Jones Lang LaSalle
A Real Estate Boom That Keeps on Giving
By VIVIAN MARINO
Published: April 30, 2006
INVESTORS in commercial real estate have profited handsomely in the last two years or so as a stable economy, job growth and keen interest from pension funds and other institutions drive demand for properties or companies that hold them.
In fact, investors who put their money into the companies that broker deals, manage buildings and provide related services have reaped particularly rich returns.
"The real pickup has been on the transaction side — with the commercial real estate brokers," said William L. Baldwin, a principal at Baldwin Anthony Securities of Dallas, who follows the stocks of companies in the sector.
Shares of the biggest publicly traded commercial real estate services companies, bolstered by robust earnings, outpaced most other stocks in 2005 and are trading near their 52-week highs this year.
Leading the pack is CB Richard Ellis, whose shares are up 167 percent for the 52 weeks that ended on Friday. The stock of Jones Lang LaSalle has soared 131 percent in that period, while Trammell Crow has climbed 82 percent. The stock price of Grubb & Ellis, which struggled in the early part of the decade, has gained 128 percent in the most recent 52 weeks.
By contrast, the Standard & Poor's 500-stock index has gained 16.8 percent in the last 12 months.
As commercial markets around the country have picked up steam, even as the residential real estate has cooled, industry analysts predict that commercial services companies will continue to do well. (Their strong performance will also help the many mutual funds that hold them.)
"My forecast is for earnings growth in 2006, driven by strong real estate fundamentals: a growing economy and demand for real estate," said William C. Marks, a managing director and senior analyst at JMP Securities. "Many corporations are hiring more," he said, "and with more people they need more space."
Indeed, office vacancy rates nationwide are expected to average 11 percent by year-end, down from 13.6 percent in the fourth quarter of 2005, according to the Commercial Real Estate Outlook, a report published last month by the National Association of Realtors. Rents for office space are projected to rise 5 percent, the association said.
Sales of all types of commercial property, meanwhile, reached a record $274 billion last year, 47 percent higher than the previous record, $187 billion, set in 2004, according to Real Capital Analytics, a research and consulting firm that tracks transactions of $5 million or more. A sizable portion involved institutional investors, with pension funds investing $51 billion in property last year, Real Capital Analytics said.
The institutions "now see commercial real estate as an important asset class and are increasing their asset allocation," relative to stocks and bonds, said Michael J. Fox, a senior analyst at J. P. Morgan Securities. "That is causing commissions on investment properties to be much stronger than what they would normally be at this stage of the economic cycle."
But the three big companies have far more going for them than just commissions and fees from rising sales and leasing transactions. They are also involved in developing property, managing assets and consulting, among other services, and they are steadily expanding overseas.
"Geographic diversification allows these firms to increase their market share," while also helping to insulate them from changing economic conditions in the United States, Mr. Marks said. "It's a little less risky."
Jennifer Pinnick, a vice president at Morgan Stanley who also follows the sector, noted too that "the overseas markets are less developed and offer more long-term growth."
Ms. Pinnick is especially bullish on Jones Lang LaSalle, based in Chicago, which derives more than half of its revenue from overseas operations, in 50 or so countries.
Like competitors, the company has been focusing lately on the thriving economies of India and China, and it has been taking aim at Japan, where there is an expanding market in real estate investment trusts and, subsequently, an increase in real estate transactions. In the United States, it recently completed the acquisition of Spaulding & Slye, a private real estate services and investment company with offices in Boston and Washington.
The stock of Jones Lang LaSalle jumped more than 10 percent on Wednesday after it reported operating income of $8.7 million in the first quarter, historically a period when it reports a loss because of the seasonal nature of its business. Revenue rose more than 40 percent in the quarter.
CB Richard Ellis, based in Los Angeles, had earnings of $217.3 million last year, more than triple the $64.7 million of 2004. It continues to expand overseas as well, in part through mergers and acquisitions.
Last year, for instance, it acquired a majority interest in its Japanese affiliate, Ikoma CB Richard Ellis, and bought Dalgleish & Company of Britain, a specialist in retail real estate. This month, it announced the purchase of a controlling interest in Noble Gibbons, a real estate services firm in Russia.
