In commercial real estate, throwing shade can occur at the highest levels.
After negotiations between JLL and Cushman & Wakefield regarding a potential Cushman acquisition fell apart, JLL CEO Christian Ulbrich said, “We haven’t seen anything which we would think was worth spending our shareholders’ money on.”
Ulbrich made his comments on JLL’s third-quarter earnings call this month. Cushman CEO Brett White had his chance a few days later. Addressing his investors, White said he was “disappointed that no great opportunities have come down the road the last four or five months.”
The real estate slump has walloped the big commercial real estate service firms with stock prices down in a range from the low double digits to nearly 50 percent. But it hasn’t dampened their appetite for M&A deals. Firms are eager to tap into their cash reserves and substantial credit lines to expand further.
JLL, CBRE and others said they’re evaluating growing pipelines of M&A deals and that their balance sheets put them in a good position to pounce.
JLL reported that its debt level was back down to where it was before the company acquired HFF last year for $2 billion. And CBRE’s overall liquidity, its cash on hand and available credit, was up over 30 percent year-over-year at the end of the third quarter to $4.2 billion.
CBRE CEO Bob Sulentic stressed his company would exercise patience.
“We’re not going to run out just because we have the dry powder we have, because we’re in a low point in the market cycle, and buy up a bunch of stuff,” he said during the firm’s November earnings call, “unless we think we can integrate it well, it’s got a good cultural fit and we can make a reasonable deal.”
Notwithstanding JLL’s big buy of HFF, big M&A deals among the large commercial firms slowed down after a heady few years of consolidation.
Back in 2014, private equity firm TPG Capital acquired the Chicago-based DTZ, Cassidy Turley and Cushman. It merged the companies to create a Big Three in commercial brokerage operating as Cushman. The firm went public in 2018.
That same year, Newmark acquired the retail-focused brokerage RKF. More recently, Newmark reportedly rebuffed an acquisition offer from Cushman.
During Newmark’s November earnings call, CEO Barry Gosin pointed out that the company has grown over the years with the help of about 50 M&A deals. Last year, the firm bought the London-based retail brokerage HDH and the CRE deal-flow tech platform Workframe. Those deals were preceded by the 2017 acquisition of multifamily-focused Berkeley Point Capital for $875 million.
“We kind of consider ourselves more in the Navy Seal category,” Gosin said. “We’ve looked at specific areas to fill in white space to put members of the team on the field in things that help us on a holistic basis and create a multiplier.”
But the big firms have taken a hit as the pandemic has put the squeeze on revenues they get from leasing office space and selling properties.
CBRE reported third-quarter earnings down 2.8 percent year-over-year to $442 million, and JLL fell 19 percent to nearly $244 million. Newmark and Cushman got hit harder with earnings falling 25 percent to $152 million and 31 percent to $117 million, respectively.
Whereas commissions from leasing deals have fallen off, the brokerages continue to see cash flows from the property-management businesses they built up in the years since the Great Recession.
But sources said those are low-margin, capital-intensive businesses that require lots of personnel to keep going. CBRE and JLL have recently made layoffs in order to keep costs in line.
Sulentic said CBRE will look to do M&A deals in areas that stand to benefit from pandemic-induced secular shifts, such as life sciences and industrial.
There is at least one real estate M&A deal that is getting done.
In October, Marcus & Millichap struck a deal to buy debt specialist Mission Capital Advisors for an undisclosed amount.
The deal, set to close before the end of the year, got started in 2019 but hit a few speed bumps along the way due to the pandemic.
When announcing the deal, executives from both companies made the corporate-speak acknowledgments of “highly complimentary” teams and “stellar reputation.”
Which, in the language of commercial M&A, qualifies as a lovefest.