Tough times for CB Richard Ellis brokerage

Tough times for CB Richard Ellis brokerage

Silicon Valley / San Jose Business Journal - by Katherine Conrad
It’s a tough time to be a commercial real estate brokerage.

But CB Richard Ellis Group Inc. insists its picture isn’t as bleak as what was painted by a report from Morningstar Inc. earlier this month.

The report described CBRE’s position as “precarious” because of massive debt and noted that cash flow was a negative $380 million in the first half of 2008 compared with a positive $163 million for the same period in 2007.

The report further stated that as much as 40 percent of CBRE’s revenue is tied to commercial real estate deals in a market that has “plummeted” as the economy falters.

Morningstar indicated that the company has $3 billion in debt and faces a funding shortfall of $500 million in the upcoming year.

Despite the downbeat tone of the report, Morningstar values the stock above where it has been trading. The company is trading at $3.77 per share as of Nov. 11, off its 52-week high of close to $25. Morningstar is pricing the stock at $6.50.

Mark Schmidt, head of CBRE’s Silicon Valley office, agreed that the economic situation is challenging and said that while other offices have cut staff, he does not plan to let any of his 40-plus brokers go. He noted that CB Richard Ellis was founded more than 100 years ago and has faced difficult times before.

“Everybody is struggling with the economy. We all have to get as lean and mean as possible and watch expenses more than we ever have,” he said. “CB is no different. We’re cutting expenses like everyone else and trying to be prudent to stockholders.”

Brett White, CBRE’s president and CEO, responded to the Morningstar report with a letter to shareholders that said the firm’s revenue was $1.3 billion for the third quarter and earnings per share totaled 27 cents, exceeding analysts’ expectation by 4 cents.

“These are certainly very challenging times for everyone,” wrote White. “Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago.”

CBRE announced as of Nov. 11 that it would offer 50 million shares of stock for sale, to deal with its 65 percent drop in net income in the third quarter. The stock offering comes on top of a reduction of $190 million in costs, which include layoffs.

CBRE, with 300 offices around the world, stands out as the largest and most public of commercial real estate firms facing an increasingly tough market. Because it is public, the firm must disclose its finances.

But CBRE is not alone.

Privately held Cushman & Wakefield Inc. and publicly held Grubb & Ellis Co. are rumored to have laid off brokers. Neither company would return telephone calls seeking comment. Grubb & Ellis’ stock has dropped to around $1 from a 52-week high of $7.50.

Mark Ritchie, whose firm Ritchie Commercial Inc. had four offices throughout the Bay Area including locations in San Francisco, San Jose, Oakland and Walnut Creek, said he plans to consolidate his East Bay offices into the Walnut Creek location. While Ritchie is saving rent through consolidation, he has added brokers in San Jose and San Francisco to his staff of 45 brokers.

“I’m so different from all of them because my firm is so small,” Ritchie said. “We’re making deals. They’re small, but they are deals.”

Phil Mahoney, principal and executive vice president of Cornish & Carey Commercial/ONCOR International, said his firm, which has been profitable for decades, also has added brokers.

“It’s a good time to be private,” he said. “We don’t have the stockholders looking over our shoulders. We don’t have debt to service and we’re not in the public eye. Pubic entities that do have debt are under severe strain.”