Real estate IPO to test investor faith in economic expansion
Cushman & Wakefield is going public, but economy could frighten off some investors
Stock market investors are awaiting one of the real-estate industry’s most closely watched initial public offerings in years, setting up what could be a Wall Street referendum on the current economic expansion.
Cushman & Wakefield, a global brokerage and real-estateservices firm that reported $6.92 billion (U.S.) in 2017 revenue, is hoping to sell $719 million to $931 million in shares in an IPO that would value the firm at roughly $6 billion including debt, according to pricing documents announced Monday.
Trading is expected to begin in early August on the New York Stock Exchange after a roadshow in which backers of the offering will discuss Cushman with potential investors, the firm said.
The real-estate business is closely aligned with the health of the broader economy, and the success or failure of Cushman’s IPO will reflect in part whether investors believe economic growth in many parts of the world will continue.
Like CBRE Group Inc., JLL, and other publicly traded realestate firms, Cushman is highly dependent on sales and leasing brokerage commissions. These balloon when companies are expanding and real-estate investors are gobbling up office buildings, hotels, apartment buildings and other commercial property.
But these revenues crater when economies contract. For example, CBRE reported $4.2 billion in 2009, the year after the stock market crash, down from $5.1 billion in 2008 and $6 billion in 2007.
Global brokerage firms have been trying to insulate themselves from this volatility by building up businesses with steadier revenue like property management. Such “recurring” revenue represented 47% of Cushman’s total in 2017, according to papers the firm filed with the Securities Exchange Commission. Still, the brokerage business draws the biggest profits from its more economically sensitive businesses, rather than those generating steady recurring revenue.
“Commercial real estate will continue to be a cyclical industry,” said Louise Keeling, portfolio manager at RWC Partners Ltd., in an email. The Londonbased asset manager with about $15.5 billion in assets under management owns shares in CBRE and Savills PLC, a London-based real-estate services firm.
Real-estate bulls believe the current economic expansion may have years to run. They point out that shares of CBRE and JLL, the world’s largest and second-largest commercial real-estate firms respectively, are trading near record highs.
“I think we’re in for an extended cycle,” said Ross Smotrich, an analyst with Barclays who follows CBRE and JLL.
But Wall Street bears point to signs that the strong rebound of commercial real-estate values that began shortly after the last recession ended is running out of steam. Values of properties owned by U.S. real-estate investment trusts have plateaued over the past 18 months, although some sectors, like industrial property, are doing better than others.
Meanwhile, rising interest rates have increased the likelihood that capital will increasingly shift from commercial real estate to the bond market, driving down property values. These concerns already have sent tremors through the realestate investment trust sector causing it to underperform the broader stock market since the beginning of 2016.
Indeed, many thought the investment group led by privateequity firm TPG that acquired Cushman in 2015 made its bet on commercial real estate too late in the cycle. Their fears seemed to be borne out in 2016, when rising interest rates and other economic concerns caused shares of CBRE and JLL to fall.
Some of those worries eased last year. Property values in most markets didn’t suffer the decline many feared, and the brokerage business strengthened as companies in Europe and the U.S. expanded. CBRE’s revenue in 2017 was $14.2 billion, up from $13.1 billion in 2016.
Last year’s tax overhaul, which many analysts believe will help extend the U.S. expansion, also boosted the commercial realestate business. Continued appetite for commercial property by cross-border investors has also helped make up for concern about interest rate increases. Sales globally in- creased 15% in the first quarter of 2018, compared with the first quarter of 2017, according to Real Capital Analytics.
“The commercial real-estate market is proving more resilient than investors had been expecting,” said Jade Rahmani, an analyst with Keefe, Bruyette & Woods. “If you would have told me the Fed is on track to raise rates four times this year on top of the rate rises we had last year and it’s not going to impact the transaction market, I would have said, ‘you’re kidding me.’”
The macroeconomic outlook isn’t the only possible concern that could cause the Cushman IPO to be a dud. The firm also has more and lower profit margins debt than many of its peers. The firm recorded net losses of $221 million and $92 million in 2017 and the first quarter of 2018 respectively partly because of spending on integrating the three firms.