The prolonged swoon that commercial real estate is currently suffering through hasn’t just been afflicting lenders and property investors. Recession and a dearth of meaningful credit have delivered a serious blow to the brokerage houses charged with leasing and selling commercial real estate – and the brokers who do the selling.
Brokers often compare commercial real estate to a box that holds the economy. When the economy tanks, office vacancies rise and rents plunge. There are fewer lease deals to be had, and in aggregate, deals are being made for fewer square feet, and at a lower rental basis. That translates to lower revenues for brokerages – and less cash in brokers’ pockets.
Historically, down cycles have pared brokers’ ranks. Usually, it’s the mid-level brokers getting squeezed the hardest. High-earning veterans have larger rosters of clients; they’ve also been through slow cycles before, and they have savings from the previous boom cycle salted away to get them through to the next upswing. Young brokers live cheaper lifestyles, and at some firms, get started on salary – not much, but enough to pay the rent.
Grinding It Out
It’s the brokers in between those two groups who have tended to get squeezed. In the past, some have decamped to development firms. Some left the business altogether. In the early 1990s, several chased salary jobs at various arms of the Federal Deposit Insurance Corp. There was upheaval.
Privately, industry insiders are beginning to fear that upheaval will strike again.
Commission checks can roll in slowly. Brokers may now be living off deals they began chasing in late 2007, and that closed late last year or early this year. For most firms, the last quarter of 2008 was brutally slow, and the ensuing months haven’t been much better. Leasing activity picked back up in the spring, and then let up again. Many expect to see total lease square-footage in greater Boston drop in 2009 by 30 percent. Dealmakers are trying to grind out the downturn by making small deals while laying the groundwork for bigger ones next year, but “For a lot of people, it’s not easy,” said one industry player. “It’ll get worse. For some people, the pain won’t hit until the paydays stop coming.”
Across the region, commercial brokerages are slashing spending. CB Richard Ellis has trimmed commissions. Many are cutting overhead – both unnecessary expenses, and bodies who don’t produce revenue.
Administrative personnel who previously assisted one or two brokers are now stretched between several. Industry sources say CBRE has lowered its head count, and that another national giant, Cushman and Wakefield, is in its third round of layoffs.
And there may be more to come.
“Layoffs will come to people who aren’t producing, who can’t cover their desk costs,” said Stephen Brodsky, the managing director of Grubb & Ellis’s Boston office. “And people in support services. Anybody with overhead. Companies have to get overhead down.”
Brodsky added that Boston’s commercial market has fared relatively better than the Southeast, the Southwest, and the West Coast – high-growth areas that have experienced nasty falls. In New York, the implosion of the financial services sector has sent occupancy rates and rents over a cliff, and frozen credit markets have already claimed one brokerage house – DTZ Rockwood, a firm that specialized in the buying and selling of expensive towers.
By The Numbers
SEC filings from the three publicly-traded national brokerages paint a bleak picture. Grubb & Ellis lost $74 million in the first half of 2009. Jones Lang LaSalle lost $76 million. CBRE lost $43 million; it finished 2008 $1 billion in the red, thanks to a $1.2 billion goodwill write-down. At CBRE’s Americas unit, revenues are off 25 percent. At Grubb and Ellis, transactional revenues are off 37 percent. (Brodsky said leasing at the Boston office is only off 10 percent of last year’s pace, which was 10 percent off 2007’s.)
“The whole industry is clearly going to go through a restructuring,” Brodsky said.
“It’s clearly a challenging market,” said Ron Perry, head of brokerage at Colliers Meredith & Grew. “We’re used to being in a cyclical market, but the overall impact has been huge.” Perry, who has been in the business since 1984, added, “The business is more sophisticated, but the basics of a soft market don’t change.”
