Commercial-property brokerages, the stars among U.S. real estate stocks this year, are losing luster as the booming market for deals shows signs of cooling.
CBRE Group Inc. and Jones Lang LaSalle Inc., the global titans of property services, have lost 8 percent and 8.7 percent, respectively, this month, reversing sharp gains compared with real estate investment trusts and the Standard & Poors 500 Index. HFF Inc. tumbled 17 percent and Marcus & Millichap Inc. fell 10 percent.
The prospect of a slowdown in real estate transactions after a five-year recovery is stoking concern that profit growth will weaken at the big brokerages, which make their money on services from selling buildings to handling leases. Rising interest rates may limit gains in property prices, while banks and other lenders to the market are decelerating their rate of new credit expansion.
Much of the earnings growth at the companies is in the rear-view mirror at this point, said Brad Burke, an analyst at Goldman Sachs Group Inc., who cut his ratings on JLL, HFF and Marcus & Millichap this month. This is a natural maturing of the real estate cycle.
Before this month, CBRE, the worlds largest brokerage, had gained 11 percent for the year, while JLL, the second-biggest, jumped 19 percent. In contrast, the Bloomberg REIT index had lost 2.6 percent.
The REIT measure is down only 1 percent for August while the S&P 500 has fallen 6.3 percent, less than the broker losses.
Commercial real estate deals in the U.S. rose 23 percent from a year earlier in the second quarter, slowing from a 49 percent surge in the first, according to Real Capital Analytics Inc. First-half volume of $255.1 billion was front-loaded by several major sales closing early in the year, including two big industrial warehouse portfolios, Manhattans Waldorf Astoria hotel, and Willis Tower in Chicago, the research firm said.
We have had a very rich transaction market for some time, so the rate of growth in activity has necessarily begun to taper off, said Sam Chandan, founder and chief economist of Chandan Economics, a provider of real estate data and analysis. Its not the kind of growth we saw when we were coming off the bottom.
The pace of expansion in commercial real estate lending is slowing, according to quarterly Federal Reserve data. After declines from 2009 to 2012, there was a 2.7 percent jump in outstanding commercial-mortgage debt in 2013, followed by 4.2 percent growth last year. Burke estimates the acceleration wont be as great in 2015, when he expects lending to increase 4.7 percent.
Commercial real estate transactions are highly correlated with credit acceleration, which will soften, Burke wrote in an Aug. 12 note.
Property brokers are facing other headwinds. Equities tumbled last week on concern about slowing economic growth in emerging markets. A strong dollar is crimping non-U.S. revenue and the slump in oil prices is denting real estate demand in energy hubs such as Houston and Calgary.
Empty office space in many markets is getting filled, limiting growth in leasing services, said Russell Platt, managing director and chief executive officer of Forum Partners, a real estate investment firm.
Were not necessarily at a pinnacle where the markets going to fall off sharply, but its hard to see the drivers that increase leasing volume materially, he said.
The property-service providers remain bullish.
Were in the middle of an extra-inning game and weve got a ways to go, Robert Sulentic, president and CEO of Los Angeles-based CBRE, said in a telephone interview. I dont ever remember being at this point in the cycle and seeing so little space being built.
CBRE and JLL have sought to diversify away from investment sales, the most volatile part of their business, to services with more predictable revenue, such as asset management and multiyear contracts to handle real estate services for corporations.
Companies increasingly are outsourcing real estate needs, said JLL CEO Colin Dyer. His firm handles all such services for about 100 clients, including Procter & Gamble Co. and HSBC.
Momentum is solid, Dyer said. People are behaving and managing in a more careful way than they were in the last cycle.
Competition among brokers remains intense and new entrants are getting into the game. Hodges Ward Elliott, a boutique hotel broker, opened a New York office this month to expand into investment sales of other property types. TPG Capital in May agreed to buy Cushman & Wakefield Inc., the biggest closely held commercial broker, and merge it with two other recent purchases.
For high-end deals, CBRE and JLL face a formidable rival in Eastdil Secured LLC, a unit of Wells Fargo & Co. Eastdil holds the U.S. crown for property sales valued at $25 million or more, according to Real Capital. CBRE is No. 1 for all building sales above $2.5 million.
If Eastdil is going to take some market share from the larger companies, theyre only going to take it in a couple of business lines, said Glenn Rufrano, who ran Cushman from early 2010 to mid-2013 and is now CEO of Vereit Inc. CBRE and JLL have done a very good job of creating truly global companies with infrastructure and dominance in major markets.