CB Richard Ellis Warns It Won’t Meet Expectations

Faced with a slowdown in commercial property sales and leasing, Los Angeles-based CB Richard Ellis Services Inc. on Wednesday said its second-quarter results would be 50% below Wall Street estimates, spurring the huge real estate services and brokerage firm to reorganize and lay off managers.

The announcement triggered a sell-off of CB Richard Ellis shares--which lost about 15% of their value Wednesday--as investors and industry analysts scaled back their financial expectations for the firm and its peers.

“I would not be an active investor in this sector right now given what’s happening,” said William Marks, a real estate analyst at Banc of America Securities who had cut his rating on CB Richard Ellis to “hold” from “buy.” “We are really past the high growth phase of the real estate cycle.”

CB Richard Ellis (formerly CB Commercial) said lower-than-expected U.S. revenue from property sales and leasing in April and May would result in a second-quarter profit of only 16 cents a share, or about half what most analysts had expected.

The poor results accelerated company plans to streamline its management structure and cut operating costs, according to CB Richard Ellis officials. The change should result in a layoff of about 70 middle managers in the firm’s North American division, which employs about 6,500 workers, said Brett White, chairman of the Americas operations. The cuts will result in annual savings of about $11 million.

The firm said the second-quarter performance was undermined by the lingering effect of last year’s global financial crises, which halted investment deals and led many jittery corporate tenants to delay expansion plans. Early results from June, however, pointed to an improvement in leasing and sales activity, according to Chief Executive Ray Wirta.

“Real estate market fundamentals in the United States remain sound, as evidenced by low vacancy rates and higher rents,” Wirta said in a prepared statement. “These factors make us optimistic that our operations for the full year 1999 will meet our targets.”

But industry observers and investors did not share Wirta’s optimism. On the New York Stock Exchange on Wednesday, CB Richard Ellis shares fell $3.19 to close at $16.25.

Despite solid results in most U.S. commercial real estate markets, it’s clear that sales and leasing activity has peaked, said Marks at Banc of America Securities. That means less business for CB Richard Ellis--which relies on its brokerage business for about half of its revenue--and other firms in the field.

Marks said the cost cutting at CB Richard Ellis is a good move in light of the slower revenue growth.

“The company needs to find other ways to improve the bottom line,” Marks said. “There are no huge growth opportunities in the real estate services business right now.”