US real estate stock stars losing their shine

SEATTLE • Commercial property brokerages, the stars among US real estate stocks this year, are losing lustre as the booming market for deals shows signs of cooling.

CBRE Group and Jones Lang LaSalle, which are the global titans of property services, have lost 8 per cent and 8.7 per cent, respectively, this month.

The prospect of a slowdown in real estate transactions, after a five-year recovery, is stoking concern that profit growth will weaken at the big brokerages which make their money on services from selling buildings to handling leases.

Rising interest rates may limit gains in property prices, while banks and other lenders to the market are decelerating their rate of new credit expansion.

Much of the earnings growth at the companies "is in the rear-view mirror at this point", said Mr Brad Burke, an analyst at Goldman Sachs, who cut his ratings on JLL, HFF and Marcus & Millichap this month. "This is a natural maturing of the real estate cycle."

Commercial real estate deals in the US rose 23 per cent from a year earlier in the second quarter, slowing from a 49 per cent surge in the first, according to Real Capital Analytics. The first-half volume of US$255.1 billion (S$359 billion) was "front-loaded" by several major sales closing early in the year, including two big industrial warehouse portfolios, Manhattan's Waldorf Astoria hotel, and Willis Tower in Chicago, the research firm said.

"We have had a very rich transaction market for some time, so the rate of growth in activity has necessarily begun to taper off," said Mr Sam Chandan, founder and chief economist of Chandan Economics, a provider of real estate data and analysis. "It's not the kind of growth we saw when we were coming off the bottom."

Property brokers are facing other headwinds.

Equities tumbled last week over concern about slowing economic growth in emerging markets. A strong US dollar is crimping non-US revenue, and the slump in oil prices is denting the real estate demand in energy hubs, such as Houston and Calgary.

Empty office space in many markets is getting filled, limiting growth in leasing services, said Mr Russell Platt, managing director and chief executive officer of Forum Partners, a real estate investment firm.

CBRE and JLL have sought to diversify away from investment sales, the most volatile part of their business, to services with more predictable revenue, such as asset management and multi-year contracts to handle real estate services for corporations.


A version of this article appeared in the print edition of The Straits Times on August 25, 2015, with the headline 'US real estate stock stars losing their shine'. Print Edition | Subscribe