Recent momentous changes have roiled the competitive landscape in commercial real estate even as the economy recovers in fits and starts from a recession that had a devastating impact on commercial property values.
Witness CBRE’s blockbuster acquisition of ING’s real estate investment management business, JLL’s purchase of King Sturge, and most recently Wall Street investment firm BGC Partners’ acquisition of not one but two of the biggest names in the business in Grubb & Ellis and Newmark Knight Frank, and one gets a sense of the profound changes sweeping through the industry.
One major firm, Cushman & Wakefield, has been noticeably absent from the recent tumult. Instead, it has diligently pursued a strategic plan it adopted two years ago under the steady direction of global president and CEO Glenn J. Rufrano.
Rufrano brought stability following a period of internal change and market challenges for the New York-based company and the broader commercial real estate industry. Cushman’s Italy-based parent company, Exor s.P.a., one of Europe’s largest investment firms, brought the veteran chief executive aboard the New York-based CRE company in late March 2010 from Centro Properties Group, where he had served as CEO since 2008, guiding the retail REIT through some of its most difficult days during the recession. Blackstone acquired the U.S. retail assets of Centro in March 2010, a year after Rufrano’s departure.
A Rutgers University graduate, Rufrano started his career as an appraiser, co-founding The O’Connor Group (now O’Connor Capital Partners) in 1983 and spending five years at Landauer Associates, where he was involved in the sale of some of the most prominent office properties in the U.S. Prior to Centro, he served as CEO of New Plan Excel Realty Trust from 2000 to 2007. Rufrano serves on the boards of Ventas Inc. and New York University’s Real Estate Institute, and previously as a director of Trizec Properties, acquired by Brookfield Office Properties (NYSE: BPO) in a $7.6 billion transaction in 2006.
CoStar News connected with the C&W chief executive last week to discuss current trends in the global property market, the changes sweeping through the CRE services industry, and Cushman’s initiatives to strengthen and realignment its geographic markets and business segments.
You reported more tolerance for risk is returning to the real estate and capital markets in your recently released International Investment Atlas. What do you see in the market that supports that conclusion? Is debt as well as equity capital ready to step up?
Glenn Rufrano: We had a capital markets dinner recently with Cushman professionals and roughly 20 investors from around the U.S., representing such firms as JPMorgan, Invesco and Clarion. Based on those discussions, the conclusion was clear. Pricing is high in some people’s minds, with core pricing being as high as it has been over the last 12 months, coupled with the fact there is clearly more debt liquidity in the market today. High pricing relative to risk may be fine, so it could be a risk-adjusted, and that’s okay for core properties. Some investors simply want higher returns — and they’re willing to take on more risk.
It’s becoming clearer there will be more liquidity migrating to the ‘B-grade’ investment product. Then the question becomes, what fundamentals are investors going to look at in the B product to minimize risk, for example, in the office sector? Investors would consider buying B product in markets they believe will see growth over a reasonable period of time.
If you have vacancy and some level of GDP and employment growth, you can expect there will be some leasing activity. We’re seeing it, for instance, in the markets outside of San Francisco. Dallas and Houston would also certainly qualify as having certain B markets which could see growth. Within the New York metropolitan area, Brooklyn, New Jersey and Connecticut could be considered markets with some growth potential as lack of supply in the core creates more demand outside the core. Office investors will be looking for nodes and centers where there will be growth.
It’s a similar story in retail, though investors will also be looking for denser markets. If you bought a B shopping center in a dense market, you might feel more comfortable if there were some occupancy issues, you could fill them.
What are your expectations for the rest of 2012 in U.S investment sales and leasing activity?
The Americas are the part of the world where we’re expecting to see the highest investment sales volume this year. There was $235 billion in investment sales activity in the Americas in 2011. Of that, roughly $200 billion was in the U.S. We think that number will be up 25% for 2012 in this part of the world. In the Asia Pacific, there was $375 billion in investment sales last year, and we think it will be flat for 2012. In EMEA (Europe, Middle East, Africa), it was $200 billion in 2011, which will also be flat in 2012.
As far as timing, we expect slowly increasing volumes between the first and second quarters, with growth accelerating in the third and fourth quarters. Anecdotally, we feel there will be a little more activity than we previously expected in the first quarter once the numbers are in. If there’s a caveat to that, it’s because of a lack of available product in many markets.
Will that supply constraint result in new development in those markets?
Good question. For the first time in maybe 18 months, we’re actually hearing talk of buying land for prospective development over the next year to two years. I wouldn’t expect a deluge of it because the key to development is financing, and financing is still difficult unless it’s preleased. But we are hearing about it more and more.
Are you seeing more actual transaction activity in the U.S. from foreign buyers, as opposed to those that have been circling the market for years now?
We expect more activity this year from offshore buyers than in 2011. There was a lot of tire-kicking last year, and we think that should have run its course in some cases, for a couple of reasons. One, people understand the fundamentals of the markets now. Those haven’t changed that dramatically in the last 12 months, so they should be able to make decisions. Number two, when you think about where to invest around the globe, especially if it’s in core, Europe is still difficult. Some capital sources would rather invest here. There are some transactions pending. They probably will not be led by foreign sources of capital, but that capital will be backing an operator in the market.
