CB Richard Ellis forecasts incremental rebound for commercial real estate
After slipping into the red in early 2009, Los Angeles commercial real estate brokerage CB Richard Ellis Group Inc. climbed back to profitability as business improved and the company found new sources of revenue.
CB Richard Ellis turned a profit in the second half of last year that was fueled by internal cuts and a real estate rebound in Asia. Revenue has continued to grow this year as property sales and leasing picked up in Europe and the U.S. The industry’s largest brokerage firm has about 29,000 employees in more than 300 offices worldwide.
Chief Executive Brett White, who started with the company as a sales trainee in 1984, recently discussed the recession and the state of the commercial real estate market.
Real estate is a cyclical business, yet nearly everyone was shocked when the market crashed again. How did so many people get caught by surprise?
In strong up cycles, even though everyone knows that the end has got to be near, people always think there is still time for one more deal. Whether you are building spec houses, buying companies or financing commercial real estate, you figure you are smarter than everyone else and there is time for one more deal.
What were the warning signs that the upward trend was coming to an end?
In a typical up cycle you start with people buying at a discount of current value. Next, people start paying what they consider retail prices for property based on current rents and current economic assumptions. At the peak of an up cycle people start buying based on future imputed values. They assume rents will continue to grow and pay prices that cannot be justified based on current economics. That’s where we were in 2006 to early 2008.
Then we had a shock to the credit market, which at first was the slow unwinding of securitized residential mortgages.... For four, five or six months everyone’s view was that the problem was residential. It has nothing to do with commercial. What everyone missed is that everything is linked. When the credit markets came down and banks began to become stressed, liquidity was sucked out of the marketplace. People began hoarding cash, and the market fell apart.
Have we seen the worst of it?
We are forecasting that vacancies will be declining and rents will be appreciating across all property types by the middle of next year. Recovery will be incremental because job growth is so anemic. Companies are doing anything they can to increase production without hiring more people. Most companies just got done letting go hundreds, if not thousands, of employees. That’s a painful, gut-wrenching process.
CB Richard Ellis went through that process too.
We did lay off thousands. We are a services firm, and as markets contract we have to let some people go. Now our employee count is quite close to what it was at the peak in 2007.
What types of commercial properties will recover first?
At the moment, multifamily is leading. There is a real demand for apartments, and rents are going up. Office and retail will follow that. Industrial will be last. We also see an incredible demand for very-high-quality, well-leased assets of all classes. So many investors lost so much money in real estate the last three years, yet they still have a lot of money to invest, so they are now investing in the safest possible properties.... Prices on those assets are in some cases close to 2007 peaks now.
How does Southern California compare with the rest of the country in its real estate recovery?
We are lagging because we are lagging in job growth. I am very bullish on California and Southern California, but I think we have ever-more structural impediments to growth, particularly in taxes and tariffs on business. Also, Southern California was ground zero for mortgage originators, particularly in Orange County, and they are all gone.
Large investors are buying property again. What about smaller investors?
It depends on your appetite for risk. If you are only interested in safety you are going to be competing against the large investment funds. If you could live with some risk, I think you would want to buy the least-favored assets. Those would probably be Class B office or industrial products in suburban locations, or hotels. I have heard about some hotel deals recently that are just unbelievable.
roger.vincent@latimes.com
