Bullish Investors Send Commercial Brokerage Stocks Soaring As Cushman Contemplates IPO
A jump in stock values this past year for the big five publicly traded commercial real estate brokerages suggests now may be an ideal time for private companies of equal scale to enter the public market.
In the year ending March 31, Jones Lang LaSalle shares advanced 56% to $174.64, Colliers International’s stock price jumped 47% to $36.06, and Marcus & Millichap and CBRE Group’s stock increased 47% and 35%, respectively. Newmark Group stock leapt 8% after only one quarter on the market — it debuted on the Nasdaq Dec. 15.
Analysts attribute bullish investors’ appetite for commercial brokerage stocks to the overall bump in equity markets this past year, the search for stocks benefiting from tax reform and the global expansion of these firms’ underlying businesses beyond traditional brokerage.
“The business models that the bigger players in the space have moved toward have been working well, which is to say that over the last five to 10 years you’ve seen the largest companies in the space like CBRE, like JLL, move to a business model that runs across a variety of different business lines and is focused on gaining share at a global level,” JPMorgan analyst and Executive Director Anthony Paolone told Bisnow.
“It’s always been the idea that if they are successful at this, it would reduce the risk and reliance on any one business line such as say investment sales, which can be more volatile.”
Real estate stocks have benefited from the dramatic increase in stock market values following the election of President Donald Trump. The Dow Jones industrial average's pace of change has increased dramatically in the past few years, having advanced from 20,000 to 25,000 last year then jumping 1,000 points to 26,000 in just seven days in January.
That record run has since stalled, with the Dow experiencing some of its sharpest single-day point drops on record in February. Stock values continue to fluctuate as investors respond in fear to talks of global trade wars, upward inflationary movement and rising interest rates.
“Looking at [brokerage] stock price performance, you can chalk it up to a couple of things,” Paolone said. “These stocks do tend to correlate with general equities, and equities have had a nice lift in the last 12 to 18 months. I’d say No. 2, these companies generally were beneficiaries of tax reform.”
To IPO Or Not To IPO ... That Is The Question
Analysts have reinforced buy ratings for CBRE, JLL, Colliers, Newmark and M&M, and Wedbush Securities analyst and Senior Vice President of the Financial Institutions Group Jason Weaver said now is the time for competitors like Cushman & Wakefield to consider launching an initial public offering while investor sentiment is still hot.
“Cushman is similar in scale. They are not publicly traded, they are owned by private equity,” he said. “There have been rumors day in and day out that they are going to file for [an] IPO, which now would be a really good time considering the multiples their peers are trading at.”
The Chicago-based firm was reportedly interviewing advisers for its potential IPO in late March, though no regulatory documents have been filed. Cushman is one of the largest brokerages in the world next to CBRE and JLL, and it is owned by private equity firm TPG Capital after it merged with competitor DTZ for $2B in September 2015. The firm could go public as soon as this year, Bloomberg reports.
“If it was me, yeah, I would definitely be thinking really hard about it,” Weaver said.
Newmark Group, a publicly traded subsidiary of BGC Partners Inc., launched its IPO in December and has rebounded from a somewhat underwhelming start. The firm had planned to sell 30 million shares at a price tag of $19 to $22/share in its initial offering. But when investor reactions came in lukewarm, parent company BGC Partners made the decision to decrease the offering size to 20 million shares at a cost of $14 to $15.
Newmark closed out the year strong with an 18% jump in revenue to $1.6B, according to regulatory filings. The company has a market cap of $2.36B. Rivals Colliers International, JLL and CBRE boast market cap rankings of $2.65B, $7.85B and $15.7B, respectively.
“We continue to view the stock as attractive here given its industry-leading growth and profitability potential as well as the continuation of the cycle in commercial real estate,” Wedbush analysts said in response to Newmark’s Q4 and full-year earnings report. “Industry participants have characterized the current environment as one where plenty of capital is chasing only a modest amount of deals which should continue to be supportive of cap rates and valuations.”
Beyond The Brokerage-Centric Model
Commercial real estate brokerages are becoming more institutionalized with each passing year. What was once known as a very niche, family-oriented segment in the industry has attracted the attention of deep-pocketed institutional investors, private equity giants and sovereign wealth funds looking to get into the commercial real estate space.
“When you think about who those principals are going to look to provide real estate services, they’re going to want a similarly large institutional-minded partner,” Paolone said. “I think that really pushes these largest companies to keep their game on par with [institutional investors] and to have all of the offerings.”
Massive consolidation through mergers and acquisitions in the past two decades have created global market leaders that are less leveraged and have more capital on hand to expand their property and facility management capabilities worldwide and to hire the best talent. Newmark Knight Frank, for example, has been on a talent acquisition spree to beef up its capital markets and valuation team. The firm has grown its valuation and advisory practice from 15 to 300 people in about a year and recently tapped several senior leaders for its hospitality, gaming and leisure practice within the valuation business.
“That’s a trend [that has] been going on since almost before the global financial crisis,” Weaver said. “We’ve seen the bigger brokerages change from pure sales and leasing, very ‘brokerage-centric’ models to more holistic real estate service businesses where they’re doing a lot of corporate outsourcing — i.e. property and facilities management [and] shared services contracts.”
“[They are taking] the entire real estate function out of the corporate entity and outsourcing that to them.”
Major commercial brokerages also have more funds on hand than they did in years past to invest in real estate development, and many have built portfolios of stable, cash-flowing assets to rival that of giant real estate managers Blackstone Group and Brookfield Property Partners.
JLL’s investment vehicle, LaSalle Investment Management, recently launched its eighth real estate fund, LaSalle Income & Growth Fund VIII. The fund will focus on value-add investment opportunities similar to its redesign of 50 Post Office Square in Boston. LaSalle Investment Management has roughly $59B worth of global assets under management.
CBRE’s independently operated investment arm, CBRE Global Investors, is larger than JLL’s. The investment management firm has $103.2B worth of assets under management and recently acquired three data centers totaling 447K SF in Northern Virginia, the largest data center market in the world.
“They’ve modified their businesses in a way that is a little less profitable for one, [which is] the downside,” Weaver said. “But the revenue stream is much more durable over the sense of an entire economic cycle.”