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Saturday, Jul 2, 2022

Multifamily Brokerage Getting Out of House

After a bumpy start, business is going well for the Valley’s newest public company, Marcus & Millichap Inc. The Calabasas commercial real estate brokerage had to pull back on its initial public offering price in October, which led many to believe the roadshow didn’t quite bowl over investors. Instead of going public at $14 to $16 a share, the shares ended up pricing at $12. But since then the firm has taken full advantage of the recovering commercial real estate market, with the stock price up about 50 percent since its IPO. Shares closed at $18.12 on May 14, giving the company a market capitalization of $663 million. It helped that the company’s reported revenue skyrocketed 65 percent to nearly $115 million in its first quarter earnings released earlier this month, leading to a more than 10 percent share pop the next day. Profit growth was even better, jumping 325 percent to $6.8 million. The company is known for its strong presence in multifamily sales in what’s knows as the “Private Client Segment,” which includes deals in the $1 million to $10 million price range that involve individual buyers and sellers. Chief Executive John Kerin said about 44 percent of the firm’s $24 billion in sales volume last year was in multifamily properties. “Multifamily has been a vibrant and growing investment choice for our core, private clients as well as larger, institutional clients,” he said in an email interview. “Multifamily still offers growth opportunity for us even though we are the dominant broker of this segment by far.” The company has been expanding since going public, which was part of its strategic plan. It has more than 70 offices across the nation and Canada, with more than 1,250 brokers, nearly 200 more than this time last year. It opened its first branches outside of the United States in the Canadian cities of Toronto, Calgary and Vancouver. Its Institutional Property Advisors division, which targets larger buyers and sellers, opened offices in Boston and Portland, Ore. The institutional sector has been a target of the firm since going public. It has historically struggled to gain much traction in the highly lucrative office and industrial property fields. Eric Sussman, professor at the UCLA Ziman Center for Real Estate, said growing into a new sector will be a challenge for the firm as real estate financing becomes more difficult. “Lower interest rates have driven the market and they have certainly been a beneficiary, but they’re closer to a peak than a trough,” he said. Timing In fact, the market has boosted everyone in the industry. Since Jan. 1, shares of Chicago-based brokerage Jones Lang LaSalle Inc. have risen about 13 percent and shares in CBRE Group Inc. of Los Angeles have climbed about 7 percent. Kerin expects interest rates and the economy to remain favorable, despite the unpredictability of the market. And he believes the private client segment will be a source of steady revenue – as the vast majority of commercial sales fall into that category – as the company moves into institutional sales. He noted that whether the market is up or down, interest rates are good or bad, private investors are influenced by personal circumstances that can lead to selling property. Partnership break ups, estate planning, divorce, taxes and more contribute to action in the market. “Real estate is a cyclical business and it is impacted by the economy and capital markets,” Kerin said. “We are in a unique position of having significant room for growth in our core, private client segment while having the opportunity to increase our presence in specialty segments, larger transactions and financing.” Still, while Marcus & Millichap has dominated the private client segment, the firm doesn’t get a lot of attention from institutional buyers and sellers. And Sussman doesn’t see that changing. “Are they going to compete with CBRE in any real way? Probably not,” he said. “They’re a very solid mid-market firm.” Tim Keating, chief executive of Keating Capital Inc., a Greenwood Village, Colo. business development firm, agrees that institutional growth will be extremely difficult for Marcus & Millichap. He said there are really only three ways for a company to grow revenue: increase the number, average size or frequency of transactions. “It’s hard to increase the frequency of transactions, and the trouble with increasing the number of transactions is that there’s a finite amount of buildings. And the market dictates the prices,” he said. “The prospect for a lot of these firms is directly tied to the health and growth of the economy.”

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