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 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 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 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 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 longrun 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 5
CBRE: Surviving the Times 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 CBREâ€™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 exhibiting weak fiscal policy implementation which could mean that CBREâ€™s operations there might be frozen for a long timeâ€” 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 firmâ€™s operations. Their global approach may be inefficiently allocating its resources.
CBRE: Surviving the Times 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 shortterm. 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 8
CBRE: Surviving the Times 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.
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 “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-CompanyHistory.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-forcommercial-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 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-globalcredit-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