In one of the biggest real estate stories to break this year, the commercial real estate company Grubb & Ellis filed for bankruptcy in February, listing $150 million in assets and $167 million in debts. The company agreed to sell nearly all of those debts to BGC Partners, the financial brokerage firm headed by Howard Lutnick that entered the real estate fray in 2011 with its acquisition of Newmark Knight Frank.
The melding of Grubb & Ellis’s broad array of corporate clients and financial services with Newmark’s strength in the New York market would create a formidable national powerhouse. But the merger was held up for longer than expected in U.S. Bankruptcy Court as Grubb & Ellis brokers fought against terms that they alleged used commissions owed as incentives to remain with the unified company.
BGC cleared these hurdles and closed on the acquisition in April, leading to the creation of Newmark Grubb Knight Frank. The Commercial Observer spoke to Mr. Lutnick—the chief executive of Cantor Fitzgerald before BGC broke away from it—about NGKF’s big first year, his love for and tussles with brokers, and his company’s future designs on commercial real estate.
Mr. Lutnick: The combination of Newmark and Grubb & Ellis has really been—what’s the best way to say it?—empowering. It has Newmark’s tremendous strength on the East Coast. And the depth and breadth of the Grubb franchise coming on top of that has really put us in an extraordinarily strong position. And the merger has gone incredibly, seamlessly well. It was swift, and very successful, including hitting industry margins in its first quarter as a unit.
Despite financial woes that led to its bankruptcy, Grubb & Ellis, like BGC, maintained a solid roster of financial services clients. As NGKF seeks tenants now, how does it balance financial clients with those from other sectors like tech and retail?
Well, I think we do unbelievably well with financial companies. They are the largest sector of commercial real estate users and owners. They both manage huge real estate assets and they’re gigantic users of real estate in and of themselves. And on top of that, we have a spectacular business relationship with Cornish & Carey, the best firm in Silicon Valley, which gives us a leg up on those tech companies. And those tech companies will continue to grow in New York—you know, we represented Facebook and took over all of Nokia Siemens’s global real estate needs, facilities, property and transactions. So I think the combination of our financial expertise and our strength in technology has really led us to a good spot.
BGC at its heart is a technology company. Our programmers built the U.S. Treasury’s electronic business. Our relationship with an enormous number of technology firms runs rich and deep. BGC’s predecessor company was called eSpeed. When we went public, [former Cisco Systems CFO] Larry Carter was on our board. So we have a profound relationship with a number of high-tech firms.
I’ll give you an example: it’s much more likely that a financial services company will tell me or BGC executives that they’re going to move out of a certain space and have it to sublet. They’re not on the market pushing it, but we know it’s out there. And our clients looking for space have access to that. That’s fun for us.
Is there a NGKF deal you’re most proud of?
Well, obviously the giant financial services deal was the [1.15-million-square-foot] Morgan Stanley transaction, which was … enormous. The Nokia Siemens transaction was important for that company. It had the backing of Newmark, Grubb and BGC—the scale and scope of our business globally helped bring that to fruition. So I think those two transactions highlighted different places where we’re doing tremendously: global corporate services for Nokia and, of course, our ability to do huge national tenant transactions and really understand workflows and everything about the client.
Were you always a student of commercial real estate or have you had to cram in the last year or so since BGC expanded its presence in the industry?
You mean do I read The Commercial Observer? Of course I do. [Laughs] Of course, I read much more now. You know, [Newmark CEO] Barry Gosin was on our board before the acquisition. And that’s why we got along. He knew the company, and how it ran, inside and out. That’s what made this transaction all the better and all the easier. Sometimes when you do transactions with people, there’s the hope of how it will work, but no one’s really sure. It’s quite another thing when Barry was sitting next to me for years on the board of directors and saw exactly how it would work from an outsider’s perspective. When it came time to do the transaction, he knew we were a brokerage company. We love brokers, and love arming brokers with tech and information. That’s the hallmark of who we are and what we do.
And since then, we’ve spent a tremendous amount of time investing in and building up our capital markets presence, completing transactions, selling and helping clients buy buildings. And then on top of all that, we’re financing those buildings. So, we really come at it with a Wall Street and capital markets mind-set that’s completely different from other people in real estate who think from a purely real estate perspective. We know how to raise equity, how to place debt and do things for clients that they’re just not used to seeing from real estate companies. We bridge the real estate and Wall Street gap.
You mentioned that BGC loves brokers. Yet high-profile Grubb & Ellis brokers fought terms of the merger pertaining to control of their commissions. Did the push-back surprise you?
Well, the problem that Grubb & Ellis had is that they’d been in financial stress for a year. So I think some of their brokers had already made determinations that they didn’t want to stay at the firm. The turnover that came from Grubb was really pre-BGC. Once we stepped in, you have tremendous financial strength and stability. You’re bringing in enormous urban centers and driving that national tenancy. That made being a Grubb broker wildly better. Whatever push-back there was predates BGC.
How would you describe the current mood at NGKF in the wake of losing so many high-profile brokers?
It’s great. Look, whenever you do a transaction, there’s a learning curve. People need to get to know each other. But we believe in brokers and invest in brokers. We are the biggest investor in technology that gives brokers information and tools at their fingertips to do their jobs. We spend $120 million a year in technology. That’s our hallmark. I think the brokers, as they become more comfortable with how to use the information we bring them and provide clients and a strong national brand, will see how well it’s working across all these different areas. Also, we have a shared equity model. We want the brokers to own the company. BGC is 37 or 38 percent owned by employees. And that’s different, but it’s also a defining trait that works for, drives and builds brokers. Our interests are perfectly aligned. They don’t work for the company; they are the company.
Does BGC have any immediate plans for further expansion within commercial real estate?
Yes! See, you finally got me to give a brief answer. [Laughs] We always say that we hire and acquire through accretion. We care about our earnings per share. But there’s great opportunity out there to grow, and we plan to do so.
What are you predictions for commercial real estate in 2013?
You’ve got to realize I’m a financial services sort of guy. So, I think it starts with very low interest rates through 2013 and beyond. That’s great for real estate, because real estate is a place where investors seek yield. The commercial mortgage-backed security market will continue to improve in terms of size. This year it was just under $50 billion. Next year, I’d say it will be maybe 20 percent bigger. Deutsche Bank says 50 percent bigger! We say $75 billion. Oh, so we agree. See, I try to be cautiously optimistic. Other guys are optimistic.
Anyway, as the CMBS business grows, the ability to finance and acquire properties gets easier. You’ll see cap rates come down and, therefore, very healthy markets in major urban centers. In the second half of 2013, secondary markets will improve as real estate investors seek higher yields and look not just at the big, famous urban centers.
You’ll continue to see New York improve as a technology center. But low interest rates will not change technology fundamentals—tech is high risk, high reward. Investing in tech will continue and the sector will grow and build—in New York first, Chicago second. Obviously it’s already all over San Francisco too, but you’ll start to see it in other places.