Inside the shakeup at JLL

The mandate became clear soon after the $2 billion JLL and HFF merger was announced: Even though JLL was buying its competitor, HFF would be the one taking over the combined capital markets business.

And executives at the firm being acquired did not want the other’s top teams sticking around for much longer, according to several people familiar with the matter.

“[We] weren’t a ‘cultural fit’ is the term they used,” one former JLL employee said on the condition of anonymity. “Despite the fact that there were a number of teams that were vastly more successful than the existing HFF teams.”

About four months have passed since the blockbuster merger officially closed. But the combined firms are still working through a number of kinks tied to the deal that created the country’s largest debt brokerage, sources told The Real Deal. Two of the biggest issues that remain the talk of the industry are top-agent turnover and a muddled direction for the consolidated business overall.

Representatives for JLL declined to comment for this story.

“I think brokerage firms are trying to mirror the banks and create these service supermarkets, so to speak, where they can supply every line of business to a client,” the former employee said. “I think that it’s brimming with conflicts of interest.”

And that comes on top of New York’s stricter rent laws, the latest challenges in brick-and-mortar retail and a very uncertain economic outlook.

Multiple analysts said that while early indicators concerning the merger were positive, they would need to wait until at least the third-quarter results were finalized to have a clearer picture of how it was working out from a financial perspective. That information is expected to come out in early November.

Mitch Germain, a REIT analyst at JMP Securities, said turnover at the recently merged companies so far could just be the tip of the iceberg, and that he would not be surprised to see more departures as consolidation plans come to fruition.

“We expect there to be a bunch of broker upheaval,” Germain said, citing ongoing discussions he’s had with competing firms. “We anticipate that’s probably going to take some time to work out.”

For now, though, most outside observers have been trying to figure out how the merger has been going with very limited information — something sources say they have in common with many people who still work at the brokerage.

“It’s been all the HFF guys telling everybody they’re in control, and nobody really knows what the business plan is,” the former employee said. “It’s been pretty segregated.”

Consolidation fever

Eric Anton, a former HFF investment sales broker who moved to Marcus & Millichap in 2017, said he doesn’t expect things to settle at the newly formed company any time soon.

But it’s been tough to determine exactly how the merger will shake out given how rare deals of that size are among commercial brokerages, he noted. “I’m not sure it’s ever been the case that two investment sales companies that big merged — nationally and in New York,” Anton said, describing the situation as “new ground for everyone.”

The playing field is certainly changing, though.

Real estate mergers and acquisitions have been on the rise in recent years as the industry grapples with an increasingly uncertain market. M&A activity among real estate firms hit an all-time high of $524.7 billion in 2017 — nearly 25 percent more than 2007’s then-record $424.5 billion, according to figures from Thomson Reuters.

Paul Massey, who launched his boutique brokerage, B6 Real Estate Advisors, last year, said JLL’s acquisition of HFF will make the firm an even stronger contender. “It makes the industry aware that JLL will be a capital markets powerhouse going forward,” Massey said, “so the landscape has radically changed.”

JLL and HFF also entered their merger with prior experience working together, including co-brokering Blackstone Group’s $640 million sale of 5 Bryant Park to Savanna last year.

J.D. Parker, an executive vice president and division manager at Marcus & Millichap, said he expects to see even more brokerage mergers take place going forward. “We anticipate further consolidation in the space,” he said, “especially considering some of the challenging market conditions that we face.”

At the same time, it’s not unusual for large and complicated merger deals to come with a fair share of turmoil.

Less than four years after Cushman & Wakefield acquired Massey Knakal Realty Services for $100 million, for instance, both Massey and Bob Knakal had left the firm. And less than one year after Newmark Knight Frank purchased the retail brokerage RKF, Robert Futterman, RFK’s founder, was fired following reports of “erratic behavior.”

JLL’s purchase of HFF has been no exception.

Sources told TRD almost as soon as the merger was announced to expect a hefty amount of turnover and poaching. Those predictions largely came true over the past few months as HFF sales and debt teams muscled out several of JLL’s top producers. (The commercial leasing teams at JLL have seen less high-profile turnover due to the fact that HFF mostly specializes in capital markets transactions.)

One of the biggest departures to date happened in August, when the head of JLL’s debt arm, Aaron Appel, left the firm with his colleagues Keith Kurland, Jonathan Schwartz and Adam Schwartz to launch their own firm, called AKS Capital Partners.