In a February conference call with analysts to discuss last year's earnings, Brett White, the chief executive and president of CB Richard Ellis, said: "We do believe that M.& A. is a core source of growth for this company going forward. In the U.S., we're currently looking at dozens of relatively small companies. They run the gamut from businesses that are in the property management business, the mortgage business, to the leasing or sales."
Trammell Crow, meanwhile, acquired a 30 percent interest in Chesterton Meghraj Property Consultants of India last year, and doubled its stake in Savills, a British company that has a presence in China, to nearly 20 percent. Trammell Crow's chairman and chief executive, Robert E. Sulentic, said the company saw tremendous growth potential for outsourcing services in India, in particular. "A lot of our big domestic customers have an interest in doing business there," he said. "It started out with call centers and has gone way beyond that."
The company's earnings grew 52 percent last year, to $59.4 million from $39.1 million, and on Thursday it reported a climb of 79 percent in its net income in the first quarter.
Analysts say the company's strong point is in development. "Trammel is by far the leader in that area," said Mr. Baldwin at Baldwin Anthony Securities.
Trammell Crow, based in Dallas, has several major projects in the works, including 2000 Avenue of the Stars, a 12-story office building near the company's Century Plaza Towers in West Los Angeles, and an office building and surgery center for the Memorial Hermann Healthcare System in the Houston area. Providing services to the health care industry "is something that we're hanging our hats on for future growth," Mr. Sulentic added.
Many analysts think that the prospects for future growth will help to support the market values for commercial services companies.
"A year ago, if you looked at CB Richard Ellis and Jones Lang stock prices, they were about half of what they are today; they're now more fairly valued," said David Gold, an analyst at Sidoti & Company who nonetheless thinks that prices are likely to continue to rise.
If the investment climate is favorable, why aren't more commercial real estate services companies choosing to go public?
LoopNet, which operates a Web site listing commercial real estate properties for sale or lease, recently announced plans for an initial public offering.
But other than Cushman & Wakefield, which has no immediate plans for an offering, "there are very few other companies that are large enough to go public," said Mr. Marks.
A Real Estate Boom That Keeps on Giving
By VIVIAN MARINO
Published: April 30, 2006
INVESTORS in commercial real estate have profited handsomely in the last two years or so as a stable economy, job growth and keen interest from pension funds and other institutions drive demand for properties or companies that hold them.
In fact, investors who put their money into the companies that broker deals, manage buildings and provide related services have reaped particularly rich returns.
"The real pickup has been on the transaction side — with the commercial real estate brokers," said William L. Baldwin, a principal at Baldwin Anthony Securities of Dallas, who follows the stocks of companies in the sector.
Shares of the biggest publicly traded commercial real estate services companies, bolstered by robust earnings, outpaced most other stocks in 2005 and are trading near their 52-week highs this year.
Leading the pack is CB Richard Ellis, whose shares are up 167 percent for the 52 weeks that ended on Friday. The stock of Jones Lang LaSalle has soared 131 percent in that period, while Trammell Crow has climbed 82 percent. The stock price of Grubb & Ellis, which struggled in the early part of the decade, has gained 128 percent in the most recent 52 weeks.
By contrast, the Standard & Poor's 500-stock index has gained 16.8 percent in the last 12 months.
As commercial markets around the country have picked up steam, even as the residential real estate has cooled, industry analysts predict that commercial services companies will continue to do well. (Their strong performance will also help the many mutual funds that hold them.)
"My forecast is for earnings growth in 2006, driven by strong real estate fundamentals: a growing economy and demand for real estate," said William C. Marks, a managing director and senior analyst at JMP Securities. "Many corporations are hiring more," he said, "and with more people they need more space."
Indeed, office vacancy rates nationwide are expected to average 11 percent by year-end, down from 13.6 percent in the fourth quarter of 2005, according to the Commercial Real Estate Outlook, a report published last month by the National Association of Realtors. Rents for office space are projected to rise 5 percent, the association said.
Sales of all types of commercial property, meanwhile, reached a record $274 billion last year, 47 percent higher than the previous record, $187 billion, set in 2004, according to Real Capital Analytics, a research and consulting firm that tracks transactions of $5 million or more. A sizable portion involved institutional investors, with pension funds investing $51 billion in property last year, Real Capital Analytics said.
