Why Are Real Estate Brokerage Stocks Hot?

Playing the Cycle... Last year, shares of the three large, diversified publicly-traded real estate companies (CB Richard Ellis, Jones Lang LaSalle and Trammell Crow) gained an average of 50.8%, versus 3% for the S&P 500. Who knew?

And Will Marks, a securities analyst at JMP Securities in San Francisco, believes these firms "are well positioned for further top line growth due to global and multi-service platforms ... and a broad cyclical recovery."

In 2005, CB Richard Ellis' share price grew 75.4%, Jones Lang LaSalle 35.3% and Trammell Crow 41.6%. If earnings continue to increase, Marks forecasts even higher prices: CB $65.4 (close yesterday: $62.75), JLL $61.90 ($57.48) and TC $34.94 ($27.29). (See his "Real Estate and Property Services Overview," Dec 13, 2005.)

Why has CB done relatively better? According to Marks, CB derives a higher portion of its revenues from brokerage (sale and leasing) than JLL and TC, which derive higher proportional revenues from management and development.

It’s all about the real estate cycle. As the real estate market heats up, brokerage commissions grow faster than fee-based and development work. Marks writes that "Trammell Crow, in particular, has excellent upside potential..." (And TC is relatively farther away from his "target.")

Marks also believes that we might see merger and acquisition activity accelerate in 2006, pointing to Eastdil's agreement to purchase Secured Capital and JLL's purchase of Spaulding & Slye.

Full Disclosure... Marks does not cover Grubb & Ellis (OTC BB: GBEL.OB) "due to its size and float." But G&E's stock has been on fire lately, rising in the past month from $7.10 on Dec 6, 2005, to close yesterday at $13.75. That's a rise of almost 100% in one month. Wow.

-- Peter Pike