Though his team had negotiated more than $40 billion in deals over the span of about five years with JLL, rumors began circulating soon after the merger that Appel would soon be on his way out. He reportedly left the company over differences in approach and style.

From left: Aaron Appel, Mo Beler and Bob-Knakal

Appel told TRD that he was fine with how the merger ended up for him and his team, and he said they had no hard feelings toward their former employer. “This merger is great for us,” he said, “and we wish JLL and HFF the best of luck.”

But others in the industry said Appel’s exit was not particularly smooth.

Peter Hauspurg, who shuttered his brokerage Eastern Consolidated last summer and took a new role at ABS Partners Real Estate, said the consolidation of HFF and JLL’s capital markets teams has been “somewhat problematic” and cited Appel and his team’s departure as the biggest shock.

“You don’t let a producer like that go easily, so there must have been some friction inside, although they tried to minimize it, as expected,” he said. “But for him to walk out like that and form his own company is sort of a big step.”

What about Bob?

Other major departures have included Mo Beler, who spent two years as the head of JLL’s investment sales division in New York City, along with Anthony Ledesma and Yoav Oelsner, who both worked under Beler. Ledesma has since moved to the smaller commercial brokerage Hodges Ward Elliott.

Knakal, who joined JLL in September 2018 to lead its investment sales team with Beler, is still at the firm. But the merger has led to a lot of speculation around what his role and future at JLL will look like, according to several sources. The veteran commercial sales broker with more than 30 years of experience, largely focused on outer-borough multifamily deals, reportedly signed a five-year contract with JLL.

Knakal declined to comment.

Hauspurg predicted that Knakal would be fine, noting that he seemed to be cementing his position at the brokerage and doing solid work in a largely abysmal real estate market — especially given the state’s new rent law.

Another commercial broker echoed that point, noting that Andrew Scandalios, who led HFF’s capital markets group along with Michael Gigliotti, does not focus on the same types of deals, making him less inclined to try to push Knakal out.

“I see that being more synergistic than it being an issue for Bob,” the broker said on the condition of anonymity. “Bob’s core competency is not selling office buildings in Manhattan like the HFF teams. It’s selling smaller multifamily buildings and development sites.”

Only a few who spoke to TRD for this story, however, could pinpoint reasons why the firm doing the acquiring had effectively agreed to cede control of its capital markets teams to the firm being acquired. One source indicated that JLL felt its own teams lacked leadership while HFF’s did not. HFF founding partner Mark Gibson, who now serves as JLL’s CEO of capital markets in the Americas, could take on an even broader role at the company going forward, the source noted.

Dollar volume may have also played a role. HFF’s national debt brokerage business closed $61 billion in deals in 2017, for example, while JLL’s closed $24.1 billion, according to figures from the Mortgage Bankers Association.

Yoron Cohen, a former broker at JLL who now works as a vice chairman at Colliers International, said the merger was mainly about finding ways to reduce costs and that it would be a long and rocky road to figuring out how good a decision it was. Cohen left JLL for Colliers in late 2016 and sued his former employer for defamation and age discrimination a few months later. The parties settled the case last March.

“It will take four to five years to see how such an acquisition works out, and until then, no doubt it will be tough,” he said, noting that the brokerages will have to deal with “two different cultures and lots of changes to all involved.”

Early projections

Hard numbers reflecting how the merger has panned out from a business standpoint so far have been scarce.

During JLL’s most recent earnings call in early August, its president and CEO, Christian Ulbrich, said the early signs have been “very positive” and told investors the firm would “share combined results and progress on integration during our third-quarter call,” which is scheduled for Nov. 5.

“So far, we are very happy [with] how the integration is running,” Ulbrich said.

Dilara Sukhov, the lead JLL analyst at Moody’s Investors Service, also said that initial signs from the merger have been largely positive, including the simple fact that it closed on schedule. “It’s one early indication among many that perhaps the teams worked very collaboratively toward the closing of the transaction, which is a good sign,” she said.

Moody’s expects the joint venture to lead to about $60 million in synergies, from consolidating office space to cutting back on redundant legal and board-related expenses, among other things.

But Sukhov said she’s confident in general that JLL will pull off the merger effectively. She noted that the firm has completed about 70 acquisitions over the past four years that have largely worked out well.

JMP’s Germain cautioned, however, that it’s too early to get a full picture of how the merger has worked out financially, given that there has not been a full quarter of results to analyze yet.

“Clearly, there has been an uptick in activity,” he said. “To the extent of what expectations were and what that means for JLL, I think it’s too early to make that assessment.”