As the U.S. economy erodes and leasing and investment sales stall, commercial real estate brokerages are aggressively growing their global footprint while expanding business lines.
Over the last three years, for example, commercial real estate brokerage titan CB Richard Ellis (CBRE) has shelled out $458 million to acquire 50 U.S. and international property service firms. Among its most recent moves, the Los Angeles-based company forked over a combined $78 million for Cederholm in Denmark and Eurisko in Romania, two large commercial property service firms in Central and Eastern Europe.
The combined acquisitions are expected to generate annual revenues of $631 million on average for CBRE. Added to the nearly $1 billion in additional property management and development services revenue that CBRE's 2006 acquisition of Trammell Crow has provided, the fatter top line is critical to withstanding substantial hits to lucrative investment sales and leasing fees.
In 2007, those fees accounted for 60% of CBRE's $6 billion in revenue. William Marks, an analyst with JMP Securities in San Francisco, which tracks the company, predicts investment sales and leasing revenues will plummet by 30% and 15% in 2008, respectively, or nearly $800 million.
But CBRE executives are betting that their diversification strategy will pay dividends. “Frankly, we anticipated for two years that the robust investment sales and capital markets would fall off,” says Christopher Ludeman, president of Americas brokerage for CBRE, which operates more than 300 offices worldwide, excluding affiliates.
“We've got such balance now that the impact on us will not be insignificant, but it will certainly be less than it will be for many of our able competitors,” adds Ludeman, referring to the soft economy.
Prevailing model
CBRE is hardly alone in the race to become a one-stop shop that provides property management, appraisals and valuations, supply chain analysis, market research, and a variety of other specialized services to property owners, investors and sellers worldwide.
Several giant brokerages such as Cushman & Wakefield, NAI Global, Colliers International and Jones Lang LaSalle have spent billions of dollars over this decade to diversify, while other companies have pursued growth and diversification differently (see sidebar p. 65).
Brokerage executives are betting the moves will help offset big declines in transaction fees, which typically contribute between 60% and 70% of a brokerage's revenues. As of mid-March, only $20.6 billion worth of offices, shopping centers, apartments and industrial warehouses had traded hands year-to-date.
If that tepid pace continues, property sales will most certainly fall well short of the whopping $438 billion total notched in 2007, according to Real Capital Analytics. The New York-based researcher tracks sales exceeding $5 million. Not only are sales dismal but U.S. office absorption will fall to 2.2 million sq. ft. this year from 53 million sq. ft. last year, predicts Torto Wheaton Research, a CBRE subsidiary.
Ready to pounce
Yet amid the recessionary climate, an almost ghoulish excitement has captured service provider executives. Diverse platforms, they proclaim, are custom-tailored to increase market share in bad times.
“Most companies right now are reducing services; most are cutting expenses,” says Martin Pupil, a managing director located in Irvine, working for Colliers International a global network of independently owned real estate service providers in 57 countries. “But if you've seen it coming and organized yourself accordingly, this downturn is really an opportunity to grow your business.”
Indeed, the slowing U.S. economy has translated into better prices for acquisition-minded service providers. The frothy commercial property market over the last couple of years spilled into services firms, and acquisition targets typically wanted steep premiums.
By way of example, companies asked for prices eight times EBITDA (earnings before interest, taxes, depreciation and amortization) compared with an offer of six times EBITDA, Ludeman explains. But in the past 90 days, he says, pricing has dropped 20% to 30%.
Brokerage executives haven't slowed their march into international markets either. Even while investment activity in the United Kingdom has slowed, foreign markets remain active as international property investors and corporations move in to milk the growing economies, says Michael Strong, president of the Europe, Middle East and Africa division of CBRE. In fact, CBRE's revenue year-over-year in that region grew 40% to $1.3 billion in 2007.
“There's still reasonable strength in the European markets and there's still plenty of capital for the right opportunities,” Strong says. “We need to make sure we build the right level of coverage to support our clients.”
Filling holes
New York-based Cushman & Wakefield continues to gain market share in its core discipline while expanding into the finance arena. In January, the firm bought Australian affiliate Laing + Simmons Commercial. That followed Cushman & Wakefield's purchase of Burnham Real Estate in San Diego, a full-service commercial property company in December, and its acquisition of commercial mortgage broker Sonnenblick Goldman in July. Cushman & Wakefield's revenue grew 20% in 2007 to $1.8 billion.
Bruce Mosler, president and CEO of the privately owned firm that operates in 56 countries, now wants to add investment management services to the company's broad array of business lines and locations. He's planning to buy an investment manager in the U.S. On the international front, the firm is in the early stages of building an investment management business in Asia and Europe.
