Led once again by especially strong results reported by CBRE Group, the world’s largest commercial real estate services company, major publicly traded commercial real estate service providers continued to benefit from the rebound in global investment sales and leasing in the third quarter, despite the uneven pace of economic recovery in the U.S. and financial and political turmoil in Europe.
While the strong performance of their firms was buoyed by continued robust leasing activity and property sales, commercial real estate executives and analysts cautioned that strong leasing growth may cool down somewhat in the fourth quarter — typically the most active period of the year for commercial real estate transactions — though property sales are expected to accelerate due to improved capital availability and investor appetite for relatively stable CRE yields in the volatile financial markets.
CBRE Group, Inc., (NYSE:CBG) by far the largest publicly traded real estate services firm, reported a 12% increase in third-quarter profits due to strong property management and leasing revenue, particularly in the Americas. Total third-quarter company revenue was $1.5 billion, up 21% from third-quarter 2010’s $1.3 billion.
The Los Angeles-based company broadened its reach into the global investment management business in a big way this week, closing its acquisition of most of ING Group NV’s real estate investment management operations in Europe. CBRE officials Tuesday described the ING deal as the most significant transaction for the firm since its 2006 purchase of Trammell Crow Co. The merged company, CBRE Global Investors, is now the world’s largest investment management firm with more than 1,100 employees in 21 countries serving more than 600 institutional clients
Other major publicly traded players in CRE brokerage and services, including Jones Lang LaSalle (NYSE: JLL), HFF Inc. (NYSE: HF) and Colliers International parent FirstService Corp. (Nasdaq: FSRV) also reported solid results over the past week.
JLL late Wednesday reported revenues of $903 million, an increase of 28% in U.S. dollars over a year ago. Net earnings fell to $34 million, or $0.76 per share, for the quarter versus $37 million for third-quarter 2010. The company attributed the decline to acquisition costs, including expenses related to the merger in May with London-based property consulting company King Sturge.
But CBRE, with a market cap of just under $5.6 billion — more than double that of Jones Lang, its closest competitor — saw the stronger results across the board.
Leasing revenue, considered a good leading indicator for job growth and overall revenue growth among brokerages, grew 19% for CBRE, with double-digit growth across all global regions. An 11% increase in U.S. leasing revenue surprised some analysts given the challenges facing companies in the slow-motion economic recovery.
CBRE’s strong third-quarter performance is evidence of the continued, albeit hesitant recovery of property markets in the face of persistent concerns about Europe and tepid U.S. job growth, CBRE Chief Executive Brett White told investors in an earnings call last week. However, CBRE said leasing growth is starting to decelerate to historical levels, a view expressed by several analysts and executives at rival CRE firms.
“We’re getting to that point where leasing is going to begin operating in a normal way. And that’s not 20% or 30% growth a year — it’s probably high single (digits), low doubles,” White said. That said, White added, “We are very well positioned for this recovery cycle, with a strong balance sheet, and remain keenly focused on sustaining our growth and improving our operating leverage going forward.”
The company, formerly CB Richard Ellis Group Inc., said net income rose in the third quarter to $63.8 million, or 20 cents a share, from $57 million, or 18 cents a share, in the same quarter a year ago. Excluding write-down charges and acquisition costs, earnings would have totaled $77.7 million, or 24 cents a share, up from $62.4 million, or 20 cents a share, a year ago.
Also notable was CBRE’s strong growth in property and facilities management, especially in Europe and Asia Pacific. CBRE has expanded its outsourcing businesses beyond U.S. shores since acquiring Trammell Crow in 2006.
In an environment of low interest rates, rising property values, available debt financing and a growing number of investors, CBRE property sales grew 23% in the quarter, almost entirely driven by a 42% sales jump in the Americas.
During the quarter, CBRE completed about $900 million of acquisitions and about $800 million of dispositions globally. CBRE has raised $1.5 billion in new capital year to date, and had $2.1 billion to deploy at the end of the third quarter.
Assets under management totaled $53.5 billion, up from $39.1 billion at the end of the second quarter, primarily due to the July 1 closing of ING Clarion, now called CBRE Clarion Securities. Investment management revenue rose 5% to $77 million in the third quarter, driven by higher fees, including asset management fees from CBRE Clarion.
