position of working on that asset, you have a much greater knowledge of it,” says William Krouch, CEO of Markets in the Americas region for Jones Lang LaSalle. When someone buys the asset, it's better to be in the incumbent position, he notes.

As of mid March, Jones Lang LaSalle's property receivership division was overseeing 15 retail properties that had fallen into distress. To avoid foreclosing on financially strapped properties, lenders typically ask courts to appoint receivers to manage the assets. Receivers collect rents and map out an action plan to salvage or sell the assets even as they work to stabilize the properties.

Executives with Jones Lang LaSalle's value recovery unit also have turned their attention to distressed office landlords and lenders before the properties fall into receivership. The group looks at ways to retain and attract more tenants, and it also seeks to operate the buildings more efficiently.

“Property management is probably as important as it has ever been because owners are trying to squeeze returns out of the property,” Krouch says. “And in these assets tenant retention is job one.”