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Minyan Mailbag: Am I Missing Something in Real Estate?


...I would hesitate to bunch brokers in with the rest of real estate players that might get hurt by a housing flop.

Prof. Zucchi,

After my success with Toll Brothers (TOL) puts, I figured puts on commercial real estate broker CB Richard Ellis (CBG) was a no brainer. The 20 something PE just doesn't make any sense to me. That said, I am getting crushed. Is there something that I am missing?

Minyan TM

Minyan TM,

I don't know the financials of CB Richard Ellis, but I often deal with large RE brokerages. IMHO they are totally different animals from the homebuilders.

  • First, they are heavy in commercial real estate which is not nearly in as precarious a position as residential.
  • Second, their fee income (property mgmt., asset mgmt., transaction and leasing) comes off the top of the deals, so chances of not getting paid are slim to none.
  • Third, their leverage to prices is modest. It makes little difference to them whether an office building sells for $100M or 110M as long as they get the deal done. For a leveraged property owner on the other hand, that may be the difference between losing and making money.
  • Fourth, in a downturn you are likely to see the turnover remain steady - at least initially - if people feel the need to liquidate; volume is what brokers thrive on.
  • Fifth, my sense is that those businesses have somewhat scalable operations (both up and down) to adjust to market conditions, and CBG is certainly regarded as one of the 900 lb gorillas in the industry.
Again, I don't know if all that is or is not in the price of CBG – but I would hesitate to bunch brokers in with the rest of real estate players that might get hurt by a housing flop.
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