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99% correlation
It's been a wild ride for brokerages since the Covid pandemic emerged in early 2020...
Lockdown
Big drop in activity
Work from home
Government injects $4+ trillion
Interest rates go to 0%
Values spike
Transaction frenzy
Inflation
Interest rate spikes
Another big drop in activity
Price discovery
Slow thaw
Pickup in activity
Unsurprisingly, the values of large brokerages followed this path. Big drop, quick rebound, another big drop, then another rebound.
But the disparity between brokerage valuations has grown. CBRE's stock price is nearly 2.4x vs. pre-Covid, while Cushman's is 22% lower. And there are four brokerages between these outliers.
What might have driven the differences?
Here's a thesis: Brokerage is a particularly volatile business, and the best way to achieve a valuation premium is to reduce volatility.
CBRE's Bob Sulentic has clearly figured this out. He's deleveraged CBRE and turned the firm into more of a steady property and facilities manager than a brokerage shop (through M&A).
Consider the following two data series...
Stock price performance since December 2019:
CBRE +136%
Colliers +118%
Walker & Dunlop +65%
JLL +63%
Newmark +19%
Cushman -22%
Debt to T12 EBITDA:
CBRE 2.8x
Colliers 3.4x
Walker & Dunlop 4.9x
JLL 5.0x
Newmark 5.7x
Cushman 6.9x
These two series are 99% correlated.
---- Takeaways ----
Creating enterprise value at a brokerage is very different from creating value on the ground in commercial real estate and may have as much to do with managing volatility as sales growth, commissions, big hires, etc.
Question for brokers...
Where would you rather work?
A) A slow-and-steady firm focused on enterprise value.
B) A nimble firm focused on transactions and clients.
C) Neither
D) Other
It's been a wild ride for brokerages since the Covid pandemic emerged in early 2020...
Lockdown
Big drop in activity
Work from home
Government injects $4+ trillion
Interest rates go to 0%
Values spike
Transaction frenzy
Inflation
Interest rate spikes
Another big drop in activity
Price discovery
Slow thaw
Pickup in activity
Unsurprisingly, the values of large brokerages followed this path. Big drop, quick rebound, another big drop, then another rebound.
But the disparity between brokerage valuations has grown. CBRE's stock price is nearly 2.4x vs. pre-Covid, while Cushman's is 22% lower. And there are four brokerages between these outliers.
What might have driven the differences?
Here's a thesis: Brokerage is a particularly volatile business, and the best way to achieve a valuation premium is to reduce volatility.
CBRE's Bob Sulentic has clearly figured this out. He's deleveraged CBRE and turned the firm into more of a steady property and facilities manager than a brokerage shop (through M&A).
Consider the following two data series...
Stock price performance since December 2019:
CBRE +136%
Colliers +118%
Walker & Dunlop +65%
JLL +63%
Newmark +19%
Cushman -22%
Debt to T12 EBITDA:
CBRE 2.8x
Colliers 3.4x
Walker & Dunlop 4.9x
JLL 5.0x
Newmark 5.7x
Cushman 6.9x
These two series are 99% correlated.
---- Takeaways ----
Creating enterprise value at a brokerage is very different from creating value on the ground in commercial real estate and may have as much to do with managing volatility as sales growth, commissions, big hires, etc.
Question for brokers...
Where would you rather work?
A) A slow-and-steady firm focused on enterprise value.
B) A nimble firm focused on transactions and clients.
C) Neither
D) Other
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