A Time of Opportunity

By Eugene Gilligan

Cushman & Wakefield Inc.’s 90th year was particularly busy. The firm received a major capital investment from a new majority stakeholder, expanded globally both organically and through acquisitions and purchased a majority stake in real estate investment banking firm Sonnenblick-Goldman L.L.C. Not bad for a nonagenarian.

The new investor provided both heightened means and added impetus to a company already focused on continued growth. IFIL Group, the investment entity for Italy’s powerful Agnelli family, closed in April 2007 on the purchase of The Rockefeller Group’s 71.5 percent stake in Cushman & Wakefield, paying a total cash consideration of $625 million to replace the 30-year-long majority shareholder. Cushman & Wakefield management and employees own the remaining 28.5 percent of the company.

IFIL Group’s equity investment forms a crucial piece of Cushman & Wakefield’s growth strategy, according to the real estate service provider’s president & CEO, Bruce Mosler. Listed on the Italian stock exchange and managing a portfolio of holdings valued at almost $15 billion across an array of industry sectors, the investment company has both knowledge of overseas markets and long-standing relationships with top executives at large global firms that can benefit Cushman & Wakefield, particularly in its plans for further global growth, Mosler said. “They have been doing business in Europe for hundreds of years.”

IFIL Group’s all-equity investment offers an additional advantage. “We don’t have to service debt, so we can continue to reinvest in the business,” Mosler said. And since its investment, IFIL Group has not asked for any changes in how Cushman & Wakefield is run.

These boosts have put Cushman & Wakefield in a better position to continue with two focuses: international growth and expansion of its service lines, with its investment management business a major concentration.

Cushman & Wakefield’s international expansion follows its long focus on geographic growth through a mix of organic and acquisitive efforts. The firm took care to identify new targets—among cities and countries—to ensure strong client need and, in the case of countries, strong gross domestic product growth.

Increasingly, its revenue stream is becoming less North America-centric, with 43 percent of its projected 2007 revenues derived from international operations, compared with 20 percent just three years ago and 38 percent when IFIL Group announced the purchase from Rockefeller Group in December 2006. An additional sign of Cushman & Wakefield’s continuing global growth is that, of the 1,000 or so brokers that attended the company’s recent global symposium in Chicago, 40 percent came from outside the United States.

Thus, the company is well on its way to its goal of deriving 50 percent of its revenue from overseas ventures by 2010, with 215 offices in 56 countries. Yet Mosler still sees plenty of opportunity for continued global growth despite the company’s cautious approach to selecting new markets. “If you look at commercial real estate on a global scale, market share is fractured, even among the Big Three,” he said. “There are lots of opportunities to grow.”

To achieve such international growth, Cushman & Wakefield is looking everywhere. Long in Asia, it has 30 offices in 15 countries there but made further strides in 2007. It expanded into three fast-growing cities in China—Chengdu, Guangzhou and Shenzhen—following the late 2006 formation of investment management group Cushman & Wakefield Capital Asia, which provides services like debt placement for corporate dispositions prior to marketing, thereby expanding the base of bidders; crossborder equity placement arrangements for real estate investment vehicles; and mezzanine-debt-structure placement for developers. “In larger developing markets, there is both a need and an opportunity to expedite the creation and supply of real estate assets by the use of financial structures and innovative capital solutions,” said Michael Thompson, CEO of the Asia-Pacific region.

In addition, seeing a need for integrated real estate services in the region’s hotel sector, the company in June 2007 launched a regional hospitality practice with the acquisition of two specialized firms, Atrium Hospitality Solutions and Hospitality Strategies Asia Pacific. Thompson also sees retail services opportunities as the middle class continues to grow in much of Asia.

Exciting Potential

Cushman & Wakefield is also focused on growth in Europe, the Middle East and Africa, an effort that is dependent on finding markets that have exciting potential and where clients want the company’s services, according to Paul Bacon, CEO of that region.

The company is expanding there through a variety of means. In January 2007, it acquired ACTIV Consulting, its associate office in Romania for the past 11 years; that office has since almost tripled in size. And in August 2007 it opened an office in Kiev, Ukraine, feeling that the country is attracting increased interest from both crossborder investors and multinational corporate occupiers, Bacon said.

In August, it also closed on the acquisition of RH International’s 50 percent stake in a joint venture that the two companies had formed in 2006 to pursue two businesses: Cushman & Wakefield Residential and Cushman & Wakefield Hotels. With 48 brokers across Europe, the Middle East and Africa, the two divisions will now be able to link more closely with Cushman & Wakefield’s global residential and hotel capabilities while offering its range of services to developers of large mixed-use projects in Russia and Turkey, two countries where the number of major reconstruction projects are on the rise. “There is such a need for quality residential and quality hotels in these countries,” Bacon said.

