A Crucial Test for a Commercial Broker

Will property giant CBRE's diversification beyond sales and leasing help it weather the credit crunch?

Just a year ago, Brett White talked about a "global wall of capital" buying up office and apartment buildings, shopping centers, and industrial property. Now the chief executive of commercial real estate broker CB Richard Ellis Group (CBG) (CBRE) is doing everything he can to keep that wall from collapsing. Credit markets have seized up, making big sales tough. At the same time a looming recession has business tenants balking at renting more space. As a result, analysts expect earnings to fall as much as 12% this year. CBRE's shares have sunk to 18 from a July, 2007, high of 42.

Now, White is telling his salespeople to find creative ways to drum up new business, from pitching environmental consulting services to existing clients to devising novel ways to finance deals. White knows a downturn is inevitable, but he hopes to cushion the blow. "It's anybody's guess where the U.S. economy is going and how long this credit crunch will go on," he says.


Few companies rode the commercial real estate boom higher than CBRE. Last year the firm earned $390 million on sales of $6 billion, up from a loss of $35 million on sales of $1.8 billion in 2003. Those results landed it on BusinessWeek's 2007 list of the 50 top-performing big companies. Now comes a test of CBRE's diversification strategy. Hatched in the early 1990s and hastened by White, it culminated in the $2.2 billion purchase of rival Trammell Crow in late 2006. By then a string of acquisitions had made Los Angeles-based CBRE the world's largest broker, helping landlords and tenants lease space, manage property, and develop new buildings.

CBRE gets 58% of its revenue from leasing and property sales, which tend to swing with the real estate cycle. But that's down from 73% in 2000. Now more stable businesses, like property management—making sure light bulbs are replaced, toilets are cleaned, and such—kick in 23% of sales.

With new buyers and renters scarce, CBRE is working to expand those types of ongoing revenue streams. Its property managers now dispense green advice. Last year, CBRE helped shave $150,000 a year in electricity expenses at Phoenix Plaza, a pair of Arizona office buildings owned by General Electric's (GE) pension fund. CBRE installed energy-efficient lighting and cooling systems as well as sensors that adjust landscaping irrigation to reflect levels of rainfall. CBRE hopes to sell such expertise as consulting to other clients.

The outlook is bleaker for property sales. In January the volume of office buildings sold in the U.S. fell nearly 80%, to $4 billion, according to researcher Real Capital Analytics, after a 40% drop in the fourth quarter. Brian Stoffers, who heads CBRE's property sales business, says his brokers are developing alternative sources of loans for clients—getting sellers to finance transactions or, in the case of apartment buildings, seeking funds from quasi-governmental agencies such as Fannie Mae (FNM).

Property bulls note that the commercial market isn't nearly as overbuilt as it has been in prior slumps, such as the late 1980s. And so far, rising vacancy rates are confined to a few markets, such as South Florida and Orange County, Calif. CBRE depends mostly on the U.S., but it has built out global branches, particularly in Europe, that are holding up better.

Commercial real estate still faces a rough patch. Earl E. Webb, who heads property sales at rival broker Jones Lang LaSalle, figures that more than $50 billion in risky commercial loans may need to be refinanced in 2008. That could bring a wave of defaults. But it means opportunity, too. Macklowe Properties, unable to refinance its big debts, has put New York's General Motors (GM) building up for sale. CBRE is brokering the deal for the trophy property, which could fetch a record $3 billion.

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