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DEAL HAS CBRE SINGING ‘NEW YORK, NEW YORK’

BY NANCY COHEN

Photo: Ian Ritter

The Insignia deal opens up one of the world’s premier markets to CBRE.

Like the sprouting of leaves in the spring, green-and-white CB Richard Ellis signs began unfurling across New York City storefronts this summer, seemingly overnight. After years of fruitlessly trying to penetrate the New York market, the Los Angeles-based commercial real estate services firm bought its way in, by acquiring Insignia/ESG, one of the city’s top brokerages, for $430 million in July.

Insignia “had such a strong foothold and [was] doing it so well, it was hard to crack,” said Marianne P. Waggoner, president of CBRE’s retail services division, based in Ontario, Calif. (Her division encompasses retail property services, retail investment services, and the urban retail and mall groups.) “They had the leading brokerage team and in the No. 1 retail market in the world. We were knocking our heads against the wall … and now we have instant credibility and expertise.”

Before the merger, CBRE had only a handful of brokers in its New York City retail division; the acquisition added “20 high-caliber professionals with tremendous résumés,” Waggoner said. Last year that team helped handle 500,000 square feet of agency and tenant representation assignments for Insignia in the city, with total transactions valued at more than $600 million. Adopting that business not only catapults CBRE to a market leadership position in New York City retail real estate services, but also significantly bolsters CBRE across the board. It represents an increase of almost 35 percent in CBRE’s retail leasing numbers, which amounted to $1.72 billion in the United States last year.

The privately held company’s leap to dominance in New York scarcely changes the market’s composition, however. CBRE’s premerger share in the city was negligible, and the company is now melding its efforts into Insignia’s — even moving its offices into what had been Insignia’s Park Avenue headquarters.

What’s more, the people heading CBRE’s tristate business are all Insignia veterans, though some had moved to CBRE before the merger. They are Mary Ann Tighe, CEO; John F. Powers, president; Robert J. Alexander, chairman; and Joseph Harbert, vice chairman and general manager for New York City.

So as far as New York City goes, the merger represents new support for an existing powerhouse by a larger, richer company, rather than the union of two strong local players into a colossal whole. CBRE’s companywide results in 2002 dwarfed Insignia’s, with earnings of $18.7 million on $1.17 billion in revenues, compared with the latter’s loss of $2.5 million on $580 million.

Such deep pockets and the combined companies’ extended reach will provide direct benefits to the New York office, says Waggoner. Those include “the coverage and the resources of a company of our size — state-of-the-art, timely demographic information and research, an investment in all the products that help us do our job better,” she said.

The ramifications of the merger extend far beyond New York, of course, and beyond CBRE’s retail division. Together the two companies (which now operate under the CB Richard Ellis banner around the globe) form the world’s largest commercial real estate services firm, with more than 14,000 employees staffing 250 offices in 48 countries, and nearly 1 billion square feet of property under management. The deal also reunited the Richard Ellis brand, which had been divided since 1998, when Insignia acquired Richard Ellis’s operations in the United Kingdom, while CB Commercial acquired all the rest.

By joining forces with Insignia, CBRE “makes itself much more competitive globally and in the U.S., with fully staffed offices with great brokers,” said William Marks, a real estate analyst at JMP Securities, San Francisco. “Most companies will tell you they’ll be an even more formidable foe.”

As much as Insignia solidified CBRE’s standing internationally, the real key to unlocking CBRE’s worldwide aspirations was access to two markets: New York City and London.

“New York is a wonderful gateway to international business because it’s the first choice for international retailers coming to the U.S.,” Waggoner said. “It was critical to our global presence, and we also needed London. New York and London tie us into the whole world.”

By the same token, CBRE’s global presence, and that of other large real estate firms, has local implications, New York brokers say.

“There’s no question it’s gotten more difficult for us,” said Robin Abrams, who is executive vice president of New York City brokerage firm Lansco Corp. and chairwoman of the Real Estate Board of New York’s retail committee. “We work with a lot of European clients and are finding they’ve already been contacted in Europe. Based on the large companies’ international relationships, the business is handed to them on a platter. It’s harder for small companies to compete.”

(Among CBRE’s larger rivals, Cushman & Wakefield officials declined to comment for this article, and executives at Colliers International and Newmark New Spectrum did not respond to requests for an interview.)

The ability to provide a full gamut of real estate services worldwide should make CBRE more attractive to the largest clients, its executives say. “We were already 40 percent larger than our closest competitor, and now we’re twice as large,” Raymond E. Wirta, CBRE’s CEO, told the San Francisco Chronicle. “If you think about the real estate landscape, the big customers — corporations, institutions — want to deal with one big services company.”

Not everyone agrees that bigger is better, however. “Money and size don’t get you into this market — it’s performance,” said Faith Hope Consolo, vice chairman of New York City brokerage firm Garrick-Aug Worldwide. “And people are loyal. If they’re happy with their 20-year relationships, why would they change? And there will always be some landlords who will think, ‘They’re too big; I’ll get lost in the shuffle.’”

To that end, says Lansco’s Abrams, smaller size presents a competitive advantage for boutique firms like hers, which has 30 brokers. “We keep hearing the wave of the future is very large multioffice, multiservice firms, so clients can consolidate their communications,” she said. “But we need to do business based on the fact that we’re smaller and serve tenants differently. We believe that because of our size we can communicate better, and there’s lots of teamwork.”

Fostering teamwork and integrating the different companies that now make up an international behemoth remain challenges for CBRE, observers say.

“There’s always turnover in any type of merger, but it usually takes about a year before you know about the fallout of brokers,” said JMP’s Marks. “The advantage in being part of a global powerhouse with national and multinational clients is that it increases the deal flow for every office, but each employee is left with a smaller share of the pie. For brokers, what is the incentive to stay?”

In that sense, CBRE’s newfound size may provide an opportunity for its competitors to win over experienced and talented personnel. “Everyone is opening up their checkbooks to acquire brokers,” said Consolo.

According to Waggoner, however, attrition has not plagued CBRE’s retail division. “We haven’t seen any defection in retail, because our businesses were so complementary,” she said. The New York retail office created an advisory board, with representatives of both groups, to ease the integration process. It is already expanding with new hires, she said. “We were cooking immediately.”

Only a few months have elapsed since CBRE consummated its acquisition of Insignia — not enough time to fully judge the effects, industry players say. But the considerable speculation the deal inspired may ultimately outweigh its actual impact, according to one expert.

“The business is extremely fragmented, and I don’t think one merger will make a huge difference,” said Matthew Ostrower, a Morgan Stanley REIT analyst. “The main issue is: Will the market start to improve? If that happens, no one will care who merged with whom.”

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