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CB Richard Ellis cuts its way to profit

The largest commercial brokerage pares costs as the office market slump continues. Third-quarter net income misses forecasts, but the firm sees upbeat signs in Asia.

October 29, 2009|Roger Vincent

The long-running torment of the commercial real estate industry dragged on in the third quarter, but the world's largest brokerage of office buildings, warehouses and other business properties managed to eke out a small profit.

CB Richard Ellis Group Inc. reported net income of $12.4 million, or 4 cents a share, after spending the first two quarters of the year in the red. However, profit was down 69% from $40.4 million, or 15 cents a share, in the same period last year.

The Los Angeles company posted adjusted earnings of 8 cents a share after deducting one-time charges mostly related to cost-cutting measures. On that basis, the company fell slightly short of Wall Street analysts' predictions that it would earn 10 cents a share.

CB Richard Ellis and other commercial real estate services firms are feeling the woes of their clients: property owners they represent who can't sell their buildings and landlords who are losing tenants. Fewer deals means fewer commissions for brokerages.

After enjoying a protracted boom that peaked in the mid-2000s, most commercial real estate markets have been in decline for almost two years as property values and rents have fallen. About 51 million square feet of office space is vacant in Los Angeles, Orange, Riverside and San Bernardino counties, 17.5% of the total.

Buildings in most urban markets across the country and in other parts of the world have suffered similar or worse declines in occupancy as the global financial crisis forced many companies to lay off workers or go out of business.

Asia may be the first to get back on its feet. CB Richard Ellis reported that its operating income from the region more than doubled in the third quarter from a year earlier to $10.6 million. The results reflected modestly better business performances in such countries as China and Australia as well as the effect of cost containment efforts, the company said.

"We are beginning to see signs that market conditions in some parts of the world and in some business segments -- like the broader economy -- are starting to stabilize," Chief Executive Brett White said. "However, major investment sales and leasing markets globally remain under pressure and will likely continue to be stressed until the credit markets and global economy recover."

Analysts said CBRE's relentless reduction of expenses and timely debt renegotiation put it back in the black.

"The company seems to have stemmed the bleeding through cost cutting," analyst Will Marks of JMP Securities said, "and now revenue declines seem to be less significant than in previous periods."

About 2,000 employees have been laid off since early last year from a base of about 30,000. Cuts have also been made in marketing expenses, budgets for company meetings and travel expenses.

CBRE said it has cut as much as $600 million in expenses. In the third quarter it reached agreement to extend maturities and amortization payments on $985 million of debt to 2013 or later.

Third-quarter revenue was down 16% from a year earlier to $1 billion, an improvement from drops of 27% in the second quarter and 28% in the first quarter.

With sales and leasing activity slow, CBRE has sought new business by managing real estate for others. Revenue from that business was down in the third quarter, but CBRE secured a contract to manage a 70-million-square-foot portfolio for RREEF America.

Sales and leasing activity in the United States isn't likely to pick up until people can start to agree on what real estate is worth again, said analyst Craig Silvers, president of Bricks & Mortar Capital.

"Uncertainty is what's killing the market right now," Silvers said. "It keeps leases from being signed and lenders from lending."

Shares of CB Richard Ellis closed down 79 cents at $11.46 before the earnings were reported. The company's stock has jumped this year from a low of $2.34 in March, when it appeared the tanking real estate market and substantial short-term debt might drive the company under.

"Six months ago, the world was coming to an end and the company was priced like it was going bankrupt," Silvers said. "The snapback is because people realize CB is going to be a survivor and maybe a thriver."


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