Retail Brokerage Firms Look Beyond Sales and Leasing to Survive the Downturn (4/23)
Apr 23, 2009 11:37 AM, By Elaine Misonzhnik
Most industry insiders agree that revenues from investment sales and new leasing transactions—commercial brokers' bread and butter—will likely continue to fall through 2009. But while 2009 promises to be a tough year for commercial real estate brokerage firms, many in the sector view the current environment as fertile soil for growth in new areas of business.
Indeed, as flipping assets to make a profit has become impossible, property owners are turning back to fundamentals. Their goals today include stabilizing occupancy, improving rental streams and cutting operating costs. And they need an experienced management staff to do that. Corporate tenants also need help controlling real estate costs while holding on to key locations. And lenders, who as a result of rising loan defaults are being forced to foreclose on commercial properties, need brokers to help them assess the value of the assets.
As a result, over the next two years brokerage firms see opportunity for expansion in the management and financial analysis arenas, including asset management, lease renegotiation, valuation and global corporate services.
"When one door closes, which investment sales certainly have, there are other opportunities arising in the commercial real estate market," says Peter Morris, senior vice president with Colliers International, a Boston-based global real estate services provider. "Today, real estate still exists. Whether it's selling or not selling, the building still needs to be managed. Tenant relationships really need to be fostered more now than ever before. Management services is where we shine."
In anticipation of that shift, some brokerage firms are in the market for top talent to handle complicated leasing transactions and distressed asset sales.
For example, the Goldstein Group, a Paramus, N.J.–based boutique retail brokerage, recently added six people to its staff and plans to hire another eight to work in its leasing brokerage division, as well as on the investment sales side. Studley Inc., a New York City–based national brokerage that specializes in tenant representation, has been interviewing brokers in major U.S. cities to join its team. The firm is looking for seasoned professionals with experience in both tenant and landlord representation. Colliers International also is on the lookout for experienced brokers and property managers. Last month, Colliers hired Mehran Foroughi, formerly a top-producing investment sales broker with Sperry Van Ness, an Irvine, Calif.–based investment brokerage firm. In the past two and a half years, Foroughi closed transactions valued at more than $120 million.
The move to hire new people when leasing and investment sales are in flux seems counterintuitive. But as property management and lease renewals become increasingly complicated, brokers find that their negotiation and valuation skills remain in demand.
"I don't think anybody will ever be at the [revenue] levels of 2008," says Chuck Lanyard, president of the Goldstein Group, which recently moved into a larger headquarters to accommodate its expanded staff. But the downturn "has created some very good opportunities for our company's growth." Over the past year, the firm has seen an increase in property management and lease renegotiation assignments and expects to handle a large number of distressed asset sales later this year.
Lagging indicators
Today, brokers are only beginning to feel the full impact of the downturn. The brokerage industry might not have realized the scope of the damage until this winter, when several national retailers that were expected to emerge from Chapter 11 ended up opting for liquidation, notes Bill Bauman, executive vice president of the national retail services group at Studley.
"Some [brokers] thought they would have at least a chance to reorganize," he says of electronics seller Circuit City. "Now, I would say everybody is pretty realistic about the fact that we could easily see these market conditions go on for another 12 to 18 months."
As a result, brokerage firms across the country have started to rethink their strategies. Many, including CB Richard Ellis (CBRE), Jones Lang LaSalle (JLL) and Grubb & Ellis have launched or expanded distressed asset services groups, which will help lenders deal with commercial properties that have defaulted on loans.
But that line of business won't start paying off for another year or two, according to Anthony Buono, executive managing director for national retail brokerage services with CBRE. That's when the bulk of risky loans made in 2006 and 2007 will reach maturity. At present, brokerage professionals are concentrating on management, valuation and lease renegotiations.
Already, brokerages have felt the impact of slower leasing and sales activity.
CBRE, the international behemoth of the brokerage world, reported a 71 percent increase in net income from first quarter of 2007 to first quarter of 2008, from $12.0 million to $20.5 million. Net income measures a company's earnings minus taxes and other expenses. By the fourth quarter, however, year-over-year net income had fallen by 95 percent, to $6.5 million. CBRE, which breaks down its transaction results by geographic region, reported that leasing revenue in the Americas declined 11 percent in 2008 and sales revenue declined 49 percent.
At JLL, net income for 2008, at $84 million, came in 67 percent below the $256 million reported in 2007. The figure was impacted by $7 million in integration costs from the purchase of brokerage firm Staubach Co. and German retail property advisor Kemper's, as well as $30 million in restructuring charges and $23 million in severance charges related to staff reductions. Revenue from transaction services in the Americas rose 26 percent during the year, due to increased activity from the Staubach acquisition. On a global basis, transaction services revenue declined 8 percent because of slower capital markets activity.
