Empire Building

CB Richard Ellis was already an 800-pound gorilla before it unveiled plans on Halloween to acquire Trammell Crow Co., a Dallas-based diversified real estate services firm widely recognized as having one of the strongest corporate real estate arms in the nation and an active development pipeline.

While the $2.2 billion buyout of one of the industry's pioneering real estate firms provides true synergies for the publicly traded giant, it also puts its largest competitor on notice: CBRE (NYSE: CBG) will command 10.5% of the $24 billion U.S. commercial real estate services market, reports CoStar Group.

Principal competitor Cushman & Wakefield will only service 3.4% of the total market. Citigroup analyst Patrick Burton remarked that the deal should make CBRE the “premier” provider in the institutional property management arena, a specialty of Trammell Crow. Burton also viewed the deal positively because it will lessen CBRE's reliance on volatile sales and leasing fees.

Ross Ford, president and CEO of real estate alliance network TCN Worldwide, concurs. “This integrated company now has a big advantage serving institutional clients while Cushman & Wakefield now appears to essentially be a pure brokerage. There's more than enough business out there to keep both firms going, but CBRE certainly has established a lead,” says Ford.

The rivalry between Manhattan-based C&W and Los Angeles-based CBRE, the U.S. real estate services equivalent of Coke and Pepsi, is fierce. But archrival C&W has executed a different strategy in recent years. While CBRE has grown through a series of acquisitions and public/private forays, C&W has focused on its core brokerage business.

C&W, which posted $1.3 billion in revenues last year, has 11,000 employees globally. But those figures pale by comparison to CBRE, which posted revenues of $2.6 billion in 2005 and will have 21,000 employees when the merger is finalized early next year.

C&W CEO Bruce Mosler declined to comment on the merger, but the firm is not standing idle. In November, Wachovia hired C&W to manage its 3.2 million sq. ft. metro New York City-area office and data center portfolio. The firm manages 238 million sq. ft. of commercial property in the U.S.

Still, the real estate services business remains highly fragmented: The top five largest firms combined only account for 16.9% of the market for real estate services, reports CoStar Group.

With the acquisition, CBRE will derive roughly 18% of its revenues from property management fees. Prior to the deal, CBRE generated roughly 8% of its revenues from property management. The merged company will manage roughly 1.6 billion sq. ft. of commercial property. Sales and leasing fees, which represented about 74% of revenues, will be reduced to roughly 64% after the merger.

“This deal isn't just about size because the quality is also there,” says William Concannon, vice chairman of Trammell Crow. As one of Trammel Crow's most senior executives, Concannon will lead the merged company's global corporate services arm from Dallas. “The demand for corporate services will only continue to grow, and our strategic position will only be strengthened.”

The share price of CBRE's stock closed at $31.40 on Nov. 20. That's down slightly from the 52-week high of $32.36 recorded two weeks after news of the acquisition broke, but well above the 52-week low of $17.36 reached last December.

TAGS: Brokerage
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