2010

FEBRUARY 9, 2010 Try L. Muller GB540: Economics for Global Decision Makers

[CBRE: SURVIVING THE TIMES] Using CB Richard Ellis as a case analysis, this paper aims to explore the economic factors that are affecting companies domestically and globally.

CBRE: Surviving the Times

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History

CB Richard Ellis (CBRE) is a fortune 500 commercial real estate company that operates

worldwide and is headquartered in Los Angeles, California. It provides broker services,

property and facilities management, real estate market research, mortgage banking,

and financial services. The firm was founded in 1906 by Colbert Coldwell and Benjamin

Banker (Funding Universe, 2004). In the 1990’s the firm embarked on an aggressive

expansion program that involved six mergers and acquisitions with domestic and global

entities between 1994 and 2000 (Funding Universe, 2004). This included the acquisition

of REI Inc. (Richard Ellis, Inc.)— from which the name CB Richard Ellis (CBRE) was

derived. These mergers and acquisitions have constituted global growth and expansion

that has resulted in the presence of 300 CBRE offices in 50 countries (Funding

Universe, 2004). Furthermore, since its public offering in 2004 it has sold over $30

billion worth of property in the U.S. alone.

Recent Operating Results

As with most companies, CBRE has had to rely on a “survival of the fittest” approach to

its business operation during the ongoing economic difficulties facing the commercial

real estate business today. The enduring weakness in the sales and leasing markets

have disrupted global and domestic operations. The main goal has been to reduce

operation expenses at a higher rate than its decline in revenue (The Free Library,

2009). From the year ended December 31, 2007 to the year ended December 31, 2008,

net income decreased by almost 200% from ($390K) to a net loss of (-$1.13M) (YAHOO

Finance, 2010). For that time period operating expenses increased while total revenue

CBRE: Surviving the Times

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decreased because the cost incurred to provide their services increased due to the

market downturn and inflated prices. If we continue to break down the operating results

by looking at quarterly data, we can see that CBRE devoted itself to reducing operating

costs at a quicker rate than total revenue so as to withstand the gradual bottoming out

during the business cycle. From Q4 of 2008 to Q1 of 2009 CBRE improved from

operating at a net loss of (-$1.2M) to operating at a net income of ($5K) (YAHOO

Finance, 2010). Even though total revenue decreased 30% from ($1.28M) to ($890K), it

was at a much slower rate than the 200% decrease in operating expenses for that same

time period (YAHOO Finance, 2010). Decreasing the operating expenses as such a

high rate helped ameliorate some of the impact of losing 30% in total revenue.

While Q4 data for 2009 is not available at this time, trends from Q1 to Q3 indicate that

CBRE will show a net and operating income with a gradually increasing revenue

stream. Let us consider the 15% increase in total revenue from Q1 ($900K) to Q3

($1.03M) compared with the 10% increase in operating expenses from Q1 ($331K) to

Q3 ($365K) (YAHOO Finance, 2010). CBRE has demonstrated the ability to alleviate

the firm of some of the operating expenses in proportion to its total revenue. This has

constituted a 900% increase in operating income from Q1 ($5.5K) to Q3 ($57K) and

subsequently a 168% increase in net income from Q1 (-$54K) to Q3 ($37K) (YAHOO

Finance, 2010). These operating results have good implications for the 2009 Q4 reports

as well as Q1 of 2010.

CBRE: Surviving the Times

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Economic Factors

Credit and labor markets: The commercial real estate industry has been hit severely

by the state of the current labor market and everlasting credit crunch. Due to a high

number of jobless claims and the initiatives by companies to cut back, the commercial

spaces are not in high demand right now because there is not a current need (Yun,

2009). Companies are looking to streamline operations and expansion is not something

that many have the capacity to pursue. Likewise, banks have not been able to extend

credit (commercial paper) to businesses like CBRE and its partners who are looking to

secure financing for the completion and initiation of projects (Yun, 2009). CBRE is

currently stalled on major projects that include the development of Wal-Mart

Supercenters (CBRE.com). This is due to the inability for firms to obtain the long-term

credit (loans) necessary to finish development and generate returns to aid in repayment.

Further ramifications can be felt in the industrial sector where a demand for exports has

declined and, consequently, a demand for space has followed because no extra space

is needed (Yun, 2009). The dynamics of the relationship between multiple economic

factors create an abundance of contingencies for the sustainability of CBRE.

