Seattle

Commercial property brokerages — the stars among US real estate stocks this year — are losing lustre as the booming market for deals shows signs of cooling.

CBRE Group Inc. and Jones Lang LaSalle Inc., the global titans of property services, lost 8 per cent and 8.7 per cent, respectively, this month, reversing sharp gains compared with real estate investment trusts and the Standard & Poor’s 500 Index. HFF Inc. tumbled 17 per cent and Marcus & Millichap Inc. fell 10 per cent.

The prospect of a slowdown in 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 world’s largest brokerage, had gained 11 per cent for the year, while JLL, the second-biggest, jumped 19 per cent. The REIT measure is down only 1 per cent for August while the S&P500 has fallen 6.3 per cent, less than the broker losses.

Commercial real estate deals in the US rose 23 per cent from a year earlier in the second quarter, slowing from a 49 per cent surge in the first, according to Real Capital Analytics Inc. First-half volume of $255.1 billion (Dh937 billion) was “front-loaded” by several major sales closing early in the year, including two big industrial warehouse portfolios, Manhattan’s 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. “It’s 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 per cent jump in outstanding commercial mortgage debt in 2013, followed by 4.2 per cent growth last year. Burke estimates the acceleration won’t be as great in 2015, when he expects lending to increase 4.7 per cent.

Commercial real estate transactions are “highly correlated” with credit acceleration, which will soften, Burke wrote in an August 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-US 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 CEO of Forum Partners, a real estate investment firm.

“We’re not necessarily at a pinnacle where the market’s going to fall off sharply, but it’s hard to see the drivers that increase leasing volume materially,” he said.

The property service providers remain bullish. “We’re in the middle of an extra-inning game and we’ve got a ways to go,” Robert Sulentic, president and CEO of Los Angeles-based CBRE, said. “I don’t 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 multi-year 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 US 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, they’re only going to take it in a couple of business lines,” said Glenn Rufrano, 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.”

— Bloomberg