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VOL. 122 | NO. 159 | Thursday, August 23, 2007

Real-Estate Brokers Take a Real Bruising

By RYAN CHITTUM | The Wall Street Journal

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Brokerage firms have prospered along with commercial-real-estate markets in the past few years, reaping record profits.

But over five weeks, shares of the biggest firm, CB Richard Ellis Group Inc., have plunged 30 percent as the credit mess leads investors to predict a severe slowdown in property sales and worry that an economic slowdown could hurt leasing. Yet, some analysts and investors believe that the selloff went too far.

CBRE isn't the only commercial-real-estate services firm being hit. Shares of Chicago-based Jones Lang LaSalle Inc. were down 13 percent at the same time while those of the much smaller and more thinly traded Chicago firm Grubb & Ellis Co. are down 34 percent.

With the turmoil in debt markets turning into panic in recent weeks, the markets for high-yield commercial-real-estate debt have seized up, making it more difficult to finance buildings. Banks have dialed back their lending, concerned about the hefty amount of real-estate loans they may have to hold on their books due to the pullback among debt buyers.

The markets have grown increasingly nervous about publicly traded real-estate companies but until recently broker firms have been spared. The shares of equity real- estate investment trusts are down more than 20 percent from their peak in February, according to SNL Financial. But until last month CBRE and JLL continued their rapid ascent on the strength of leasing and sales markets, the main sources of revenue for brokerage firms. (Another major investment-sales firm, Eastdil Securities, is owned by Wells Fargo & Co. and its results aren't reported separately.)

Broker share prices peaked July 16 and started a downward trend that picked up steam as the debt crisis grew. Even strong earnings reports in the two weeks after the peak didn't stop the fall.

The stock dive is rare in an industry that has performed phenomenally in the past three years. CBRE went public at a split-adjusted $6.33 a share in June 2004, and its shares skyrocketed nearly seven times its IPO price by this summer on soaring profits from investment sales and leasing transactions. Even now, CBRE's return to shareholders has been 376 percent since its initial public offering. JLL is up 316 percent in the same period and Grubb & Ellis has risen 616 percent.

Brokerage executives say business is still strong. Brett White, chief executive of Los Angeles-based CBRE, declined to comment about his company's share price but says that even though debt-market volatility has raised the cost of transactions, "deals are still getting done." In 2006, commercial-real-estate sales reached $353.7 billion, according to Real Capital Analytics, a New York based real-estate research firm. Through August 15 of this year, the number had already reached $311.2 billion.

Colin Dyer, JLL's chief executive, agrees but notes that the pace of dealmaking is slowing somewhat and the profile of buyers has changed.

"On any new business that comes to market, instead of 20 offers there might be 10 or less," he says. "The sort of people making bids are better capitalized institutional investors, who've got funds to spend."

Typically, these buyers are happy to fund about half of the purchase with debt. In recent years, sales have been dominated by buyers who used very little cash and leveraged up to 90 percent of the sale price.

Grubb & Ellis declined to be interviewed but Rich Pehlke, chief financial officer, said in a conference call on Aug. 16, "If there's any disruption from the debt markets, it's being viewed as temporary ..." according to a transcript provided by Thomson Financial.

CBRE has been hit harder than Jones Lang LaSalle in large part because it is more dependent on investment sales and is less internationally diversified. Property sales and financing comprise 32 percent of CBRE's revenue (which totaled $4.03 billion last year), while they make up about 23 percent of JLL's. Furthermore, 64 percent of CBRE's revenue comes from the Americas (primarily the U.S.), while 31 percent of JLL's revenue is from the Americas. Grubb & Ellis is down more than the other two, because it's as dependent on investment sales as CBRE, but has almost all of its business in the U.S. and Canada.

Still, analysts and some investors think the stocks, and particularly CBRE, are oversold. "Clearly transaction volume will slow a bit, but a 35 percent selloff (of CBRE) seems to be a little overstated here especially with a company that has such a dominant market share," says Joseph R. Betlej, vice president and portfolio manager for Advantus Capital Management Inc., a St. Paul, Minn., investment firm that owns about 130,000 CBRE shares, according to FactSet Research Systems Inc.

"I think the stock is trading down as if Wall Street believes that the investment sales spigot has been completely turned off," says Will Marks, an analyst with San Francisco-based JMP Securities, who rates CBRE and JLL as strong buys. "That's extreme, in my opinion."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

PROPERTY SALES 91 293 13,051
MORTGAGES 58 168 8,171
BUILDING PERMITS 99 744 30,678
BANKRUPTCIES 34 156 6,220