Within the past two decades, the nation's largest real estate brokerages have formed a variety of new service lines that include asset management, appraisal, consulting and mortgage financing. Research shows that much of the growth is driven by corporate real estate executives who are increasingly outsourcing assignments. The question is whether these large firms can handle the role of soup-to-nuts service providers? Or will their clients prefer to use a slew of best-in-class providers for each individual service?
To Francisco Acoba, manager of commercial real estate at consulting firm Deloitte & Touche, large corporate clients with extensive owned and leased portfolios will increasingly embrace the latter option, but in a novel way. “We see more corporations outsourcing their real estate functions to a few closely allied service provider partners,” says Acoba, who believes this so-called “integrated” approach will gain traction over the next 10 years. “This allows the corporate [real estate executives] to leverage the best service providers in any market through referrals. It also acknowledges that very few firms can cover every single market the best.”
Under this model, says Acoba, one real estate services firm is expected to oversee the outsourced assignments rather than complete them. While this gives corporations greater flexibility to pursue the best-qualified service providers, it also assumes that the integrator firm is willing to refer certain tasks to competitors. “This model encourages the service providers to focus on their core business, but it's built on a certain amount of transparency and visibility,” says Acoba.
A 2004 research paper, “Corporate Real Estate 2010: Solutions Delivery,” by corporate real estate trade group CoreNet Global suggests that this model will take hold. The paper predicts that real estate service providers will indeed work with corporate clients on a less transactional basis over the next few years.
One key finding from the report was that service firms will need to decide which role they wish to play in the industry. That means identifying a core business that the firm does well, then establishing non-exclusive relationships with clients to service their needs — not exactly a ringing endorsement of the soup-to-nuts platform.
Kingdom building
One driving force behind the growth of full-service brokerage in recent years has been Wall Street. Firms such as Jones Lang LaSalle, CB Richard Ellis, Grubb & Ellis and Trammel Crow are all operating as public companies today, and analysts have placed pressure on them to smooth out earnings. For a business that's highly dependent on the volatile leasing and sales markets, such an approach makes sense — if only to cement relationships with key clients during the lull preceding a transaction boom.
Case in point: shares in both Jones Lang LaSalle and CBRE have risen sharply over the past 12 months. Even Grubb & Ellis, which took a beating in the market a few years back, has seen its stock make a strong rebound. This suggests that the full-service road is the surest way to predictable cash flow after all.
As the largest real estate services firm in the world, CBRE has captured plenty of outsourced real estate business during the past 16 years. The firm has also beefed up its services platform during that period (see sidebar on p. 34) to tap into clients' needs.
“It's taken CB Richard Ellis a long time to build this platform. But once you've done that, you can offer your client whatever services they need and that's a very strong value proposition,” says Brett White, CBRE's chief executive officer. Last year, the company spent $101 million to buy six advisory firms across Europe, Asia and Australia, growing CBRE's empire to 356 offices in 58 countries.
While the firm's range of service offerings is impressive, its bottom line is still driven by core leasing and sales commissions. In 2005, for example, roughly 75% of CBRE's revenues came from commissions on sales and leasing transactions. That percentage stood at 76% in 2004. And CBRE, which posted $2.9 billion in revenues last year, commands a strong lead in the market. Its principal competitor, Cushman & Wakefield, posted revenues of $1.2 billion in the same time frame. To White, CBRE's large lead is proof that the market has embraced his company's full-service, global platform.
“When a firm has a marked lead over the competition, businesses tend to follow that firm for several reasons,” he says, adding that times have changed. Back in the 1980s, he says, it was commonly held that focusing on one single business line — such as management or tenant representation — offered an advantage. Full-service turned a corner in the early 1990s when corporations were forced to cut costs by outsourcing real estate tasks.
In fact, a 2004 study by the Washington, D.C.-based Outsourcing Institute found that 80% of Fortune 500 companies outsourced some or all of their real estate functions. White says that clients wanted to work with larger, integrated services firms for a simple reason: “By definition, it's inefficient to find a different firm to do every different task.”
Client concerns
Not everyone agrees with White. One outspoken critic of the full-service model is Los Angeles-based office landlord Zaya Younan, who owns a 5.5 million sq. ft. portfolio of Class-A office buildings scattered across the country. Younan believes it's difficult, if not impossible, for one brokerage to deliver best-in-class service across multiple lines.