Inflation: CBRE must be able to offer competitive prices and retain the negotiation

power between buyers, renters, and itself. Inflation adds a different dynamic because

CBRE must remain competitive— sell and rent space— while maintaining decent levels

of revenue. Inflation decreases the consumer’s purchasing power and increases

CBRE’s operations costs (Hartzell, 2006). This also inhibits CBRE’s ability to profit from

property sales or develop deals because investors and buyers want to see returns on

CBRE: Surviving the Times

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their investments and are not incentivized by an overvalued deal. A combination of

inflation and high vacancy rates really limits CBRE’s ability to capitalize on

opportunities. Due to the firm’s unique position, there are not many inflation-hedging

strategies that would alleviate the effects of inflation (Hartzell, 2006).

Social Factors

Environmentally Friendly Development: CBRE has performed research and initiated

an industry movement— not too far past the inception stage— towards incorporating

environmentally friendly and energy efficient construction and retrofitting initiatives into

its business strategy. Using such environmentally friendly strategies has been found to

decrease the number of worker sick days by 2.88 and 55% of the companies surveyed

reported an increase in employee productivity (Palmeri, 2009). This movement is

projected to create over 5 million jobs and contribute to $554 billion to the economy over

the next four year (Palmeri, 2009). The implications of higher returns in the form of

employee productivity and improved health will allow a firm like CBRE to charge

premium prices for their properties. Demand for their services will increase in the long-

run because of the “green appeal” that the firm would be fulfilling.

Diversity: CBRE operates in over 300 countries. Diversity initiatives would seem like a

moot point if the workforce in its U.S. entities was not so homogenous (CBRE, 2008).

The firm projects its diverse intent on its material and advertising and its views on

diversity can are implicit due to its global operations. However, it still needs to make the

effort to reach a much more diverse range of individuals. To address the issue CBRE is

launching a program that will take a systematic approach to balancing the

CBRE: Surviving the Times

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disproportionate distribution of culture in their offices (CBRE, 2008). It has also

strengthened its Hispanic Networking Group and has increased efforts to reach the

diversity-specific organizations on campuses (CBRE, 2008).

Political Factors

Domestic stimulus: The Federal Reserve has already played a major role by

expanding its TALF (Term-Asset Backed Securities Loan Facility) program in order to

stimulate the weaker commercial real estate market (Farrell, 2009). This gives investors

the chance to buy commercial mortgage-backed securities by offering them loans at low

rates (Farrell, 2009). Monetary policy is critical to CBRE’s survival because the firm

operates in such a volatile landscape. Short-term strategies like this might incentivize

investors to and provide CBRE with economic band-aids while the business cycle takes

its time.

Global fiscal policy: The global manipulation of fiscal policy creates significant

contingencies for CBRE that affect the business strategy. For instance, China currently

does not have a very proactive fiscal policy (Tao, 2010). It currently is relying heavily on

its monetary policy since this is what helped them to fair pretty well during the economic

downturn (Tao, 2010). The thought is that the fiscal policy can be used for long-term

growth and sustainability in case of a financial crisis (Tao, 2010). Thus, CBRE has

somewhat of a safe market to work in globally knowing that the country is planning for

long-term sustainable growth. On the other hand, Western European countries are

CBRE: Surviving the Times

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exhibiting weak fiscal policy implementation which could mean that CBRE’s operations

there might be frozen for a long time— potentially inciting a new strategic approach.

SWOT Analysis

Strengths

Intellectual property + technological resources: has allowed the company to assert

itself on many different levels while developing deep knowledge of virtually every major

global market. It trains employees extensively to be able to conduct business across all

landscapes.

Global Reach: CBRE has a built great rapport globally and has hedged its way into the

market so well that it has positioned itself for an abundance of business opportunities

that act as catalysts to its growth and sustainability. .

Weakness

Managing operation expenses: this has been improved over the last 3 quarters of

2009. But expenses could remain high if CBRE does not streamline its operations and

devote resources to business components that are generating the most revenue.

Operating in weak global economies: many of the countries in which CBRE operates

have weaker economies that exhibit below average recovery rates and poor fiscal

policy. This constitutes high levels of unemployment and adversely affects the firm’s

operations. Their global approach may be inefficiently allocating its resources.

CBRE: Surviving the Times

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Opportunities

Growth through M&A: because of its global market coverage, CBRE has the capacity

to sustain growth through mergers and acquisitions— opportunities to consume or

integrate weak industry competitors are abundant.

Industry trend setter: with such industry influence and salience, CBRE can set the

tone for the integration of green building and energy efficiency— being a catalyst to a

huge market mega trend.

Threats

Credit crisis: this will continue to act as a barrier to growth. The market will remain

illiquid in congruence with the business cycle— stimulus is only helping in the short-

term.