Meredith & Grew, Perry said, is “a very conservative firm to begin with.” The firm has put an emphasis on watching expenses and retaining talent who drive business. It has been “very, very selective in hiring.” When Perry’s brokers hit the streets, they “focus on adding value and helping clients. Now, there’s more on the line for [clients].” Meredith & Grew has placed emphasis on research and market knowledge, because when brokers meet with clients, “we talk about leasing, and also, they want good information. We’re much more advisers. It’s a transaction market, and you can’t force it. You stick to your fundamentals. We’re in a business where there are ups and downs. It seems to even out over time. Stay poised, if you’re in it for the long haul, it’ll come back to you in spades, because you’ve taken care of people.”
At Jones Lang LaSalle’s Americas group, operating income in the second quarter of 2009 was 43 percent higher than during the same period last year. Year-to-date, Americas’ revenue is up 19 percent, and operating income is up 24 percent. Some of that bump has come from the firm’s merger with the Staubach Co.; some has come from expanding the number of service lines that existing clients are availing themselves of.
Ear To The Ground
David Slye, head of Jones Lang LaSalle’s Boston office, is telling his charges to “Keep your eyes, ears, arms and minds open, to learn of opportunities to service clients.”
Leasing is down, Slye said, but the firm has seen a surge in corporate outsourcing work. Facilities management work is up, and construction management is busy with a large number of jobs that are small in scale, and price. The office’s asset management group is doing value-recovery work for the holders of troubled loans. Investment sales have been hurt badly, but with businesses worried about the health of potential landlords, investment brokers have been teaming with tenant brokers to explain the state of building owners’ capital stacks to tenants.
“That’s an exciting collaboration,” Slye said. “We have a depth and breadth of services. There are opportunities to collaborate and pick up business. It gives us an edge. We’re working twice as hard for lesser money. But we’re creating new opportunities that are actually large, and include more than one service. And if you do a three-year deal, in a year and a half, you’ll hear back.”
At Grubb & Ellis, “We’re much more focused on making sure our professionals have the tools they need to win business, and advise clients as if they’re sitting in the clients’ shoes,” Brodsky said. On the tenant-rep side, that means taking blend-and-extend deals to landlords. Investment sales brokers are meeting with banks and special servicers, “putting them in a position to pick up business.” And since the group normally focuses on sales between $2 million and $20 million, “there’s still some velocity in that area.” Like JLL, Grubb & Ellis has seen growth in third-party management services, and “that’s helped make up the difference” that the leasing slowdown has left.
SEC filings for CBRE show an upswing in corporate outsourcing and property management work. In a recent conference call, Brett White, CBRE’s CEO, said that, during the last commercial downturn, “our revenues picked up well in advance of the bottoming of rental rates,” as tenants jumped to secure cheap space. White said he expected a similar trend to unfold this time around, though he added, “I don’t want to [say] late 2009 because there’s no way to tell.” He also said he expected investment sales business to pick up REO business. CBRE’s Boston office, which is run as a partnership with CB Richard Ellis Group Inc., did not comment for this story.
“Everybody knows brokerage is off this year,” said Mike Edward, head of brokerage at Lincoln Property Co.’s Boston office. “We’re not having our best year ever, but nobody is, no matter who you are. The best thing you can be doing is making contacts, meeting with people. Now, people are looking for advice.” Lincoln’s property management arm is carrying the Boston office, Edward said, and appraisers “are as busy as they’ve ever been. Overall, we’ll be profitable. It won’t be bad. It’ll be an OK year. Some of our groups are picking up the slack.”
“The margins are not the same, but we’re still profitable,” said Joe Sciolla, managing principal at CresaPartners’ Boston office. Cresa has cut expenses, but hasn’t had layoffs.
“Our staying power is a lot better than some of the national firms,” Sciolla argued. “There’s no overhead on owner-management or property-management lines. They take huge overhead. We can run lean and mean, and maintain profitability. We’re a specialized niche player. On the tenant side, there’s a lot of restructuring leases to roll over. As long as leases are churning over, we’re in good shape.”
