CRE Stocks Drop $20B: Selloff or Strategic Opportunity?

Throwing the property stocks out with the bath water?

What’s next?

The last 48 hours were tough for the stock market. Almost no ticker spared.

Within CRE, brokers and office REITs lost more than $20B.

Headlines attribute the selloff to the "AI scare trade." Fair enough, but guesses about AI’s impact on real estate remain purely speculative.

Three practical real estate nuggets buried in the broad selloff…

==== 3 TAKEAWAYS ====

---- What about performance? ----

The biggest losers were the most improved.
If that makes no sense to you, trust your instinct.

Office REITs are about halfway through earnings season and have shown relatively strong performance overall. A recovery is definitely underway and some markets, especially NYC, are relatively strong with companies having cut to the bone and almost no supply on the horizon.

On the brokerage front, CBRE is down 20% over the last two days but just announced year-end results yesterday which were generally positive. Not glowing but certainly signs of a sustained recovery in their primary profit generators.

---- What goes up? ----

Some of the biggest losers over the last few days were the biggest winners over the last year or so, while some of the most muted declines over the last few days have experienced more structural declines in recent years (smaller office REITs).

Would you rather be...

-- A big broker down 20% this week but up 90% since 2021. e.g., CBRE.
-- An office REIT down 5% this week but down 75% since 2021. e.g., BDN.

It's possible that the market is getting it wrong.

---- Big M&A ahead? ----

Is CBRE gearing up for a big acquisition?

On one hand, CBRE is worth a lot less today than it was a week ago, so its primary currency has declined meaningfully.

But on the other hand, it's sitting on $2B of cash AND the prices of acquisition targets are cratering since the AI scare is affecting all firms. CBRE could relatively easily swallow a $3-5B acquisition.

If cash is king, CBRE is about to buy a big company.

(Note: to be fair, this isn't a very controversial call given CBRE's recent comments and the fact that it has paused stock buybacks.)

But what could CBRE buy?

Three directional guesses:

(i) CBRE has been largely left behind in terms of revenue from data center/infrastructure services.

(ii) Its investment management division has been a revolving door over the last five years and continues to be a relative laggard. One quick way to shake it up would be to buy an investment manager.

(iii) Smaller brokerages are on sale, but this seems unlikely unless CBRE could expand into a big speciality area like agency lending/DUS or something similar.