The difference between belt-tightening and job-shedding at commercial real estate companies comes down to a singular factor: debt. Fewer commercial deals are getting done this year, and when they do go forward, they’re being signed for less money. Brokerages without debt have thus far been able to gut it out with their new, reduced margins. Those firms with large debt loads are having the roughest go of it, and have reportedly had to reduce headcount.
Joe Sciolla, managing principal of CresaPartners in Boston, said, "There isn’t one dollar of debt [on Cresa]. Not having debt gives you a lot of staying power," he argued. "With any blip in the economy, in real estate, if you have debt, there’s no room for error. Debt is absolutely the killer."
Mike Edward, head of brokerage at Lincoln Property Co.’s Boston office, added that "on a day-to-day basis, [debt] doesn’t affect your ability to do business, but on a corporate basis, it has to have an impact on everything, and that will flow down to the brokers."
Edward noted that because Lincoln is private and debt-free it’s able to do things on the margins that others can’t. The firm offers all brokers a salary plus commission, and is in the process of expanding the size of its Boston brokerage.
Debt’s Detriment
CB Richard Ellis, which files public reports, illustrates the ravages that debt is taking on brokerage margins.
The company has spent the bulk of the year grappling with a $1.9 billion debt load. In March, when the company filed its annual report with the SEC, it said that while it did not expect a liquidity shortfall in 2009, it had $457 million in debt scheduled to mature over the year. The report added, "Management is unable to project whether long-term cash flow can cover long-term debt."
In the second quarter, CBRE raised $146.4 million in a public stock offering. Nearly all of those proceeds went toward prepaying a $1.1 billion term loan facility. CBRE also raised $450 million in a private note placement. Those notes carry an interest rate of 11.65 percent. By comparison, the notorious loan that Mexican billionaire Carlos Slim recently made to the New York Times Co. carried an interest rate of 11 percent in cash, plus 3 percent in company bonds.
Two weeks ago, CBRE announced its lenders were extending the maturity date on $985 million in debt until 2013. Even with all its moves – the company has raised $800 million in equity since last November, and nearly doubled the amount of cash it has on hand – its long-term debt load has actually increased this year, to $2.1 billion.
This debt load has thinned the international brokerage’s margins. It has crammed down on expenses and reportedly reduced headcount. A company spokesman would not address staffing numbers. CBRE’s second quarter earnings report shows the company has cut operating and administrative costs by 30 percent.
Even in the first half of 2008, before the credit crunch hit, interest expense for CBRE’s Americas segment was more than two-and-a-half times greater than the segment’s net income. In the first half of 2009, the segment lost $31.8 million, and was responsible for $67 million in interest expenses.
