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Looking for Trouble

Struggling through the weakest investment sales and leasing environment in recent memory, commercial real estate brokerages are capitalizing on the one commodity that's in high supply: distress.

Many brokerages are seeking to provide property management, consulting and other fee-based services to troubled property owners. Some service providers also are launching new businesses.

Brokerages are ultimately trying to fix the problems of their distressed clients, whether it's by selling properties or loans, finding additional capital, or squeezing value out of buildings by enhancing operating efficiency.

How dormant is the property sales market? Some $143.6 billion in properties changed hands last year, down 71% from 2007, according to New York-based Real Capital Analytics, which tracks deals above $5 million.

What's more, the office market experienced negative absorption of nearly 45 million sq. ft. in 2008, a stark contrast from the positive absorption of 51.5 million sq. ft. the year before, according to New York-based Reis, which tracks 79 office markets nationwide.

“The players that have diversified revenue streams are better positioned to weather this storm,” says Will Marks, a brokerage analyst with JMP Securities in San Francisco. “But even those companies are cutting costs.”

Some brokerages, including heavyweight CB Richard Ellis, have even gone so far as to reduce commission splits for agents, say Marks and other industry experts. When that occurs, a brokerage house receives a bigger slice of the revenue pie on transactions while the individual brokers receive less.

Branching out

The depressed commercial property cycle and various cost-cutting measures have prompted brokers to bounce from firm to firm. Companies also are seizing the opportunity to expand their business. For example, New York-based Studley in March hired a 13-person retail team from Colliers International.

The move marks a definitive departure for Studley, which for years toiled exclusively in the office and industrial markets. The new division, which is primarily focused on Southern California, will represent retail landlords as well as tenants, and it will broker investment sales and offer development services.

The decision to launch a retail division stems from a contrarian philosophy by which Studley generally operates, says Michael Colacino, president of Studley. It's easier to attract good workers in tough times than in boom times.

The widespread distress in the retail sector also played a role in the decision, Colacino adds. As an increasing number of retailers go bankrupt and restructure, a slew of transactions and work is emerging.

Among other services, Studley intends to advise bankrupt operators on which leases to keep and renegotiate the terms for those leases. It also will work with retailers who may swoop in and buy a bankrupt competitor.

“If our competitors are slashing commissions and cutting their workforce, we're going to improve our talent pool,” says Colacino, who aims to expand the retail division into Washington, D.C., Chicago, and New York this year. “The question was where we should do it? Retail was hit first and hardest, so that's what we hit first.”

Targeting distress

Studley isn't alone in its efforts to shake up business in the gloomy climate. Increasingly brokerages are aiming to provide property management, consultation and other services to landlords and lenders under duress.

Essentially the brokerages are establishing one-stop shops that will help distressed property owners or lenders maximize asset value and execute a reasonable exit strategy.

Moreover, real estate service providers hope to win permanent property management, leasing and other real estate assignments with the eventual owners of the distressed assets.

“By being in a position of working on that asset, you have a much greater knowledge of it,” says William Krouch, CEO of Markets in the Americas region for Jones Lang LaSalle. When someone buys the asset, it's better to be in the incumbent position, he notes.

As of mid March, Jones Lang LaSalle's property receivership division was overseeing 15 retail properties that had fallen into distress. To avoid foreclosing on financially strapped properties, lenders typically ask courts to appoint receivers to manage the assets. Receivers collect rents and map out an action plan to salvage or sell the assets even as they work to stabilize the properties.

Executives with Jones Lang LaSalle's value recovery unit also have turned their attention to distressed office landlords and lenders before the properties fall into receivership. The group looks at ways to retain and attract more tenants, and it also seeks to operate the buildings more efficiently.

“Property management is probably as important as it has ever been because owners are trying to squeeze returns out of the property,” Krouch says. “And in these assets tenant retention is job one.”

Investigating ownership

The wave of potential foreclosures and workouts concerns Studley executives, too, particularly because the fallout could affect tenants they represent. The company recently hired a former Lehman Brothers investment banker to assess the complex mix of senior debt, mezzanine financing and other subordinated debt that frequently underlie office properties that Studley's clients occupy or could occupy.

