There’s an old saying in real estate development that the “raised nail gets hammered” and perhaps that saying also applies to commercial real estate service firms.
This week that became apparent with the bankruptcy filing of the once iconic Grubb & Ellis (GRBE) brand. At one time the Santa Ana-based commercial real estate service firm towered above all of the other leading commercial real estate brands and today the global giant has been reduced to a debtor in possession worth a mere $30 million.
The once dominant brand was considered the McDonald’s of commercial real estate services (with a similar highly visible yellow and black logo) and the globally recognized leader grew over five decades into a stalwart transactional service firm.
Founded in 1958 by Bill Grubb and Hal A. Ellis, Jr., the Oakland brokers establish an innovative, growth-oriented company with a penchant for providing clients with best-in-class service. Throughout the 1960’s and 1970’s the company grew into a full-scale firm providing services including brokerage, property management, development, and insurance.
During the 1980’s it grew ten-fold by acquiring nationwide offices with a goal of integrating and consolidating services. In 1983 Grubb & Ellis listed on the New York Stock Exchange and in 1984 the company acquired Henry S. Miller Companies, a firm that was at that time the largest real estate company in Texas.
After that acquisition, Grubb & Ellis became the third largest commercial real estate firm in the U.S.
It was during the 1990’s that Grubb & Ellis grew to global supremacy. This worldwide expansion resulted in strategically located offices in England, France, Germany, Italy, The Netherlands, Spain and Mexico.
Of course the four decades of growth also resulted in heavy borrowing and extraordinary risk. At the peak in 1997, Grubb & Ellis was trading for around $17 a share and the largest individual shareholder, Michael Kojaian, was on the way up. The Bloomfield Hills real estate investor had made his first investment in 1996 and he continued filling up his holdings for more than fifteen years.
That fifteen year journey was a wild ride for Kojaian (and ownership by his family and affiliated companies) as his GRBE holdings have expanded from 2.5 million shares to 22.9 million, now representing roughly 30 percent ownership in Grubb & Ellis. During that period Kojaian has taken various management positions (chairman 2002-2007 and chairman 2009-last week).
In the Jim Collins book, How the Mighty Falls, the author writes:
“Every institution, no matter how great, is vulnerable to decline. Anyone can fall, and most eventually do. But decline, it turns out, is largely self-inflicted, and the path to recovery lies largely within our own hands. We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they can often rise again.”
On December 10, 2007, Grubb & Ellis announced that it had completed a merger with NNN Realty Advisors and that the combined companies would be “better positioned to more effectively compete in an increasingly global commercial real estate industry.”
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Former Grubb & Ellis President and CEO Scott Peters said “This merger combines two complimentary firms to create a new company that is greater than the sum of its parts.”
NNN Realty Advisors purchased the iconic brand (via a reverse merger) utilizing a $725 million stock-only transaction. Many of the tenant-in-common assets managed by NNN’s illiquid partnerships were highly leveraged and the fees that NNN had generated were not sustainable. The end result of the “self-inflicted” merger was the precise opposite of what Peters described as a model with “sums greater than the parts.”
Instead, the combination of the iconic global service firm and the highly-leveraged tenant-in-common king resulted in an unaligned investor option with very little alignment–and mounting debt.
The last recession created a wave of bankruptcies with most tenant-in-common partnerships disappearing or dissolving. And of course the huge fees that were once generated by selling the securities related to these partnerships vanished. In addition, the management fee income also decreased considerably and many of the brokers moved on to greener pastures (stable firms).
The last straw for Grubb & Ellis was the loss of substantial management contract (valued at around $40 million) that resulted in around $10 million in direct losses in 2011.
Of course, as Jim Collins wrote, “the mighty can fall, but they can often rise again.” This week BGC Partners (BGCP) signed an agreement to purchase the remaining assets of Grubb & Ellis for $30 million (plus $4.8 million in bankruptcy financing).
BGC Partners, an affiliate company of Howard Lutnick’s Cantor Fitzgerald, is a well-regarded global financial intermediary and his company recently acquired (October 2011) another strategically-aligned company, Newmark Knight Frank. The combined company should bring considerable scale and resources and perhaps bring the vintage yellow and black brand to its namesake prominence.
Of course, risk is inescapable and success and failure are directly correlated to good or bad judgment. Jim Rohn, famous for his motivated writing and speaking has said, “Failure is not a single, cataclysmic event. You don’t fail overnight. Instead, failure is a few errors in judgment, repeated every day.”
Hopefully Grubb & Ellis will survive five more decades (making the company 100 years old) and the new owners will remember the carpenter’s words: “the raised nail gets hammered.” (credit brad thomas, forbes)