CBRE closed on the acquisition of ING REIM in Asia on Oct. 1 and finalized the purchase of the European operations this week. “Our expanded investment management business will enhance our service offerings for institutional investors in commercial real estate, and provide us with another source of stable revenues.”
Jones Lang LaSalle
Increased market share, the addition of King Sturge in Europe, the Middle East and Africa (EMEA) and higher
incentive fees powered revenue across all of JLL’s global segments and in LaSalle Investment Management. The company’s leasing and capital markets transaction business grew 20% and 50%, respectively, in the third quarter, while corporate outsourcing powered nearly 20% growth in property and facilities management revenue.
“Our third-quarter results were solid, and we continue to see healthy business pipelines into our seasonally strong fourth quarter,” Colin Dyer, JLL president and chief executive officer, said in a release.
In JLL’s Americas region, total third-quarter revenue rose 22% in local currency to $379 million over the prior year, led by growth in capital markets and hotels (44%) property and facility management (26%), and leasing (22%).
HFF, Inc. a leading commercial real estate financial intermediary with a strong emphasis in debt placement, loan origination and loan servicing, reported strong results reflecting the higher level of sales activity in CRE capital markets. The company reported revenues of $63.9 million, an increase of $26.4 million, or about 70.5% compared to third-quarter 2010 revenues of $37.5 million. Operating income, driven primarily by capital markets production volume, rose 135.6% to $13.9 million compared over a year ago.
Total transaction volume of $10 billion nearly doubled (a 96% increase) over the same quarter one year ago, with the 267 closed deals representing 53% growth. The company reported an 87.5% increase in debt placement volume to $5.4 billion, a 40.2% increase in investment sales volume to $2.7 billion, and a 510% increase in loan sales to $1.3 billion.
Falling interest rates have supported increased sales activity in most core U.S. commercial real estate markets during the past seven quarters. However, “over the past 60 days, we have witnessed select pricing headwinds for certain of the more risky transitional assets in both the public and private markets,” said John H. Pelusi, Jr., HFF, Inc. chief executive officer.
“Generally speaking, the U.S. commercial real estate property level fundamentals, while continuing to improve in select tier-one markets and for select property types such as multi-housing and hospitality, remain challenged,” Pelusi said.
“Given that property level fundamentals have historically lagged the U.S. economy, we expect them to remain challenged for select property types, especially in secondary and tertiary markets, throughout the remainder of 2011 and likely well into 2012. These aforesaid headwinds have the potential to adversely impact transaction volumes relative to past historical norms in the U.S.”
After total revenue growth for HFF of 116%, 114% and 71% in the first three quarters, JMP Securities is assuming 50% revenue growth for HFF in the current quarter.
“The fourth quarter comp does appear to be a bit more challenging and we believe that brokers may have more trouble completing deals in the fourth quarter than in the third quarter, when business that commenced during the second quarter was still closing,” said JMP analyst William C. Marks in a research note. “Still, our broker conversations, and comments by HF, indicate that business in core markets is still vibrant, albeit with some slowing versus earlier in the year.”
HFF’s results over the last several years “have significantly outpaced its end markets as smaller brokers have struggled to retain talent or gone out of business and mid-tier firms struggle with talent retention and competition from both niche and full-service provider, added Brandon Dobell and Timo Connor in an investors note this week.
FirstService Corp., parent of Colliers International, generated solid year-over-year revenue gains in both its commercial real estate and residential property management segments, said Jay S. Hennick, founder and chief executive officer of the Toronto-based company.
FirstService reported $252.9 million in CRE services revenues in the third quarter, up 14% from a year ago. About 6% of the growth was internal, driven by year-over-year gains in brokerage, property and project management revenues in the Americas and Europe. About 6% of total CRE revenue growth came from favorable foreign currency translation, and 2% from recent acquisitions.
“We continue to see abundant growth opportunities in our Colliers International commercial real estate services operations, particularly as the market for commercial real estate strengthens,” Hennick said.
“Despite economic conditions that remain challenging, and which are impacting our businesses everywhere, FirstService is in a very enviable position. We benefit significantly from the stability and scale opportunities of being a world leader in residential and commercial property management with more than 60% of FirstService revenues coming from recurring property management contracts.”
Revenues in property services were down slightly as property and distressed asset management operations were impacted by continued government regulation and other constraints, preventing banks and other mortgage servicers from taking action on their distressed properties and slowing the flow of new properties coming under management, Hennick said. (credit, r, drummer, co-star)