Demand for commercial property: companies will not demand space in a time where

they cannot afford to expand. The commercial real estate market is frozen and demand

will not increase because there is no incentive.

Planning For the Future

Property values: The ability to pay back loans and generate returns with those loans is

all contingent upon the fluctuation in property values in the short and long-term. The

U.S. banking sector has suffered upwards near $200 billion in commercial real estate

during this crisis (Wei, 2009). Unless the rate of economic return to equilibrium

improves, we will see the rents, vacancy rates, and property values continue to freeze

the market and loans will fall into further default— risking a severe long-term recovery of

CBRE: Surviving the Times

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the market (Wei, 2009). It is important for CBRE to analyze trends and forecast the

property values before it invests in endeavors with unfavorable market contingencies.

Fading stimulus: The global economy is poised to have positive growth, but

government stimulus is going to slowly phase out (Villamin, 2010). . CBRE must have a

sustenance plan and readdress its business strategy. The firm must recognized where

its operations are generating the most revenue and leverage those areas to provide a

platform for short-term sustenance and long-term growth. Wherever it finds this

leverage, CBRE must prove to be capable of operating independent of partners—

hopefully stimulating some investor confidence and improved business operations.

Global economic recovery: countries that have run huge debts during a volatile

economy are being pressured to strengthen fiscal policy (Gjelten, 2010). The European

countries as a whole have experienced very slow recovery as their labor markets

struggle with sever unemployment issues (Gjelten, 2010). Many of the countries in

which CBRE operates could soon become “unsafe markets” (Gjelten, 2010). The global

economy has created a “multipolar world” that could constitute a greater level of

international centralization to improve policy and regulation of world markets (Gjelten,

2010). This may be the time for CBRE to create some density at these “market poles”

and devote its resources to operations into relatively “safer” markets.

CBRE: Surviving the Times

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“CB Richard Ellis Group, Inc. Reports Third Quarter 2009 Financial Results”. (2009)

Retrieved from CBRE.com.

http://www.cbre.com/EN/AboutUs/MediaCentre/2009/Pages/102809.aspx

“CB Richard Ellis Group” (2004). Retrieved from Funding Universe database.

http://www.fundinguniverse.com/company-histories/CB-Richard-Ellis-Group-Inc-Company-

History.html

“CB Richard Ellis Group, Inc. Reports Second Quarter 2009 Financial Results”. (2009)

Retrieved from The Free Library by Farlex database.

http://www.thefreelibrary.com/CB+Richard+Ellis+Group%2c+Inc.+Reports+Second+Quarter+2

009+Financial...-a0204628408

“Leadership in Corporate Responsibility” (2008). Retrieved from Social Funds database.

http://www.socialfunds.com/csr/report.cgi/7378.html

YAHOO! Finance. (2010). Income Statement. http://finance.yahoo.com/q/is?s=CBG

Gjelten, T. (2010. “Global Economic Crisis Abated, But Effects Linger”. Retrieved from

NPR programming database.

Hartzell, D, Webb, B. (2003). “Commercial Real Estate and Inflation During Periods of

High and Low Vacancy Rates”.

MacDonald, E. (2009). “A US Government Rescue for Commercial Real Estate ?”

Retrieved from Fox Business database

http://emac.blogs.foxbusiness.com/2009/08/07/a-us-government-rescue-for-

commercial-real-estate/

Palmeri, C. (2010). “Green Buildings: Fewer Sick Days, Higher Rents”. Retrieved from

Business Week database.

http://www.businessweek.com/the_thread/hotproperty/archives/2009/11/green_buildings.html

CBRE: Surviving the Times

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Tao, L. (2010). “China Faces Tough Economic Dilemmas and Policy Challenges”.

Retrieved from China Daily Global Newspaper database.

http://www.chinadaily.com.cn/hkedition/2010-01/30/content_9401160.htm

Wei, L. (2009). “Commercial Property Faces Crisis”. Retrieved from The Wall Street

Journal database. http://online.wsj.com/article/SB123802456807742287.html

http://www.npr.org/templates/story/story.php?storyId=122155918

Villamin, N. (2010). “Navigating global credit crisis: 2010 risks re-visited”. Retrieved from

The Edge database. http://www.theedgemalaysia.com/commentary/158859-navigating-global-

credit-crisis-2010-risks-re-visited.html

Yun, L. (2009). “Commercial Real Estate Hurt by Credit Crunch and Weak Economy”.

Retrieved from Realtor.org database.

http://www.realtor.org/press_room/news_releases/2009/05/commercial_crunch

http://www.reri.org/research/abstract_pdf/wp14.pdf