A steep plunge in transactions over the past year has forced commercial real estate brokerages to take stock of their operations and in many cases, to shift focus and offer new services to create value at a time of national economic distress.
According to the Mortgage Bankers Association, U.S. property sales plunged 80% in the first quarter of 2009 compared with the same period a year earlier, to $8.9 billion. Commercial and multifamily mortgage originations fell 70% from a year earlier. In fact, mortgage originations declined across every major investor group, including an 80% drop in originations by commercial banks and a 66% decline for life insurance companies.
Against this backdrop, some brokerages are providing more financial services to help clients maximize their investments or root out hidden liabilities in mortgage contracts. Others are falling back on leasing activity, which is less disrupted by upheaval in the capital markets.
“Our industry is going through a transition. The best and the brightest do well, and those that aren't get riffed out,” as the military would say, notes Harvey Green, CEO of Encino, Calif.-based brokerage Marcus & Millichap.
Because commissions based on transactions are the lifeblood of most brokerages, the steep decline in sales volume is being keenly felt across the country. “We've probably had 30% of our transactions during the 2008 cycle terminated as a result of the client's inability to obtain financing, or the bank reneging on prior financing commitments because of the change in the marketplace,” says Aaron Hodgdon, president of the Hodgdon Group, based in Colton, Calif.
In one deal that fell through, a buyer planned to build a retail building and worked with a team from Hodgdon for a year, preparing the $10 million project. But even though the owner planned to invest 40% in equity, banks said no to the financing.
“It's a little painful when you work on something for such a long period of time and then at the last minute it doesn't come together,” says Hodgdon. “That's part of the changing environment we all have to deal with.”
Diversifying has helped Hodgdon keep his company strong despite the economic downturn, he says. The firm is a one-stop shop, providing developer as well as brokerage and financial services. Hodgdon just represented Ashley Furniture in its purchase of two industrial buildings with a collective 439,000 sq. ft. in Colton.
Marcus & Millichap's strategy includes aggressive marketing to keep buyers aware of the broker's inventory. Researchers churn out reams of data for agents and clients, to help with portfolio decisions.
“A lot of people see this as an opportunity to reposition themselves,” says Green. For some clients, that means investing in the hard-hit retail sector, or in apartments, which could recover more quickly.
Financial skills are critical at a time like this, says Green. “If you're not aware of what's transpiring in the financing arena, if you don't know how to solve problems in terms of working around the [net operating income] and effectively helping the client evaluate his position, you're kind of in trouble.”
Marcus & Millichap is sticking to its mission, says Green. “We're not hunkered down. I know a lot of firms have had significant support staff cuts and layoffs. We have not experienced a lot of that. Now is the time you have to invest in your agents and your client base.”
At the peak of transactions in 2007, Los Angeles-based CB Richard Ellis (CBRE), the nation's largest brokerage, had about $135 billion in transactions, says Christopher Ludeman, president of Americas brokerage for the firm. “That number is significantly less today.” Company specialists are helping clients restructure debt and equity transactions, and a new business unit is evolving around restructuring services.
CBRE, which has 30,000 employees and 300 offices, also counts on its leasing business. “In good times and bad, robust economies and those that are falling, the leases roll every day,” says Ludeman.
Although each year the company experiences 5% to 10% turnover among its transactional employees, it has not lost a substantial number of professionals because of the recession, Ludeman says.
Besides traditional investment and portfolio management, CBRE offers niche services such as labor analytics and health care investment, says Ludeman. “We're not just a brokerage company.”