The Real Deal New York

A wide open lane for commercial brokerage IPOs

Is Newmark’s latest IPO news just the tip of the iceberg for the firm and its biggest rivals?
By Rich Bockmann | November 01, 2017 10:00AM

Commercial brokerage NKF is being spun off from its parent BGC Partners

Newmark Knight Frank took one step closer to joining the ranks of its publicly traded rivals late last month when it filed paperwork for its hotly anticipated initial public offering. Newmark Group, as the new company is known, will trade under the ticker symbol NMRK and is looking to raise up to $100 million through the IPO, according to its red herring prospectus. And the commercial brokerage — which will spin off from Howard Lutnick’s BGC Partners — is heading to a public market with a rapidly growing appetite for real estate service firms.

CBRE — the largest commercial brokerage, with a market capitalization of $13.36 billion — has seen its stock price rise nearly 49 percent over the past year to $39.59 in late October. The second-largest, JLL, with a market cap of $5.81 billion, saw a gain of roughly 26 percent to $128.17 a share in the same period. Colliers (up 35.48 percent to $54.60), HFF (up 61.11 percent to $43.18) and Marcus & Millichap (up 16 percent to $27.79) all saw their prices rise, too.

But even as the big get bigger, there’s plenty of room for the megabrokerages to grow without bumping shoulders. Newmark and the five other top firms, including Cushman & Wakefield, hold a roughly 15 percent share of the $200 billion global commercial brokerage market, according to BGC. By contrast, in the $182 billion accounting industry, the four biggest firms together control nearly 72 percent of the market.

At a June conference hosted by investment bank Sandler O’Neill, Lutnick said the big brokerages can keep scaling up their businesses without needing to worry much about overlap. “Big fish can eat small fish for the rest of my life and it won’t make a darn bit of difference,” he said.

Newmark, meanwhile, has made far more progress toward Wall Street than Cushman, which was rumored to be eyeing a public offering in the third quarter of 2017 (all has been silent on that front). But while Newmark’s recent filing sheds some light on the brokerage’s inner workings, including CEO Barry Gosin’s $30 million compensation in 2015, there is far more to be revealed in the weeks ahead.

The brokerage has yet to disclose how many shares it will offer and at what price, something its 4,500 employees are sure to be watching closely. That’s because Newmark’s principals, including Jeff Gural — who stepped down as chairman last month — and its president, Jimmy Kuhn, hold shares in the firm that could be worth a personal fortune when converted into public stock, sources said.

Other top dealmakers, including David Falk, Brian Waterman, Neil Goldmacher, Moshe Sukenik, Scott Klau, William Cohen and Michael and Paul Ippolito, hold large ownership stakes in the firm, sources familiar with the matter told The Real Deal. A representative for Newmark declined to comment.

One thing that is clear from the filings is that Newmark Holdings (the entity that will have a general partner interest in the publicly traded brokerage) will have 157 founding partners, who will hold a combined 12.7 million shares. Those equity units will be traded on a one-to-one basis for Newmark common stock, but the value will depend on how much total stock is issued and at what price.

“That amount will be diluted by the actual offering, depending on the number of shares they register,” said Richard Morris, a partner in the law firm Herrick Feinstein who’s not affiliated with the offering. “They’ll be filling in those numbers at some point.”

Another looming question is how Newmark plans to deploy its projected $100 million in new funds. One of the areas Lutnick sees as a growth driver for Newmark is on the debt side of the commercial real estate business, which surpassed the $3 trillion mark this year for the first time, according to the Mortgage Bankers Association. The Wall Street titan has said he’s baffled by the inefficiencies in the debt market for commercial properties.

BGC made a big bet on that market this year when it bought the mortgage provider Berkeley Point Capital for $875 million and merged it with Newmark. That marked the largest real estate firm acquisition BGC has made.

And Newmark’s debt division is the fastest-growing part of its business. Through the first six months of 2017, a little more than 16 percent of the brokerage’s $737.7 million in revenues came from mortgage banking. That was a 61 percent increase over the first half of 2016, compared to an 18 percent increase in commercial leasing, which accounted for 37 percent of revenues.