The firm is also striving to become a major force in Scandinavia. It has already expanded its Swedish operations, adding an office leasing team to its capital markets and client solutions lines; it also wants to expand its presence in Finland, where it opened an office at the end of last year, according to Bacon.In the Middle East, the company was slated to purchase an alliance partner in Istanbul, Turkey, by the end of 2007, though the deal had not been completed at press time in late January 2008. It also plans to open an office in Abu Dhabi, United Arab Emirates, this year.

Europe, the Middle East and Africa are providing other opportunities for growth, as well. Cushman & Wakefield Investors, which was founded in 2006 when the company’s U.K. specialist-fund-management team formalized a partnership with Europe’s Fountain Capital Partners and is part of the company’s global investment management business, has grown to 35 people. It has $10 billion under management in the United Kingdom and continental Europe. In September, the group, in partnership with financial services group KGAL Group, launched its first European property fund, The Paris Office Growth Fund, targeting core-plus and value-add opportunities.

In addition, Cushman & Wakefield has a crossborder investment team in the Europe, Middle East and Africa region that totals 15 people and has secured high-value, multijurisdictional assignments, according to Bacon. In 2007, for instance, the group advised Lehman Brothers Inc. on its $3 billion purchase of the Coeur Defense office complex in France.The Americas also offer international growth potential. One initiative is the strengthening of the company’s asset services lines, including project and property management from offices in Canada and Central and South America. In Brazil, Cushman & Wakefield acquired the remaining 20 percent of its alliance partner’s operation at the end of 2006. The firm is also exploring opportunities in Costa Rica and Panama, two countries in which clients are expressing greater interest, according to Tony Marano, CEO of the Americas.

Revenue Change-Up

Cushman & Wakefield has identified other means to diversify its revenue stream, as well. Worldwide, it is pursuing growth in client solutions, consulting services and investment management services, which is part of the capital markets line
of business. (The fourth primary service line is transaction services).

The company took a giant step toward that goal with its acquisition of a majority stake in real estate investment banking specialist Sonnenblick-Goldman L.L.C., finalized in July of last year. Founded in 1893 and one of the most recognized names in the New York City financial world, Sonnenblick-Goldman provides a capital markets expertise that complements Cushman & Wakefield’s investment sales, leasing and client services businesses. The buy also adds to Cushman & Wakefield’s hospitality advisory strength with a significant hospitality finance practice, chairman & CEO Thomas McManus told CPN when the deal was announced. McManus, a former GMAC Commercial Mortgage head who joined Cushman & Wakefield last January to lead its global capital markets practice, assumed chairmanship of the investment bank upon the deal’s close; Sonnenblick-Goldman president Steven Kohn retained his position.

Mosler noted the importance of Cushman & Wakefield’s addition of “specialists” in debt and equity raising to the existing investment sales practice, thus offering clients a single platform. Added Christopher Lowery, CEO of global capital markets and principal activities, “Our clients who are selling buildings increasingly need to know how activities in the debt markets will affect the price of their assets.”

Indeed, the real estate services provider was not the first to seek such a combination. Mortgage bank Holliday Fenoglio Fowler L.P., for instance, added an investment sales capability in 2002. CB Richard Ellis Inc. followed its purchase of mortgage bank L.J. Melody & Co. several years ago with a tightening of the debt/investment sales relationship through the formation of CBRE|Melody in 2005. And last month, capital markets provider NorthMarq Capital Inc. announced its own expansion into investment sales.

The trend is primarily driven by the basic desire to increase customer share from existing clients and to expand platforms, according to Christopher Lee, president & CEO of commercial real estate consulting firm CEL & Associates Inc. But adding such capabilities provides a competitive edge against others that offer an investment sales platform while only providing what Lee called a “stay in touch” strategy within the capital markets.

While Cushman & Wakefield had previously provided debt and equity financing advisory services, its team worked almost exclusively on large, highly complex corporate finance assignments, primarily involving the integration of accounting, capital and tax issues, Lowery said. Cushman & Wakefield was attracted to Sonnenblick- Goldman’s reputation and what he called the “experience, sophistication and integrity” of the principals. Cushman & Wakefield approached Sonnenblick-Goldman a year before the acquisition to gauge its interest in combining forces.

“Somewhat to our surprise, and to our great pleasure, they were indeed interested,” Lowery said. The smaller company did feel some trepidation about being swallowed up, Lowery revealed, but plusses such as a complementary culture and some common clients helped move the deal forward.

And, in fact, certain Sonnenblick-Goldman practices are being retained under the new Cushman & Wakefield Sonnenblick-Goldman L.L.C. name, though it will be integrated into Cushman & Wakefield’s capital markets group. The salary and bonus system and operating system will remain intact, for instance, while the information systems and business-development processes are being integrated with the rest of Cushman & Wakefield’s capital markets group. The entity has expanded into the Midwest and New England, with more expansion planned for Texas, Florida and elsewhere in the Southeast and then Europe.

