The World - News from Dec. 11, 2001
Stung by a significant slowdown in leasing and sales, Los Angeles-area commercial real estate brokerage firms have cut staffs and shifted strategies. Moreover, they’re bracing for even more pain next year.
The slump--although not as severe as the real estate bust of a decade ago--is certain to intensify the consolidation in the brokerage business, resulting in fewer firms and jobs in the long term.
“There will be a lot less [brokers] in two years,” said Andrew Rattner, co-manager of California operations for Cushman & Wakefield, one of the state’s largest commercial real estate brokerages. “Every large firm has retrenched and announced layoffs, and the smaller regional houses are feeling it too.”
Brokerage firms nationwide are taking steps to handle the consequences of a slowing economy that finds tenants delaying decisions or giving up space:
* New York-based Cushman & Wakefield, which acquired Cushman Realty Corp. of Los Angeles this year, has cut its staff by 5%, reduced advertising and marketing expenses and scrutinized spending on technology.
* Jones Lang LaSalle, Inc., headquartered in Chicago, is cutting its North American work force by 9% as part of a campaign to reduce expenses by $45 million annually.
* The corporate parent of Los Angeles-based CB Richard Ellis has reduced the size of its administrative and headquarters staff after a 13% decline in leasing and sales revenue during the first nine months of this year in its biggest markets.
“Revenues are down for us and down for all the other large brokerage companies,” said Robert Bach, national director of market analysis for New York-based Grubb & Ellis. “We are not doing as well as we had hoped.”
Brokers in office and industrial real estate have watched revenues fall as vacancy rates across the country have risen higher than expected this year.
The current downturn is relatively mild compared with the dramatic drop in real estate values and increase in vacancy rates that took place during the recession of the early 1990s. At that time, the industry’s problems were exacerbated by a glut of speculative buildings.
But after a few years of rising rents and falling vacancy rates, the nation’s commercial real estate markets have steadily weakened during the last year. The nationwide vacancy rate rose to 13% in the third quarter of this year from 8.5% during the same period last year, according to Grubb & Ellis. If there is no significant pickup in demand, Grubb & Ellis researchers say the rate could reach 18% next year--a level not seen since the recession of the early 1990s.
Real estate sales--another important source of brokerage commissions--have dropped off significantly, according to Grubb & Ellis. During the third quarter of 2001, sales of office buildings, for example, totaled $6.2 billion, down sharply from the $10.5 billion recorded in the fourth quarter of last year when real estate markets were peaking.
Los Angeles, despite some pockets of strength, is not doing much better than the nation. During the third quarter, Los Angeles County reported an office vacancy rate of 14% while Orange County came in at 13%, according to Grubb & Ellis. Industrial vacancies remain low in comparison but sales and leasing activity has dropped across the board, falling nearly 15% from last year’s levels in Los Angeles County.
Some Southern California brokers say they remain busy and expect to match last year’s performance. A large office portfolio sale pending in Woodland Hills is an exception in a sluggish market.
However, in general, the drop in leasing and sales has translated into reduced commission revenue for most brokerages and forced many to take a hard line on staffing.
“We are not where we expected to be [in terms of revenue,]” said Rattner of Cushman & Wakefield. “We will continue to take a look at those [employees] that probably are not long-term players in the organization.”
In the Burbank-Glendale-Pasadena area, dubbed the Tri-Cities by brokers, vacancy rates may have declined in recent months but “leasing velocity has slowed quite noticeably,” said Grubb & Ellis broker Bill Boyd. “There might be only one or two companies looking for 20,000-square-feet of space whereas 18 months ago there might have been eight to 10 companies looking.”
The slowdown has forced some brokers to change their approach. In Orange County, industrial real estate specialist Jeff Chiate spends more time focused on helping small and medium-sized firms buying buildings instead of advising large corporate clients on leasing deals.
“We are aggressively pursuing buyers,” said Chiate, who works for Cushman & Wakefield.
Chiate and other real estate observers are counting on the economy to start growing once again next year. But it will take some time before renewed growth results in any significant demand for commercial real estate. Industrial real estate might begin to perk up during the middle of next year but the office market won’t recover until much later, say property analysts.
“We really won’t see any traction in the markets until early 2003,” said Bach of Grubb & Ellis.
