These are edgy times among commercial real estate brokerages.
Mergers are creating a new breed of mega-brokerage corporations as high-profile firms gobble up boutique practices and big companies combine to become titans.
Consider some of these well-publicized consolidations: CB Richard Ellis Group, the world’s largest commercial real estate services company, acquired Trammell Crow for nearly $1.8 billion one year ago. The combined companies have about $4.4 billion in annual revenue and a more than 10 percent share of the U.S. commercial real estate market.
Last week, Jones Lang LaSalle, a global real estate money-management and services firm, bought Upstream, a United Kingdom-based real estate sustainability-services company. Together, the company can offer green practices and expand the energy management delivered to clients worldwide.
The JLL and Upstream announcement touted the 30-member London-based team that already counts among its clients a “significant and growing portion of the UK’s leading occupiers, developers and investors.”
Those deals signal a consolidation trend among commercial real estate firms. Top players seek to get bigger and offer more services at a time when the nation’s office and industrial property market set records, analysts said. Because the commercial real estate industry is highly fragmented, companies seeking a bigger market share must offer a broader array of services, according to experts.
CB Richard Ellis’s acquisition of Trammell Crow helped generate a more reliable source of revenue beyond property sales and leasing brokerage fees. CBRE has used acquisitions to grow the firm, as it came three years after its purchase of New York-based Insignia Financial Group for $415 million.
Earlier this month, the Wall Street Journal reported that a torrent of takeovers suggests that more companies will need to integrate competitive sales forces. The worldwide value of mergers and acquisitions so far in 2007 is a record, according to Thomson Financial, an arm of Thomson Corp., one of the world’s largest information companies. Thomson reported that U.S. activity this year likely will exceed 2006’s level of $1.5 trillion, based on the $1.45 trillion of deals struck through Nov. 5.
But the question is, who will benefit from these mergers? Will clients be better served?
“The jury is still out,” said one Boston-based broker who spoke on the condition of anonymity. “Obviously the successful mergers will not only enhance company profits, but make clients feel they are better off with an array of specialized services that couldn’t be offered before the merge.”
Daniel Probst, Jones Lang LaSalle’s chairman of the environmental sustainability board, said that his company’s recent purchase of Upstream stemmed from property owners’ and corporations’ demand for sustainability services to help their operations be more green.
“The overarching goals these days for corporations is to reduce their impact in the environment, including emissions into the atmostphere which they may produce directly as a manufacturer or indirectly as an office tenant, where electricty is produced by a coal-fired plant,” he said.
Meeting Demand
Today, the focus for real estate is to reduce waste, materials and water consumption, and use recyclable materieals such as carpeting, Probst added. “We come in and explain how to reduce consumption from simple things, such as having employees shut off the lights, to big capital investments for improved lighting and heating, ventilation and air-conditioning systems,” he said.
Probst acknowldeged that the growing concern over global warming has created a demand on JLL staff for more experts. “We bought a consulting firm to be on our team all at once instead of hiring consultants one at a time,” he said. “Our clients and prospective clients are looking for us to help achieve their goals and this is the best way to do it. ”
Another broker agreed. “It’s simple,” he said. “Big corporate clients demand that you can offer services globally.”
The mergers have not been limited to commercial real estate. Boston executives recall doing business with Bank of New England, Bank of Boston, BayBank and Shawmut. Today, those local names have been replaced with giant corporations including Bank of America, Citi, Citizens Bank and Sovereign Bank.
In February, the Blackstone Group’s $39 billion purchase of Equity Office Properties was the nation’s biggest private real estate sale of all time. While Blackstone has sold off much of the portfolio since then, the firm is keeping many of its Boston properties, including Center Plaza in Boston’s Government Center, Rowes Wharf, Russia Wharf and 60 State St.
Through consolidation, many companies have repositioned themselves for competition in an increasingly global and competitive market. Fifteen years ago, commercial real estate brokers could do most of their deals on a napkin. It was all about relationships. If a broker played golf with a property owner, deals were made during lunch after the game. Today, the napkin approach won’t do.
Clients not only expect a greater degree of cleverness from brokers, but also expect that sophistication to keep pace with their growth. It is no longer acceptable to have brokers specialize in office space, for instance, as brokers develop a focus in submarkets – a downtown, medical office, warehouse or research & development specialist. And that will continue to evolve, with analytical programs and specialized knowledge driving deeper and deeper into the niche, executives say.
Still, there’s tension. Company executives say the firms need to get beyond the so-called hot-shot dealmakers and professionalize the business. They want to create teams of professionals who provide a range of real estate services along with a multitude of revenue streams.
Mergers are forging new alliances with a best-in-class global real estate services firm, which would not only empower employees to deliver more robust global services but ensure access to the best of international standard systems and processes.
“No one knows where it will end up,” said one broker.