“It's an opportune time to acquire an investment management business given the changes in the marketplace,” Mosler says. “We think it's a time where we can grow the firm through significant, transformative acquisitions.”
Mosler adds that Cushman & Wakefield will also ratchet up recruiting to attract professionals that until now were too busy to consider joining the company. That's yet another way that a softening economy gives brokerages a chance to grab market share, he and other executives maintain.
Healthy special emphasis
Executives at Colliers, in fact, are wagering that efforts over the last four years to encourage brokers to specialize in products or markets will attract professionals who are hitting a rut. Pupil counts the brokerage's healthcare group among its specialized successes.
The real estate healthcare specialists provide a wide range of solutions, from development services and leasing to investment sales, and has captured about 80% of the medical office market in Orange County, he claims.
“A platform that brokers can leverage to grow their business regardless of market conditions starts to become interesting in slow times,” says Pupil, speaking from his office in Irvine, Calif. “When brokers aren't as busy, it's easier to show them alternatives that make money.”
The specialization strategy coincided with Colliers' push to expand internationally, increase property management revenue and add other services such as project management, appraisal and mortgage banking.
Logistical play
NAI Global in Princeton, N.J., a commercial real estate provider that manages a franchise member network of more than 375 offices in 55 countries, also has focused on specialization to ease the downturn's effects while expanding aggressively in international markets.
A supply-chain management group, for example, grew out of a brokerage team that began to address changes in the logistics industry, says Jeffery Finn, president and CEO of NAI Global.
Currently the company is focused on strengthening its logistics group along with its multifamily and life sciences groups, explains Finn, in an effort to attract business and increase market share.
“You have to make sure your team is highly focused, highly specialized and highly productive, even when the market is shrinking,” says Finn. “Opportunities still exist for evaluating, repositioning and optimizing portfolios.”
Joe Gose is a Kansas City-based writer.
| Property | City | Square Feet | Price | Buyer |
|---|---|---|---|---|
| 666 Fifth | New York | 1.55 million | $1.8 billion | Kushner Cos. |
| Worldwide Plaza | New York | 1.6 million | $1.73 billion | Macklowe Properties |
| Travelers Building | New York | 2.6 million | $1.57 billion | SL Green Realty complex Corp. |
| AXA Financial Center | New York | 1.97 million | $1.54 billion | Vornado Realty Trust |
| Five Times Square | New York | 1.1 million | $1.28 billion | AVR Realty |
| Source: Real Capital Analytics | ||||
Globalization isn't everyone's cup of tea
Though it's gaining momentum, the one-stop shop concept — providing an array of services at home and abroad — is a long way from permeating the brokerage industry. Some companies are avoiding adding or beefing up additional business lines, preferring instead to strengthen their core investment sales and leasing practices.
Sperry Van Ness in Irvine, Calif., for example, purchased JBM Realty Advisors in November. JBM Realty is a high-end multifamily brokerage in Tampa, Fla., that is adding institutional investors to its roster of high-net worth clients.
JBM Realty's investment sales average around $30 million Conversely, investment sales brokered by Sperry Van Ness typically range between $2 million and $30 million. Even as the investment market cools, institutional investors stay relatively active, says Kevin Maggiacomo, executive vice president of Sperry Van Ness International.
That acquisition followed the firm's expansion into 150 U.S. markets from eight between 2001 and 2007. “Sperry Van Ness was built on organic growth and franchising, but acquiring JBM Realty is another piece of our diversification strategy to help mitigate risk,” he says. “That firmly entrenches us in the institutional brokerage arena, and we'll build it into other property types.”
The company also is looking at foreign markets. Late last year, Sperry Van Ness awarded its first international franchise license to Costa Rica Real Estate Services, and the firm is negotiating to enter the Middle East, Germany, Ireland and China this year. But the company has no plans to add business lines or expand its small property management group.
Marcus & Millichap in Encino, Calif., is pursuing a similar strategy. To date, the investment sales brokerage has yet to enter any international markets, although it is considering the idea, says Hessam Nadji, managing director of research services for the firm, which completed 5,027 transactions last year in the U.S. totaling nearly $21 billion in sales volume.
Marcus & Millichap has grown to 71 offices today from 32 in 1999, and has increasingly added institutional investors to its list of private clients. The company's mortgage brokerage is expected to arrange $2 billion in financing this year.
Large corporations and organizations that tap brokerages for a range of services account for only a sliver of the investment market, says Nadji, and Marcus & Millichap best serves its customers by selling market and product expertise.
“Our entire company was built on the notion of value-added brokerage. That's an advantage for us,” Nadji says. “Even in the heat of the market, we never forgot that you need to underwrite real estate correctly, market it correctly, access the right buyers and close the sale correctly.”
— Joe Gose