The chart toppers
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"A marketplace like this will bring to us what may very well be once-in-a-career opportunities"
Brett White, CB Richard Ellis |
A conversation with Brett White, chief executive of CB Richard Ellis, brings to mind the Mercer/Arlen lyrics: "Accentuate the positive/eliminate the negative, latch on to the affirmative". For in the face of second-quarter earnings numbers that would cause any chief executive to blench, White sees the proverbial silver lining. He and his team have lived through tough markets, he says. He’s confident the company he leads will come out of the current horror show of a market to be bigger, better and further ahead of the competition.
"We believe, as we have in prior downturns, we will likely emerge from this one having captured market share and having put the company in a position where we ought to derive outsized benefits from the recovery we know is coming," he says.
Before CBRE reaps these predicted benefits, it, like its competitors, remains under pressure thanks to the global credit crunch and the economic downturn. Next to investment banking, nowhere has the pinch been felt more profoundly than in real estate. CBRE’s second-quarter numbers are a good illustration of how hard this market has been hit.
At the end of the second quarter of 2008, the Los Angeles company’s net income was down 88% on the same period in 2007 at $124.6 million. Its biggest business areas have been savaged. In the six months ended June 30, sales are down 38% and revenues from investment management have plummeted 52%. Leasing, which contributes 33% of revenues, is up 5% for the first half but discouragingly down 6% for the second quarter. This key part of CBRE’s business is set to soften further as market conditions and the global economy deteriorate.
In the market as a whole, investment sales are down roughly 50% globally and 60% in the US, in large part because of the disappearance of securitized debt and the standoff in buyer and seller expectations, manifested in the wide bid-offer spreads in property. What had been largely a US and UK problem is spreading to other markets, even Asia-Pacific, where optimism about real estate had remained high. Now that market is showing signs of a slowdown, illustrated by a 23% decline on 2007 in CBRE’s second-quarter 2008 sales figures in that region.
| The difference a year makes |
| Change in revenue over a year in $mln |
|
2008 |
2007 |
| Leasing |
436.2 |
465.7 |
| Property and facilities management |
419.7 |
324.4 |
| Sales |
250.2 |
432.1 |
| Appraisal and valuation |
92.4 |
101.2 |
| Investment management |
43.3 |
86.3 |
| Development services |
30.1 |
16.4 |
| Commercial mortgage brokerage |
24.7 |
44.4 |
| Other |
18.3 |
19.9 |
| Source: CB Richard Ellis |
White, however, points out that not all the numbers bode ill. "Our revenue has held up pretty well considering the market conditions," he says. "We’re up 6% for the first half of the year and we’ve maintained profitability, albeit at lower levels than the prior 12 months, but profitable nonetheless. We’re particularly proud of our ability to convert revenue in a tough revenue environment to profitability in all of our jurisdictions around the world."
Deals such as the $2.9 billion sale of New York’s landmark General Motors building are keeping CBRE on top. Billed as the largest single-building sale of all time, the deal was brokered by CBRE for a group led by Boston Properties. The firm’s capital markets team was behind a few big European deals, too. In January this year it completed the sale and leaseback of Banco Santander’s vast property portfolio with the sale of its Madrid headquarters for $2.8 billion. CBRE also acted for HSBC in the sale and leaseback of its global headquarters in Canary Wharf in London. That deal was worth £1.1 billion ($2.09 billion) and set a record for a single property sale in the UK.
Although CBRE’s investment management business suffers from a dearth of deal flow and a steep drop-off in incentive fees earned, there is some positive news. This year, according to White, CBRE expects to raise $7 billion in equity. Right now it has $44 billion under management, up 17% on the end of 2007. This increase in assets under management enables CBRE to continue to generate revenue, despite the lack of activity.
"While no-one likes to be in a market cycle that’s moving down, we in our management team here have been through these before," says White. "This is the fourth serious market downturn I’ve been through as an employee of CBRE. I don’t like it but my team and I certainly understand it. We know the levers to use to increase efficiency and we know the strategies to employ to increase share and to emerge from the downturn a stronger and better firm, and that’s exactly what we intend to do."
Some of these strategies are already bearing fruit. In the first half, CBRE’s market share of US property sales was 17%. That’s more than double the shares of the number two and three firms combined. "The distance between where we sit at the moment in the US on the capital markets side and our competitors is fairly significant," says White. "And that is a shift from last year. So again this speaks to the fact that in difficult times we tend to accrete share fairly quickly, and that’s absolutely happening."
The company has also shored up its market share in the key global markets of London, Paris and New York. For example, in the first half of 2008 CBRE was responsible for seven of the top 10 largest leasings in New York, the world’s biggest commercial real estate market.
Outsourcing uplift