We’re interested in your views on the commercial brokerage business and what lies ahead. Tremendous changes have altered the brokerage landscape, including the successful investment by Ifel, now Exor, in Cushman & Wakefield a few years ago and continuing last year with CBRE’s acquisition of the global real estate investment management business of ING, JLL’s purchase of King Sturge, and most recently Wall Street investment firm BGC Partners’ acquiring two of the biggest names in the business. What do you see happening to the brokerage business model in the future as a result of these and other changes?
These changes are a result of what people in the market believe would be a successful real estate financial services business model. The two successful models that I believe exist are global and niche CRE companies. The global model is the one CBRE, JLL and Cushman & Wakefield have either achieved or are moving toward. Examples of the niche players would be companies such as Eastdil Secured and HFF in investment sales and finance.
The differences are stark. The global companies have five or more business lines and operate in all the major capitals of the world. The niche players generally have two major business lines and will take their business only to certain geographies, primarily major U.S. cities. Both of these models seem to be working pretty well; the global model because it provides large-scale clout and diversification, and the niches because of their strong focus and profitability. Anything in the middle, it’s very difficult to see how those businesses will have long-term success.
In what business lines and world markets do Cushman & Wakefield see the most opportunity, and where does the company need to acquire more strength?
We presented a strategic plan to our board in December 2010 in which we identified business lines by geography that we’re in and need to strengthen. We created four initiatives, starting with global alignment and management. If we didn’t align our management teams, nothing else we did would have mattered. Global is the format we believe will be successful as an economic model.
The second initiative was to create a consistent business mix around the globe. We looked at every Cushman & Wakefield office to determine profitability and how our businesses are mixed between leasing, capital markets, corporate occupier and investor services, valuation and consulting — the mainstays of the company.
We concluded that we have offices that needed strength in some of those business lines, and that has been an ongoing initiative for us for the last 15 or 16 months. The third initiative is client prioritization, focusing on clients by region and by business line, and the fourth is creating efficiencies in how we operate Cushman & Wakefield, which means we need to be more conscious of costs for our company and our clients.
Where are we focusing? We first determined that there are geographies that we want to grow proportionally higher in than others. For instance, we have 8% of our revenue in Asia, a high-growth market, and we expect that it should be higher, so we have a focus to increase our penetration across the Asian Pacific region. In business lines, we felt that corporate-occupier and investor services, our corporate services components, needed to be strengthened. The movement of corporations around the globe, both physically and through their capital, is extremely important to our success, and we have to service those flows. We’ve determined that over time, unless we can create a more consistent business mix, we will not be able to serve our clients as well as we should.
Do you foresee opening more U.S. offices?
We don’t think we need to open up many more offices, or close any offices. We just have to supply more power to those offices. For instance, we may have an office that is very strong in capital markets and leasing but has less of strength in valuation. Since those two businesses cross sell, we would bring in more valuation professionals.
We’ve seen some unexpected things happen among the top service firms over the past 12 months. On your two-year anniversary with Cushman, can we expect any surprises regarding external growth, change in control, etc.?
We’re holding steady. We created a plan and we want to stick to that plan, growing appropriately in the right markets. If we find an opportunity that’s different than organic growth, we’ll evaluate that separately. I was a public company CEO for 10 years. What I found counted was that if you said you were going to do something, you do it. It doesn’t matter if it’s big or small. You build credibility by doing what you say. What we want to do is create a plan and complete that plan, steady and easy.
What’s the value in companies acquiring an investment management and financing platform as CBRE did in acquiring ING?
I thought it was an excellent purchase by CBRE and a good business for them to add. Over time, I’d hope and expect that we can increase our investment management capabilities. But we’re going to focus first on our primary businesses, our five business lines. As we get them running on closer to eight cylinders, we’ll be looking to increase our investment management business.
You have a deep background in retail and REITs. Does Cushman have a significant retail presence and do you see the firm boosting its presence in that area in the U.S.?
Our retail presence differs around the globe. Cushman & Wakefield bought a company that specialized in retail called Healey & Baker in 1998 and consequently, we have a very large retail business in Europe. In the U.S., we have less of a retail component relative to our overall business. But it’s a very focused business, which is retail leasing in urban centers, and one that has completed the largest retail deal in New York City’s history – Uniqlo’s lease on Fifth Avenue. In Asia, we have a strong retail business in Japan and Korea, and we’re strengthening in China.
Retail is a very important part of our business, not only for leasing revenue but also investment sales. We’re beefing up both throughout the globe.
You have a reputation as having a great eye for spotting and bringing in talent. What percentage of your time is spent in recruiting, versus other areas?
Human resources is a major component of every CEO’s business. There are some who argue that the CEO’s job is nothing more than HR because if you put the right people in the right spot, you don’t have to do anything else. On a percentage basis, I would say it has to be 10%-20% of my time, or else I’m not getting my job done.
Any possibility there could be a change in ownership or the way Cushman & Wakefield is structured in terms of the public or private markets?
We have a 75% owner in Exor – our employees own the other 25%. Exor has investments in a number of other companies, including [automaker] Fiat. We’re private, and two of our big competitors are public. The answer to your question rests with what the owner wants to do. Exor has stated publicly that they have no need for more liquidity. They’re a public company and they have 1.5 billion euros of cash on their balance sheet. What they really want is for us to increase the value of Cushman & Wakefield.
As we increase that value, if the owner per chance wants to liquefy, I should be providing the means to liquefy. They could do that in any number of ways, including going public. Being public is nothing more than a form of finance. Right now, our owners choose to finance privately and they’re perfectly comfortable. If at some point they change their mind, we just have to be responsive. (Credit To R, Drummer-Co-Star)