The goal: to identify potential problems with a building's ownership that could create unease and uncertainty among tenants, Colacino says. For example, the company wants to determine which capital providers would have a claim to a building with a complicated financial structure to ensure that obligations such as tenant improvement dollars are met. That's particularly true if lenders force an ownership change between the time a tenant signs a lease and when it moves into the space.

Landlords may also be bleeding capital reserves to pay the mortgage, he adds, which could delay the replacement or repair of critical building infrastructure. Ultimately, that could disrupt a tenant's everyday operations.

"The capital structure complexities on some buildings will take years to unwind, so we're doing a much greater level of financial and organizational due diligence," Colacino says. "That was something we never would have thought about 10 years ago."

Traveling back in time

For some real estate providers, focusing more on property management and consulting represents a return to the past. Newport Beach, Calif.-based Voit Commercial Brokerage is rebranding itself as Voit Real Estate Services and will offer brokerage, property management, and other services for banks, financial institutions and landlords.

The firm, which is part of Voit Cos., offered property management services years ago but sold the business in 1999. Like other service providers, Voit Real Estate will concentrate on troubled assets and loans.

"We're going to provide a single point of service for properties and portfolios," says John Pierce, a managing partner with Voit Real Estate. "We're going to see a landslide of workout deals."

Princeton, N.J.-based NAI Global, meanwhile, is establishing an auction business to help distressed owners and lenders find buyers for their properties or loans, says CEO Jeffrey Finn. Coined Commercial Property PowerSale, the service will give sellers the choice of sealed bids or live auctions, or a combination of both.

Finn says the process marries the Resolution Trust Corp. of the 1990s with the online marketing technology of today to elicit interest from as many buyers as possible. The firm also will help some sellers wring out extra value from the properties before going to auction by trying to improve occupancy, reposition assets or operate them more efficiently.

"This is a mechanism to create a market and find a balance between buyers and sellers," Finn says.

Harsh market

Moves among brokerages to concentrate greater efforts on asset management and other fee services won't entirely make up for the plunge in leasing and investment sale revenues.

CB Richard Ellis, for example, reported that revenues from investment sales totaled $869.7 million in 2008, a decline of 48% from 2007, according to the company's year-end earnings report.

Those revenues won't improve much anytime soon. Only $5.7 billion in properties traded hands during the first two months of this year, according to Real Capital Analytics. That represents a decline of 83% from the same period last year.

What's more, property management and other fee-based businesses typically provide lower profit margins than commission-based services, noted Brandon Dobell, an analyst with William Blair & Co., in a February research report.

Still, the push to build up fee businesses is bearing fruit. CB Richard Ellis generated $1.7 billion in revenue from property management last year, a 23% increase over 2007. The company reported that it added 33 new corporate clients and expanded services for 32 existing clients in 2008.

During the fourth-quarter earnings conference for CB Richard Ellis in February, CEO Brett White told analysts he expected the property management business to keep growing as more landlords and corporations try to cut costs.

"Outsourcing is a business that we believe will continue to provide a great cushion in this difficult environment," White remarked. "We think that the business is going to be an ever-larger percentage of the overall revenue and profit of the firm."

Joe Gose is a Kansas City-based writer.


Despite a falloff in investment sales, some brokers have handled large transactions. Through mid-March, buyers still showed interest in New York, Washington, D.C., and Bridgewater, N.J.

Property Name City Sq. ft. Price Seller's Agent
Sotheby HQ New York 493,000 $370 million Jones Lang LaSalle
Bertelsmann Building New York 906,287 $356 million Eastdil Secured
Techworld Washington 757,904 $265 million HFF
Sanofi-Aventis HQ Bridgewater 669,703 $230 million Cushman & Wakefield
New York Times HQ New York 750,000 $225 million Cushman & Wakefield
Source: Real Capital Analytics
TAGS: Distressed
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