Brokers battered because business besieged

Steve Marcus

Recent sale: A commercial building project is shown near South Buffalo Drive and Interstate 215. The complex was recently sold.

By Buck Wargo

Fri, Sep 11, 2009 (3 a.m.)

Steve Marcus

Sign of the times: A for-sale sign advertises a commercial building project near South Buffalo Drive and Interstate 215.

The commercial real estate slump is taking a toll on brokerages whose revenue has dipped sharply because of the steep decline in sales and lease rates.

In Business Las Vegas research in its annual survey showed a shake-up in the ranking of brokerages and the extent of the decline in activity.

CB Richard Ellis lost its top spot, falling to fourth as its total sales and lease activity went from $3.16 billion from July 2007 through June 2008 to $216 million from July 2008 through June this year. That’s a 93 percent decline.

Colliers International jumped from second to first with $423.6 million in sales and lease activity. That happened despite a drop in transactions of 81 percent from July 2007 to June 2008 and July 2008 to last June. It was $2.24 billion a year ago.

This year’s list excludes Marcus & Millichap, third last year, and NAI Las Vegas, sixth last year; neither provided numbers to In Business Las Vegas.

The drop in volume, analysts said, is simply a function of the marketplace. The oversupply of office, retail and industrial space and the lack of financing have stifled sales and new development. Much like residential brokerages, companies have cut staff and tried to position themselves for a recovery. Before that happens, consolidations and some firms going out of business are expected.

“We have seen this trend for residential real estate with Realtors and mortgage brokers, and now this concept translates into the commercial sector as well,” said Brian Gordon, a principal at research firm Applied Analysis. “The current climate in the commercial sector is challenging, and I suspect it won’t correct itself overnight.”

Commerce CRG moved from fifth place to second with $270 million in activity, down 32 percent from $398 million. To deal with less activity, the firm cut back on advertising and during the past 12 months cut payroll by about 30 percent.

“Our company is like everybody else. We had cost reductions in an effort to squeeze every dime as tight as we can,” said Mike Hillis, managing partner at the brokerage. “The strength of the firms is determined by how they weather this. I look at it being another 12 to 18 months of a tough market. It is not going to come back at the same time. It will come back in pieces.”

Grubb & Ellis rose to third with $217.6 million in activity, down from $411.5 million in last year’s survey.

R.O.I. Commercial Real Estate rounded out the top five with $97.5 million in activity, down from $263.3 million a year ago. It was eighth on last year’s list.

Sage Commercial Advisors was one of the rare firms to record an increase, jumping to the sixth spot. Its business rose from $46.5 million a year ago to $54.5 million this year. It was 18th last year.

Voit Commercial remained in seventh after activity fell from $320.8 million to $52.8 million.

Clifford Commercial Real Estate fell to 15th with its activity falling from $122.1 million to $6.5 million.

For the most part, the brokerages haven’t been hurt that much by leasing activity. It’s the lack of sales that has brought down their volume the most, analysts said.

“Obviously revenues (of brokerages) like so many in real estate are dependent on new activity,” said John Restrepo, principal of Restrepo Consulting. “New development is a big driver of the real estate brokers and revenue is derived from demand for land. The fact that such a large portion of the business has gone away is not just commercial brokerages, but construction companies, legal firms, architects and other companies.

“It has been broad and deep and everything has reset. There have been some fundamental changes.”

Restrepo adds that until new development returns, there won’t be any recovery in the commercial real estate market.

“That is going to be a while and for now everyone will be struggling to do the best we can under this new paradigm,” Restrepo said.

CB Richard Ellis, for example, saw leasing activity drop from $190.1 million to $137.4 million. Sales activity, however, fell from $2.97 billion to $78.6 million.

Patricia Nooney, managing director of CB Richard Ellis, said investment sales came to a halt last year because of the capital markets and lack of financing. The company reacted by not filling some positions when they became vacant, she said.

“We will be going up because that is the only direction we can go,” Nooney said. “We feel we are at the bottom right now and once the commercial capital markets come back, we will start to see some activity. I think it will be significantly better later in 2010 and into 2011. We will see activity in investment sales that have been nonexistent since the second half of 2008 and thus far in 2009.”

Colliers International saw sales volume drop from $985 million a year ago to $164.5 million in the latest survey.

“Our ability to weather the downturn is because of an experienced group of brokers,” said Mike Mixer, the new managing partner at Colliers. “Our company is completely debt free and that gives brokers come comfort know the company is stable.”

Gordon said he doesn’t expect any changes in the commercial marketplace until consumer spending changes. Businesses are being cautious with expenses and that includes lease of office, retail and industrial space.

Record vacancy rates have hit Las Vegas, with office at 22 percent, anchored retail at 10 percent and industrial at 12 percent, Gordon said.

“This cautious behavior by business owners and management is limiting the number of commercial real estate transactions, and at the same time price points are declining and that equates to lower commission volumes for those who consult on those transactions,” Gordon said.

Hillis said the changing dynamics of the marketplace have prompted his firm over the last 18 months to start working with lenders and loan services on foreclosure properties that have to be managed and prepared for sale. This will be the biggest flurry in the market for now.

“This has been a growth area for us because there are an awful lot of investors who have assets in this market who are not in the market at this time,” Hillis said.

The foreclosure wave is just starting in commercial real estate, Hillis said. Last year, there were less than 100 on the market but there are 600 on the market this year.

“We are just starting to see the front part of that,” Hillis said. “The residential market is well into that and has a bit of a recovery coming, but we are just getting into the commercial stuff.”

Joseph Kupiek, managing director of Grubb & Ellis, said the best way to compare commercial real estate is with what happened in the residential market where it ground to a halt but was bolstered by foreclosure sales. That is about to happen to the commercial market and is creating opportunities for property management and dispositions, he said.

“I am pretty optimistic about the next 18 to 24 months regardless of the type of transactions that will be done and we will have a decent market share,” Kupiek said.

Hillis said the retail segment has been hurt the most because it has been hard to retain tenants. He said he expects the office market will be next with increased vacancy.

“The actual tenant rep and landlord rep business has not gone away,” Hillis said. “We are still busy representing both sides and it just that the lease rates are dropping because of the economy ... When lease rates drop, that is less commissions.”