The institutions "now see commercial real estate as an important asset class and are increasing their asset allocation," relative to stocks and bonds, said Michael J. Fox, a senior analyst at J. P. Morgan Securities. "That is causing commissions on investment properties to be much stronger than what they would normally be at this stage of the economic cycle."
But the three big companies have far more going for them than just commissions and fees from rising sales and leasing transactions. They are also involved in developing property, managing assets and consulting, among other services, and they are steadily expanding overseas.
"Geographic diversification allows these firms to increase their market share," while also helping to insulate them from changing economic conditions in the United States, Mr. Marks said. "It's a little less risky."
Jennifer Pinnick, a vice president at Morgan Stanley who also follows the sector, noted too that "the overseas markets are less developed and offer more long-term growth."
Ms. Pinnick is especially bullish on Jones Lang LaSalle, based in Chicago, which derives more than half of its revenue from overseas operations, in 50 or so countries.
Like competitors, the company has been focusing lately on the thriving economies of India and China, and it has been taking aim at Japan, where there is an expanding market in real estate investment trusts and, subsequently, an increase in real estate transactions. In the United States, it recently completed the acquisition of Spaulding & Slye, a private real estate services and investment company with offices in Boston and Washington.
The stock of Jones Lang LaSalle jumped more than 10 percent on Wednesday after it reported operating income of $8.7 million in the first quarter, historically a period when it reports a loss because of the seasonal nature of its business. Revenue rose more than 40 percent in the quarter.
CB Richard Ellis, based in Los Angeles, had earnings of $217.3 million last year, more than triple the $64.7 million of 2004. It continues to expand overseas as well, in part through mergers and acquisitions.
Last year, for instance, it acquired a majority interest in its Japanese affiliate, Ikoma CB Richard Ellis, and bought Dalgleish & Company of Britain, a specialist in retail real estate. This month, it announced the purchase of a controlling interest in Noble Gibbons, a real estate services firm in Russia.
In a February conference call with analysts to discuss last year's earnings, Brett White, the chief executive and president of CB Richard Ellis, said: "We do believe that M.& A. is a core source of growth for this company going forward. In the U.S., we're currently looking at dozens of relatively small companies. They run the gamut from businesses that are in the property management business, the mortgage business, to the leasing or sales."
Trammell Crow, meanwhile, acquired a 30 percent interest in Chesterton Meghraj Property Consultants of India last year, and doubled its stake in Savills, a British company that has a presence in China, to nearly 20 percent. Trammell Crow's chairman and chief executive, Robert E. Sulentic, said the company saw tremendous growth potential for outsourcing services in India, in particular. "A lot of our big domestic customers have an interest in doing business there," he said. "It started out with call centers and has gone way beyond that."
The company's earnings grew 52 percent last year, to $59.4 million from $39.1 million, and on Thursday it reported a climb of 79 percent in its net income in the first quarter.
Analysts say the company's strong point is in development. "Trammel is by far the leader in that area," said Mr. Baldwin at Baldwin Anthony Securities.
Trammell Crow, based in Dallas, has several major projects in the works, including 2000 Avenue of the Stars, a 12-story office building near the company's Century Plaza Towers in West Los Angeles, and an office building and surgery center for the Memorial Hermann Healthcare System in the Houston area. Providing services to the health care industry "is something that we're hanging our hats on for future growth," Mr. Sulentic added.
Many analysts think that the prospects for future growth will help to support the market values for commercial services companies.
"A year ago, if you looked at CB Richard Ellis and Jones Lang stock prices, they were about half of what they are today; they're now more fairly valued," said David Gold, an analyst at Sidoti & Company who nonetheless thinks that prices are likely to continue to rise.
If the investment climate is favorable, why aren't more commercial real estate services companies choosing to go public?
LoopNet, which operates a Web site listing commercial real estate properties for sale or lease, recently announced plans for an initial public offering.
But other than Cushman & Wakefield, which has no immediate plans for an offering, "there are very few other companies that are large enough to go public," said Mr. Marks.
posted by Jones Lang LaSalle NJ News Blog at 9:39 AM
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