TRD Forum: Consolidation is the new normal in LA’s uber-competitive CRE market
But mergers — along with the rapid rise of tech — aren't for everyone, experts say
The force fueling consolidation in the commercial real estate industry has little to do with the current cycle. Now, something else is happening.
The ultra competitive environment, coupled with new technology and more available capital, has pushed companies to scale up fast. That can be seen in the level of consolidation industry-wide, which has surpassed the 2007 record by more than 25 percent.
“If you look back 100 years, usually at the end of a cycle, there’s a big uptick in mergers and acquisitions,” said Ralph McLaughlin, founder of Veritas Urbis Economics. While that is the case today, the panelists agreed that current market dynamics don’t tell the whole story.
McLaughlin was among a panel of speakers who gathered for The Real Deal’s Century City showcase on Wednesday, there to discuss how big data, consolidation and IPOs will shape the industry in the 21st century.
“The dynamics of this business have changed a lot,” said Pat McRoskey, managing director at CBRE, who on the panel. McRoskey, who started off his career by cold-calling for business, said the industry will start seeing far fewer family-run and mom-and-pop shops.
“You’re going to see bigger companies getting bigger and smaller companies getting absorbed,” he added.
Jeff Rinkov, CEO of Lee & Associates, said commercial real estate is now in an “environment where capital is chasing transactional volume.” That has been a catalyst for his firm to expand, he said. That expansion could now include Canada and “opportunities in Mexico,” he added.
The poster-child for rapid expansion in the commercial real estate industry may very well be Compass. The venture-capital behemoth has recently expanded into the commercial end through its acquisition of Paragon and most recently, Pacific Union International.
But as Compass digs deeper into commercial, traditional commercial brokerages are flirting with residential. Konrad Putzier, senior reporter at TRD and the panel moderator, posed that question, as a possible trend.
But it may not fit everywhere.
“We don’t have aspirations of becoming a crossover company,” said Rinkov, who recently launched a residential division in his firm’s New York office. But, he added, New York is a “unique case.” He doesn’t see the company becoming what he called, “resimertial.”
Within the last year, two commercial giants, Cushman & Wakefield and Newmark Knight Frank, went public. Some speculate Compass, on a nationwide tear, might be next. Elizabeth Clark, who joined Pacific Union in May, and had been at BRC Advisors, said she’s heard rumblings that her new firm might do the same. To her, however, it doesn’t make a difference.
“We’re so insulated in our business that I don’t think it will affect us in a negative way,” she said.
But going public isn’t in everyone’s future.
“I never wish I was a public company,” Rinkov said. “We’re transactional brokers. I would not want to report to an investor group or conference call each quarter.”
In addition to mergers and IPOs, perhaps the biggest impact on the industry has been big data, which has forced companies to retool in recent years with the additions of Zillow, Trulia, CoStar and others.
But unlike residential, there is still “a long way to go” for data on the commercial side to make a big impact, said McLaughlin, a former economist at Trulia. On the commercial side, it needs to be more “value-add” he said, than on the residential side, where the typical consumer might be less informed.
“The next level of data is predictive analysis,” Rinkov said. His firm is already eyeing transit plans and government investment as a way to spot “real catalysts and drivers” fueling new neighborhoods. He added that the firm won’t pivot to become a tech company. It will, however, “buy great technology.”
Still, IPOs and technology aren’t panaceas.
“I think it’s just going to complement our business as opposed to taking over our business,” said Clark. Knowing the zoning codes, or the future plans of an abandoned house down the street, are more “irreplaceable data points in the business.”
And nothing replaces the “human factor,” McRoskey said. “Many people have same data — it’s way you market and present it. I think that human factor has a lot to do with it.”