“This full-service platform has been put to the test over the past thirty years, and it's failed,” says Younan, chairman and CEO of Younan Properties. “As a landlord, I want the best service provider in each market, and that rarely means using the same brokerage at each property.”
Unlike many other large office landlords, Younan has been managing his own portfolio since December 2004. But when he did hire third-party service firms to execute his leasing and management assignments in the past, he singled out specialist firms to manage his properties.
“You have to separate these roles, because the brokerages will often sell their management expertise cheaper just to get the leasing assignment down the road,” he says. The result for landlords who employ full-service firms, says Younan, is mediocre property management.
To one niche brokerage, simply removing that cloud of doubt is important to establishing a solid business relationship with clients. “We don't want to be experts in all areas of the business,” says Mitchell Steir, chairman and chief executive of Manhattan-based real estate brokerage Studley. The strategy may not allow Studley to service its clients in a variety of ways that the full-service firms can, but it does allow for greater transparency.
The 52-year-old firm, which was established by industry legend Julien Studley, solely represents tenants on commercial real estate transactions. Studley does no third-party management and is 100% owned by its employees. “The full-service firms have too many profit centers that depend on doing business with landlords,” says Steir. “So you have to ask: Who is the bigger fish that the broker works with?”
He uses the example of a tenant rep broker at a full-service firm who also represents landlords in the same market. When a tenant asks the broker to press hard for the lowest renewal rate, how can the tenant expect the broker to be his advocate if it turns out the landlord is also a client?
Steir doesn't believe that many clients who employ full-service firms routinely ask that question. Yet under the integrated model proposed by CoreNet Global, the conflicts are less problematic. Corporate clients can exploit the wealth of existing real estate talent without limiting themselves to one service provider.
“We represent both tenants and landlords, and every market you encounter is one or the other,” says Bill Lee, founder and CEO of Los Angeles full-service brokerage Lee & Associates. Like Younan, Lee's firm is privately held with 29 brokerage offices. “This is the age-old question, asking if you can represent both sides,” he says. “And I come from both the landlords' and the tenants' perspective, which is a plus for my client.”
Parke M. Chapman is senior editor
ONE-STOP SHOP
CB Richard Ellis has bought or built several new service arms within the past 16 years.
| Year | Expansion | Specialty |
|---|---|---|
| 1990 | creates global corporate services division | occupancy consulting |
| 1995 | acquires Westmark, forms CBRE Investors | fund management |
| 1996 | acquires LJ Melody | debt financing |
| 2005 | acquires Dalgleish & Co. | retail services (UK) |
| 2006 | acquires Project Advantage Group | facility move management |
| Source: CB Richard Ellis | ||
Full-Service Behemoth
Few brokerages have embraced the full-service model as vigorously in recent years as CB Richard Ellis. From global logistics and food facilities to life sciences and seniors housing, the publicly traded firm has supplemented its core business with a dizzying range of new service lines.
“The goal is not to just offer as many services as possible,” says CBRE's CEO Brett White. “Companies are very smart today, and they want to work with diversified firms that can help them across many markets in many different ways.”
Last fall, CBRE bought one of the United Kingdom's leading retail brokerages, Dalgleish & Co., in order to strengthen its presence in the British market. In March of this year, CBRE acquired Project Advantage Group, a relocation management firm, to help clients shuttle staff between offices.
White refers to this strategy of matching clients' far-flung needs to a growing raft of services as “connecting the dots.” Dots aren't cheap, however, as this campaign requires a massive capital infusion and the ability to manage growth expectations. To that end, White says that CBRE invested “significant cash flow” into the global services platform last year.
That's no idle investment, either. CBRE expects associated revenue from service businesses that were added in 2005 to generate $179 million in 2006. It's difficult to compare that projection to associated revenue from other service lines since none were adopted in 2004. If CBRE can match its 2005 revenue of $2.9 billion this year, that $179 million would represent an additional 6.1% in revenue.
“We've invested in our business at a level that few can match,” he boasts. “The faster we can reinvest those dollars into the platform, the better we can serve our clients.”
— Parke M. Chapman