Interesting Times

The nation’s largest commercial real estate services firm, Los Angeles-based CB Richard Ellis, has reported a 13% decline in third-quarter revenue from the same period in 2007, and CEO Brett White says that amid deteriorating global economic conditions, the company’s transactions have reached a record low.

Revenue for the third quarter totaled about $1.3 billion compared with $1.5 billion in the third quarter of 2007, according to the company's third-quarter earnings release. Earnings per share stood at $0.20 for the third quarter compared with $0.50 for the same period a year ago.

“Our third-quarter results reflected the extremely challenging market conditions,” White said. “The investment sales and investment management businesses continue to operate at reduced levels of activity due to the unprecedented weakness in the credit markets.”

One indicator of the troubled economy, the latest jobs report from the U.S. Department of Labor, showed that the U.S. lost 240,000 jobs in October, pushing the unemployment rate up to 6.5%. Job losses were seen in the construction, manufacturing and service industries. The financial activities sector alone lost 24,000 jobs last month.

Economists for at least one firm, commercial bank Goldman Sachs, predict that conditions could worsen before they get better. Goldman says the national unemployment could rise to 8.5% by late 2009, and inch even higher in early 2010.

After noting that the current volume of transaction activity is “the lowest level we’ve recorded in our business,” White said in a Friday earnings call that he was hopeful that “better days may be around the corner,” although the company has braced for a steeper downturn.

Many companies across the country have been hurt by the drop in transactions. New York-based research firm Real Capital Analytics reports that transaction volume on the four major commercial property types — office, retail, industrial and multifamily — at the end of the third quarter was at $112 billion, a 67% drop from activity of $337 billion at the end of the third quarter in 2007.

Nationally, and for CBRE, transactions could rise if the large number of property owners who have waited to sell since late 2007, agree to buyers’ offers, which in many cases have been lower than sellers wanted. Trades could also pick up, since many funds are obliged to return capital to investors. Also, debt capital will need to be refinanced and some properties may be sold if they can’t be refinanced on favorable terms.

As much as $300 billion of equity is sitting on the sidelines looking for deals, but investors are waiting for prices to drop, White says.

While the next two quarters will be tough for investment property sales, White believes the velocity of deal making could also improve because the current level of activity is so low that it can’t be sustained.

The credit crisis has reduced the field of transaction players on both the debt and equity sides. As underwriting standards have tightened, loan origination volumes have dropped to levels not seen since about 2004, when commercial mortgage origination activity was approximately $136 billion.