“Tom McManus has put together an ambitious plan for further expansion of the array of real estate finance services to be offered by Cushman & Wakefield, some of which will continue to be delivered by Cushman & Wakefield Sonnenblick-Goldman and others of which will be delivered by new units he will create,” Lowery observed.

Local Leverage

Cushman & Wakefield also wants to expand its investment management business. Lowery reported that the firm is well equipped to arbitrage markets due to knowledge of local market dynamics. “This results from our extensive and … global agency/brokerage business,” he said. “We are immersed in transactions around the world, and therefore we have insight into what is about to happen, as opposed to most investment managers, who have to rely on market research that is backward looking.” Turbulent financial markets especially will require property-level expertise in evaluating whether to dispose of or acquire loan portfolios and property-based securities, he said.

Growth opportunities also exist for both the client solutions and global consulting lines of business, according to COO John Santora. Client solutions encompasses such functions as transaction, property, facilities and project management and lease administration, as well as sustainability advisory services relating to greening of real estate operations.Among the project management team’s sustainability contracts, it is advising on the Bangalore International Exhibition Centre which will become India’s first green public building upon its completion. The project is registered with the U.S. Green Building Council, and developers are targeting LEED silver certification. The team is also advising clients in Brazil on the construction of a number of green buildings, seeking LEED certification on several that are currently registered with the U.S. Green Building Council.

In the United States, Cushman & Wakefield received awards in 2007 from the state of California, CoreNet Global and BOMA International for greening its building operations and green-retrofitting Adobe Systems Inc.’s three-building, 18-story facility in San Jose. The Adobe Systems initiative achieved the first-ever LEED triple-platinum certification for an existing facility.

The global consulting group has also targeted supply-chain management and portfolio consulting—advising on real estate consolidation opportunities and merger-and-acquisition due diligence, as well as on the available labor pool in a particular state or city and available tax incentives.

The U.S. retail services business represents another growth area, having already doubled its revenue during each of the past three years, according to Marano. And with specialization increasingly in demand in the Americas, the company is continuing to beef up its global legal specialty practices group; it launched a life sciences practice group last year, which Marano directly oversees both in the Americas and globally; and at press time it was about to launch a healthcare practices group. “It’s like the medical community,” Marano said. “Nobody goes to the general practitioner: Everyone wants a specialist.”

The company is also considering acquisitions among its 21 U.S. alliance partners. For instance, it acquired full ownership of its Minneapolis office in 2007, following the purchase of the San Diego office in late 2006.

Leadership in Tough Times

In total, the company closed on the acquisition of seven firms during 2007.Further growth is likely to prove tricky even for the larger, more equity-rich firm, given the slowing economy and credit-market freeze-up. The first half of this year should be particularly challenging, Mosler believes, though he thinks things will improve during the second half of the year as credit issues work their way through the economy.But he also believes a less frothy market could present opportunities to acquire companies at lower multiples than during recent years. “We’re going to offer leadership, not panic,” he said.

The next five to 10 years will likely be an ideal time for real estate companies to expand by acquisition, according to Lee, as many heads of top regional firms will be reaching an age at which they will start to look for an exit strategy. And continuing turbulence in the capital markets could accelerate those plans.

Furthermore, Mike Myatt, managing director & chief strategy officer for consulting firm n2growth, believes expansion plans that are launched in slowing economic times can pay dividends. “This is a good time for opportunistic growth. … Companies that can successfully manage growth during a down market come out the other side with a much-improved market position over their competitors, as most companies will tend to pull back, re-engineer and consolidate during times such as these,” he said.

A template for Cushman & Wakefield’s expansion could be its late 2007 acquisition of Burnham Real Estate, a large, independent commercial firm founded in 1891 that focused on San Diego. “Many of the firm’s clients wanted global solutions to their needs,” Marano said. The acquisition made strategic sense for Cushman & Wakefield, which wanted to add to its office in San Diego, building up its business in Southern California, where it also has offices in Los Angeles and Orange County.

For these growth initiatives to succeed, though, the company will need patience, Lee said. “There has to be a clear, long-term vision that is embraced by the whole corporation,” he advised, since opening offices in emerging markets frequently does not translate into a fast return on investment.

For Mosler, this period is what he calls a “time of opportunity,” though he emphasized that both acquisitive and organic growth will adhere to the company’s overriding philosophy of cautious decisionmaking. “We’re not going to be all things to all people, and we’re not going to be the biggest,” Mosler said. “We want to be known as best in class.”

—Reach Eugene Gilligan, senior editor, at [email protected].