Mid-Sized Brokerage Firms Feel the Pressure of Globalization

Consolidation continues to be a major theme for commercial real estate brokerage firms this year, as corporate clients globalize and seek service providers that can help them with multiple needs in every corner of the globe.

Increasing globalization has been a within the industry for the past 15 years, but in the aftermath of the Great Recession, this activity has reached a new fever pitch, as corporations big and small adapt a global operations model as they see fewer opportunities in established markets such as U.S. and Western Europe, says Jim Underhill, CEO for the Americas with global brokerage firm Cushman & Wakefield. In going global, brokerage clients have developed a strong preference for using the same firm for all of their needs, both on a geographic and a service basis, spurring industry consolidation.

That’s meant that commercial real estate services providers have had to build up the scope of their operations. For example, in the past two years, Jones Lang LaSalle, a global brokerage firm headquartered in Chicago, opened new offices in Shenyang, China; Pattaya, Thailand; and Tijuana and Guadalajara, Mexico, to name just a few of its expansion points.

Growth, however, is not an easy feat in markets outside the U.S., where oftentimes there is a shortage of experienced commercial real estate professionals that can be hired locally.

“Getting global is very, very hard today,” Underhill says. “We are global and we are looking to continue to grow in almost every major market in the world, but there is not much quality talent out there. If you are not global today, I don’t know how you get there.”

Plus, reaching the geographic scope of firms with established international operations, such as CBRE, Jones Lang LaSalle and Cushman & Wakefield, requires a capital investment on a scale that mid-market players might not have access to, notes Jack Durburg, global president of transaction services with CBRE. For example, last year, CBRE spent $940 million to acquire ING’s real estate investment management businesses in Europe and Asia, transactions that gave it an edge in the arena of global investment management. But CBRE also closed $159 billion in investment sales and leasing deals in 2011. Firms that did a fourth or fifth of its business would have a difficult time coming up with the same amount of capital for acquisitions.

Go big or go home

While boutique brokerage firms that focus on small local markets won’t have to compete with the big guys because of their local positioning, those in the middle seem to be facing two choices: find a specialized niche or merge with a bigger rival that offers multiple service lines and global capabilities.

Studley, a New York-based brokerage that completed $49.91 billion in investment sales and leasing transactions last year, would appear to be more of the former. Several years ago, Studley established an office in London and formed a partnership with the French brokerage AOS, but its main strength appears to be its focus on tenant representation.

Meanwhile, Newmark Knight Frank and Grubb & Ellis chose the second option. Last year, Newmark Knight Frank merged with BGC Partners, a spinoff of Cantor Fitzgerald. Then this spring, BGC also acquired the assets of Grubb & Ellis through a Chapter 11 sale, forming Newmark Grubb Knight Frank. As separate companies, the two firms closed a total of $64.35 billion in investment sales and leasing transactions in 2011. Together, they will have more than 100 offices in North America and 250 million sq. ft. in property and facilities management contracts.

The industry should expect to see more of these kinds of deals going forward because of the intense competition for market share among mid-sized players.

“I think local and regional firms are going to be pressured because [clients] want global reach,” says Barry Gosin, CEO of Newmark Grubb Knight Frank. “That’s one of the reasons we sold the company [to BGC], because we’ve felt the pressure to do that. We felt that it was important for us to have the resources to expand our services.”

“Clients have more complex problems [than in the past], particularly in these challenging times, so they need solutions that go across a broad range of services and broader geographies,” adds Greg O’Brien, CEO of brokerage with Jones Lang LaSalle. “And whenever you have something as complex, you are going to have competition around the growth. So there is a good opportunity for both growth and shifting of share within the industry.”

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