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Brokerage M&A Wave: Does 1+1=3?

Who would have guessed even a year ago that Cushman & Wakefield would buy Sonnenblick-Goldman? After all, C&W is known as a leading brokerage firm, while Sonnenblick-Goldman is a major real estate investment bank, completing some $7.5 billion in capital transactions in 2006.

But the May announcement by the two New York-based firms is just the latest in a string of consolidation moves among the brokerage industry's major players. In fact, the three top firms on NREI's annual top brokerage survey have made significant mergers and acquisitions in the past 12 months, and the trend seems likely to run unabated.

The largest deals occurred in December 2006, when CB Richard Ellis bought Dallas-based Trammell Crow Co., and more recently in May, when the relatively unknown NNN Realty Advisors, based in Santa Ana, Calif., acquired Grubb & Ellis Co. in Chicago.

“There is continued consolidation among the major players across the globe really,” observes Frank Liantonio, executive vice president and a 26-year veteran of New York-based Cushman & Wakefield. The private company ranked No. 3 on NREI's Top Brokerage survey with the total value of investment sales and leasing transactions in 2006 reaching $85.7 billion. “There clearly is a move on the part of all of the organizations to diversify both geographically and across service lines and create scenarios where one and one equal three or four.”

Flexing financial muscle

The leading brokerage firms are finding new ways to service client needs on both sides of every transaction, particularly in the financial services area. “Ten years ago, financing a transaction that you are selling might have been perceived as a conflict,” says Liantonio. “Today the markets are so driven by capital that being able to finance a purchaser merely facilitates a transaction getting done at the optimal price.”

While Liantonio says that C&W's debt and equity finance capabilities had not been properly integrated into the firm's investment sales platform, the plan has changed. “We will expand the capability of Sonnenblick-Goldman into key markets around the United States in support of our investment sales activity.”

C&W also wants the ability to issue debt throughout the entire capital stack, as well as traditional 65% loan-to-value, mezzanine and preferred equity financing. “We want to provide as many services across the capital spectrum as we can in support of our clients' needs,” says Liantonio.

Growing globally

Wall Street analysts are tracking the movements of the largest publicly traded firms, and approve of managements' global growth strategy. “We believe CBG and JLL can increase operating earnings 35% to 40% in 2007, as both leverage their global capacity in an increasingly international real estate market and can earn sizable fees from their rapidly growing investment management business,” wrote David Boardman, a senior analyst with Wachovia, in a midyear research report on the commercial real estate services sector.

As for Grubb & Ellis, reviews are mixed, pending the outcome of the NNN merger and better financial guidance on growth prospects.

For their part, publicly anyway, Cushman & Wakefield executives are happy being private. “We're not dealing with quarter to quarter earnings pressures other than those that we impose on ourselves and we're not subject to the vagaries of the public markets,” says Liantonio.

Still, there is a new and distinctly international air to the firm. In April, Italy's IFIL SpA, the Agnelli family's investment entity, purchased a 71.5% majority ownership in C&W for $625 million, promising to bring even more global reach to the firm.

“Clients want to have a firm that can handle a deal in New York, London and Tokyo and everywhere in between. It's important to be a global player today,” says Liantonio. He predicts that within the next year, the firm will make targeted acquisitions regionally in the United States as well as in Europe and Asia.

Analysts expect increased leasing activity to offset any future declines in investment sales. According to New York-based research firm Reis, 46 out of 79 markets recorded declining vacancy rates in the first quarter of 2007, up from 40 out of 79 in fourth-quarter 2006.

Many pundits, including Liantonio, see no end in sight for the red-hot investment sales market. “As long as there is an arbitrage between the public and private markets, it should take us through the balance of the year.”

TAGS: News Brokerage
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