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Brokerage and commercial real estate services consolidations are trending in the current market. Giant firms continue to expand their portfolios with the purchase of already large companies. Most recently, CBRE acquired Integra Realty Resources’ Los Angeles and Orange County affiliates, commercial real estate valuation, counseling and advisory firms.
It is not just the big industry name deals highlighting the growing trend of mergers, acquisitions and consolidations. So far this year, several firms have combined services to stay competitive in a stiff market.
Recent headliners
KLNB recently acquired Edge Commercial Real Estate, allowing the brokerage firm to expand in size by some 20 percent. With the two becoming one, KLNB expanded its office footprint, increased its CRE tenant representation and entered the multifamily market.
A recent merger with KLNB’s joint venture partner, the Divaris Group, saw Divaris Real Estate absorbing The McGarey Group. Divaris Real Estate is a real estate platform that, alongside other divisions within The Divaris Group, manages and leases some 37.3 million square feet of commercial real estate. Under its new leadership, The McGarey Group will continue to operate as it had been, performing leasing and advisory services for mixed-use retail developments.
“The KLNB joint venture and the acquisition of The McGarey Group are not directly related to each other,” said Tony Divaris, international controller, CFO & executive committee member of Divaris Real Estate. “However, they are both built on strong industry relationships, and finding the right counterpart and balance to our efforts.” Divaris explained that both strategic partnerships have cohesive working relationships between the owners and company executives. Each deal led to a strengthened business and additional services.
Also following the industry trend, SSH Real Estate acquired Advantage Building & Facilities Services, a property and facilities management company. Advantage, founded in 2005, had been a long-time client of SSH. After looking at several acquisitions of both property management and brokerage companies, Advantage became the first company acquisition for SSH.
“It was just, really, a perfect fit in terms of having no real duplication (in services) but enabling us to expand on the services we can offer that are already consistent with what we are doing,” said Peter Soens, founding partner of SSH. Key factors in the acquisition included having similar values along with enough familiarity for a rather seamless transition, he added.
“It really came down to having more clients and a lot of small contracts that add up and give us a good diversity of revenue and the ability to entree into different companies and businesses that aren’t going to hire us to do a full scope of management,” Soens concluded.
Why make a deal like this now?
Where previously valuations were increasing and interest rates were low, the industry is now in the midst of rate hikes and bank collapses. Stiff competition is leading toward businesses figuring out how to continue operating and find a normal ground.
“When you look at the brokerage space there is a trend toward consolidation of a very fragmented ecosystem,” said Tim Bodner, global real estate deals leader with PwC. That consolidation is being driven by a couple of things, Bodner continued, the first and most important being scale. This scale is not just in terms of the size of the firm but also in a company’s product offerings.
“Many of these businesses’ customers like to go to one provider,” Bodner added. “If you are not able to offer the full ecosystem of services it is really hard to compete, in particular in the brokerage side of these businesses, which is a transactional business with lower margins.”
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The second reason Bodner believes so many consolidations are occurring is aimed toward achieving diversity in terms of product mix and scope. The third reason is filling geographic gaps in their businesses. “Every business is trying to figure out what their new normal is going to look like coming out of the pandemic and how they are going to operate a new business model,” Bodner explained.
“During times of uncertainty, we tend to be very bullish, so with the current economic climate as it is we feel it is a great opportunity for expansion and solidifying our footprint in the markets we have a presence in,” Divaris added, on his reasoning for making an acquisition in this climate.
Acquiring the right financing
Despite being a great time for mergers, acquisitions and repositioning, there are aspects that will make these deals tricky. “It’s going to be hard because the valuation is affected by interest rates,” Soens mentioned. “It is just about being creative in how the transactions get done because the financing markets are so challenging.”
Funding these deals can come from a few means. “Relationship banks are still out there to finance these types of deals, but real estate has gotten a lot more challenging to finance,” explained Soens, who secured his terms before rate hikes began escalating.
However, Bodner believes that who real estate companies find as their relationship bank is changing. “The question is, who is the relationship bank today versus yesterday?” said Bodner. “Increasingly in the real estate ecosystem there has been a complete evolution in private debt capital, where a lot of the nontraditional players are starting to become the relationship banks of the future.”
Beyond nontraditional banking players, Bodner says most of these deals will happen via liquidity or via equity trades. “These businesses, particularly the larger ones, have a tremendous amount of liquidity,” Bodner added. “Large brokerages have the balance sheet capacity to play offense and make big deal acquisitions.”
Where the balance sheets, cash and liquidity don’t cut it, Divaris says equity will: “Financing these deals is generally performed utilizing equity with little to no debt,” he explained. “In most cases we have seen earnouts as the channel used in the acquisition process so as to ensure the transition of value from the acquiree to the acquirer.”
Ongoing momentum
Now is the time and the financing is locatable. So, what types of companies are we expected to see making these corporate-level acquisitions?
“I believe brokerage and service entities will perform the most mergers, joint ventures and acquisitions with like-minded talent wanting to do more in their particular market or expanding into other markets,” said Divaris. “The opportunity to leverage the strengths of individual brokerage and service entities enhances the chances of success and will appeal to more companies that might have previously been competitors.”
“In terms of the businesses that will think will most often be the acquirers, it is going to be the scaled participants in a lot of cases,” said Bodner. Scaled brokerages are going to be interested in companies with recurring and resilient revenue streams. Therefore, he believes property management, facilities management and valuation companies will be most prominently acquired.
According to Bodner, the deals market surrounding acquisitions, mergers and consolidations of this nature are not always episodic or linear. While many companies are currently undergoing these types of transactions to remain competitive amid economic uncertainty, the real question, according to Bodner, is do we think the real estate brokerage space is going to continue to consolidate? His answer is yes.
“There is not enough differentiation and scale in some of these businesses to compete in the environment we are moving into,” Bodner stated. “Businesses that don’t have scale in terms of size, talent, product mix can either sell or close up shop. They are going to be forced to.”
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