After Receiving Unsolicited Inquiries from Potential Suitors, National Real Estate Company Hires Adviser to Explore Strategic Options
Get bigger and go global, or go local and specialize by serving a specific niche or providing high-touch service appears to be the trend among companies in the business services sector, including those providing commercial real estate services to other businesses.
With the largest CRE companies increasingly on the hunt for external growth opportunities and mid-market firms under rising competitive pressure to sell or merge in order to maximize their service footprint and grow market share, several experts predict that a new round of mergers and acquisitions in the commercial real estate services sector may accompany increasing commercial real estate transaction volume.
The announcement this week
by Grubb & Ellis Co. (NYSE:GBE
) that is it has hired San Francisco-based investment banking firm JMP Securities to explore strategic alternatives for the company, including a potential sale or merger, provides the latest sign of changes rippling through the CRE brokerage services market.
Despite improved leasing and sales volume, Santa Ana, CA-based Grubb & Ellis's share price fell to its 2011 low of 98 cents on Friday, March 18, down from the 52-week high of $2.27 on April 14, 2010.
With the economy and real estate market on the upswing, the company said in its filing and press release that the timing is right to explore the possibility of selling itself or merging with another company.
"While the management team has made progress restructuring the business and driving top-line growth, we believe now is the time to explore opportunities on how to best leverage the broad platform and capabilities of the company into an improving market for the benefit of all stakeholders," said Grubb Chairman C. Michael Kojaian.
In its announcement, Grubb & Ellis disclosed it has received "unsolicited inquiries," presumably from potential suitors, and decided to explore its strategic options as part of a formal process that represents "the best interest of all of our constituents," Kojaian said.
After enduring two brutal years in 2008 and 2009, commercial real estate service companies enjoyed top-line growth in 2010, with investment sales activity up significantly year over year. The leasing business bounced back more quickly than expected, fueled by an improving economy and pent-up demand. Analysts forecast significant bottom-line earnings growth going forward for the CRE services sector.
In February, the industry's two largest global property services companies, CB Richard Ellis Group and Jones Lang LaSalle, reported solid results for the last quarter of 2010. FirstService Corp., the Canadian parent of Colliers International, saw total revenue jump about 18%, strengthened by a 30% boost in CRE transaction revenue. However, Grubb & Ellis reported a net loss of $10.7 million on a 10% boost in revenue, though the company narrowed its loss for a year earlier.
With fortunes on the upswing, mergers and acquisitions activity among CRE firms will probably accelerate through 2012 as Grubb & Ellis and others begin to formally explore their options.
"The Grubb & Ellis announcement is part of a natural evolution in the industry where firms in the middle market with revenues between $100 million and $1 billion will really have to either get much, much bigger, or much smaller," said Dylan Taylor, chief executive officer in the U.S. for Colliers International. "Mid-market firms are strategically challenged. They may not be big enough to be multi-billion-dollar global players that can afford to invest in recruitment of talent and technology."
Colliers made several mergers and acquisitions during the downturn as part of its U.S. expansion strategy. However, most M&A transaction occur during up cycles, Taylor said, and the Grubb & Ellis move "makes sense because as we're coming out of a [down] cycle and some firms realize that they are not going to be able to take advantage of the coming upswing in their current strategic position."
"With the combination of improving market conditions and the investments that Grubb has made for the last several years, we've shown significant top-line growth, and the board has determined that now is the right time to look at our options," Janice McDill, senior vice president, marketing and communications, told CoStar. "We're one of the largest brokerage firms. We have essentially the same footprint as CBRE, but obviously, from a revenue standpoint, we're a lot smaller."
Although the company has a wide U.S. footprint for delivering transaction and management services, one of the challenges facing Grubb & Ellis is that it also has a large portfolio of troubled tenant-in-common (TIC) assets acquired when Grubb joined with NNN Realty Advisors Inc. in 2007 near the peak of the real estate boom. The company has faced complicated integration issues during the downturn, including management of the NNN Realty legacy assets.
In February, Grubb launched Daymark Realty Advisors Inc. as a wholly owned and separately managed company
to manage those assets. Daymark becomes the fourth Grubb & Ellis reporting segment in addition to its transaction, management and investment management businesses. It also becomes one of the nation's largest asset management companies, overseeing a nationwide portfolio of about 33 million square feet, including more than 8,700 multifamily units.
Some of the expanding firms may be international firms looking to enter or grow their presence in the U.S. For example, London-based Savills recently announced it was reviving its U.S. expansion, opening two new offices and forming an international investment group. In February, CBRE agreed to acquire ING Real Estate Investment Management,
a unit of Holland-based ING Group NV.
Regional and mid-market national brokerage last year continued to partner with or be absorbed by larger companies.
In January 2010, Colliers and FirstService Real Estate Advisors executed their plan to combine operations and global platforms, operating as Colliers International in 61 countries. In response, eight breakaway affiliates from Colliers, Grubb & Ellis and NAI Global immediately launched St. Louis-based Cassidy Turley, a new national company. CT expanded throughout the year, with moves that included striking a partnership with Fuller Real Estate, a major player in the Denver market for nearly 55 years, which dropped its affiliation with NAI Global.
Other aligning of interests between brokerages reflected the move toward consolidation by large full-service companies with national and international offices. New York-based Newmark Knight Frank continued to expand nationally last summer, merging with Cornish & Carey Commercial, one of Northern California’s largest regional real estate firms, and later joining with Denver-based Frederick Ross Co., another of Denver's largest and oldest commercial real estate firms.
Other so-called "mid-major" brokerages also weren't shy about jumping into the expansion fray. Toronto-based Avison Young, headed by former Grubb & Ellis CEO Mark Rose, acquired a number of U.S. real estate services firms, including Hodges Management and Leasing Co. in Atlanta, and Appian Realty Advisors LLC, in the Washington, DC, market.
The major firms made a number of high-profile expansions and executive moves last year as well. Jones Lang LaSalle tapped veteran investment brokers to head its Mid-Atlantic multifamily sales force and help grow the firm's national apartment investment business. JLL also recruited leading mortgage bankers Thomas J. Melody, Thomas O. Fish and Michael J. Melody as executive managing directors heading its Real Estate Investment Banking (REIB) business in the Americas.
Cushman & Wakefield, the world's largest privately held commercial real estate services firm with 230 offices in 60 countries, made two major executive changes in 2010. In February, the firm appointed Glenn Rufrano as the firm's new president and chief executive officer, succeeding Bruce Mosler, who moved to the role of co-chairman of the board at the beginning of the year. Rufrano previously had been chief executive at international retail real estate giant Centro Properties Group.
In another key move, Cushman & Wakefield in November appointed James M. Underhill to serve as the next CEO of the Americas, the company's largest business unit, giving him overall responsibility for enhancing the firm's value to clients and growing market share. Underhill oversees 141 of the firm's offices in nine countries throughout North and South America, succeeding John Santora who was named chief of the firm's Client Solutions group in June and plans to remain based in Cushman & Wakefield's Washington, DC office.