As the velocity of U.S. commercial property sales begins to slow, the ability of brokerage companies to post big gains in quarterly revenue is at risk. With the credit crunch hitting commercial property markets, CB Richard Ellis faces a possible 30% decline in investment sales during 2008, estimates Jonathan Habermann, a securities analyst for Goldman, Sachs & Co.
For the past several years, it was the strength of the investment sales and leasing markets that helped buoy brokerages. In the second and third quarters of 2007, Los Angeles-based CB Richard Ellis reported year-over-year revenue gains of 64.9% and 54.2%, respectively.
Now that buyers and sellers are at odds over pricing, the good times are rapidly fading. After reaching a record $500 billion in 2007, total U.S. commercial property sales are expected to dip to $350 billion in 2008, says Dan Fasulo, managing director of real estate research firm Real Capital Analytics. “In 2007, financing conditions were perfect,” he says. “In the current environment, it is difficult to see how mega-deals will be done.”
In coastal cities, like New York and Los Angeles, sales and leasing activity remain healthy, says Fasulo. But activity is slowing in the Midwest and former hot spots, like Las Vegas and Phoenix. “People are reluctant to buy because they don't know what the prices should be,” says Samuel A. Lieber, portfolio manager of Alpine International Real Estate, a mutual fund.
With investors worried, brokerage stocks have fallen. Share prices of CB Richard Ellis dropped from $42 in mid-July 2007 to below $17 in early January. During the same period, the stock price of Jones Lang LaSalle fell from $124 to below $62.
Now brokers are utilizing a variety of strategies. Global operators are expanding overseas into countries where economies are still growing rapidly. Cushman & Wakefield recently opened offices in China and the Ukraine — and for good reason. China's gross domestic product is growing at a 10% annual rate while the Ukraine is hitting annual GDP growth of 7%. “For the next few years, the company will focus on strengthening its global business,” says Maria Sicola, executive managing director of research for the New York firm.
Brokers plan to continue ramping up their outsourcing business, assuming duties once handled by corporate clients. In the current climate, some companies are laying off real estate employees and hiring outside firms to fill the gap. By outsourcing, companies hope to cut costs and take advantage of skilled specialists.
Jones Lang LaSalle plans to assume more real estate duties for clients, including Cisco Systems and Bank of America. “In some cases, we transfer employees of clients onto our payrolls,” says Bill Krouch, CEO of markets for Jones Lang LaSalle Americas. “The employees continue doing their same jobs.”
Research is another potential revenue generator. CB Richard Ellis, with a global research staff of more than 400, is receiving more requests for current market information, says Christopher Ludeman, president of brokerage in the Americas. “In the past, clients were asking for quarterly research reports,” says Ludeman. “But in today's uncertain markets, clients want to know what is happening this month.”
Even as brokerage firms brace for tougher times, Northmarq Capital, a major mortgage banker in Minneapolis, is opening an investment sales office in Washington, D.C. and exploring opening offices in half a dozen major U.S. markets, including Houston, Minneapolis, and Los Angeles. The aim is to buy regional firms or open offices from scratch.
Northmarq considered moving into the investment sales business for several years, says CEO Edward Padilla, but was reluctant to enter the field during a peak period in the market cycle. “When the market was roaring, it was expensive to recruit talent and buy brokers,” says Padilla. “But now that sales are slowing, it is cheaper to enter the business.”