CB Richard Ellis feeling industry pain
As an international economic crisis dumps widespread woe on the commercial real estate industry, Los Angeles-based giant CB Richard Ellis Inc. is bracing for trouble.
For decades, it has been the big-dog deal maker and property manager helping hammer together the office core of the nation’s downtowns, its far-flung industrial parks and vast shopping districts.
Today, its core business is suffering right along with the property owners it represents who can’t sell their buildings and the landlords who are losing tenants.
For a business that works largely on commission, there just aren’t so many big transactions -- and less money to go around.
That’s evident in its stock price, its layoffs and the sharp skepticism from investors about prospects for the world’s largest commercial real estate services company.
Real estate company stocks are being clobbered, and shares of CB Richard Ellis are no exception.
In the last year, its shares have plummeted 75% in value. They closed at $5.05 on Wednesday.
Faced with a contracting real estate market and falling profit, the company has scrambled to cut costs and eke out new revenue sources while acknowledging that times are hard and likely to stay that way for a while.
The company said it had cut $190 million in fixed costs this year, in part through eliminating about 1,100 budgeted positions from a workforce of 29,000, mostly through layoffs and attrition. It reduced other expenses such as travel and marketing. CB also ended its deferred compensation program for managers and sales professionals and will get a $100-million tax deduction in 2009 by stopping the program.
Meanwhile it is still doing big deals. Its brokers arranged a 1.35-million-square-foot lease expansion last week in New York for Viacom Inc. and relocated Taco Bell’s 181,000-square-foot headquarters in Irvine last month. On Wednesday the brokerage announced that it won the job of marketing distressed residential and commercial properties taken over by the Federal Deposit Insurance Corp.
The company’s largest investor and board chairman is San Francisco financier Richard Blum. Married to Sen. Dianne Feinstein (D-Calif.), Blum led efforts to take the company public in 2004 and now owns almost 15% of its stock.
At the helm is President Brett White, a former broker who runs the company from its headquarters in West Los Angeles.
“Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago,” White said in a letter to clients this month after third- quarter profit fell 60% from the same period a year earlier.
“Market conditions of unprecedented strength are roiling the world’s financial markets,” White went on to say. “The global economy is either in, or close to, recession and 2009 is not likely to be a year of great recovery.”
White insisted, however, that the company had quickly responded to the downturn by reducing expenses and would be positioned to grab a bigger share of the real estate market when the economy eventually improved.
Wall Street analysts aren’t so sure success is around the corner. They have given the real estate services firm mixed reviews on its efforts to cope with the downturn and a debt of $515 million it has coming due during the next two years, though most reject dire prospects for CB Richard Ellis.
“I don’t expect CB to go bankrupt, and I don’t think their lenders have any interest in owning them,” said analyst Will Marks, who follows the company for JMP Securities.
The brokerage, he said, is also “doing everything it can” to keep its debt at a level that lenders have insisted on. If it fails to maintain the agreed-upon level, CB Richard Ellis could be forced to pay higher interest rates on its debt.
To improve its financial position, the company raised about $207 million in a public stock offering this month after abandoning plans to raise the money from private sources. The largest buyer was Blum.
What is ahead will be key to the industry’s stability.
“There is not going to be a lot of transaction income” for real estate companies, said analyst Craig Silvers, president of Bricks & Mortar Capital. “Tenants who aren’t going bankrupt are curtailing their expansion plans or shutting down and consolidating offices and stores. And with the capital markets basically shut down, there are not going to be a lot of sales.”
JMP Securities analyst Marks, however, said property sales might pick up in 2009 because the market has been stalled for almost a year and pent-up demand to buy commercial property is growing. If lenders reopen their money spigots, sales by owners who are in financial distress might be brisk, he said.
Competing large real estate brokerages are also laboring in the down economy, and real estate stocks in general are down 70% to 90% from a year ago, analysts said. Competitor Jones Lang LaSalle Inc.’s stock is off 66% from last year and closed Wednesday at $24.53. Grubb & Ellis Co. shares have fallen about 80% in value and closed at $1.14.
Profit at CB Richard Ellis was $56.1 million in the third quarter, compared with $29.7 million at Jones Lang LaSalle and a loss of $44 million at Grubb & Ellis. Cushman & Wakefield, which is owned by an Italian company and not traded in the United States, reported a profit of about $10.7 million.
William Blair & Co. predicts CB Richard Ellis’ stock will outperform the market but should experience “significant volatility in share price in the near term.”
Like practically every other business, the brokerage’s future depends on how well the world copes with recession, analyst Silvers said. “It’s a good company, but they are not so good that the economy won’t hurt them,” he said. “Nobody is.”
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