Last October, BGC Partners surprised everyone by getting into the commercial real estate business.
The firm, an inter-dealer brokerage spun off from financial services giant Cantor Fitzgerald L.P. in 2004, acquired Newmark Knight Frank. Then, six months later, it struck again, acquiring the assets of Grubb & Ellis Co.
The result of those deals is Newmark Grubb Knight Frank. Prior to the merger, the two entities accounted for $64.35 billion in investment sales and leasing transactions globally in 2011—ranking it as the fifth largest commercial real estate brokerage globally according to NREI’s calculations. BGC estimated real estate accounted for 11 percent of its revenues in the first quarter and that the sector would generate $110 million in revenues in the second quarter. Newmark Grubb Knight Frank and its London-based partner Knight Frank together operate more than 300 offices in property markets on five continents, including approximately 100 in North America.
Some of the key leaders managing the new giant and integrating the pieces include Michael Lehrman, global head of real estate for BGC Partners; Barry M. Gosin, CEO of Newmark Grubb Knight Frank; and Jimmy Kuhn, president of Newmark Grubb Knight Frank. That group is quickly moving to consolidate all the pieces of the combined firm and take advantage of what being part of BGC Partners brings to bear.
But to understand the vision of what pulled these disparate parts together, you have to go straight to the top: BGC Chairman and CEO Howard W. Lutnick.
Lutnick also still serves as chairman and CEO of Cantor Fitzgerald, and he and the firm will always be linked with September 11. The company inhabited the 101st to 105th floors of One World Trade Center. Overall, 658 employees—two-thirds of its workforce—perished as a result of the attacks. Not one of its employees in the building that day survived. Cantor people, in fact, accounted for more than one out of every four victims that died in New York City that day.
The firm, for all intents and purposes, had to be rebuilt from the ground up in the United States. The bulk of its remaining employees were based in London. Cantor was faced with the prospect of dealing with the tremendous loss of life while trying to pick up the pieces and rebuild from scratch.
By Lutnick’s reckoning, BGC—then part of Cantor—was the top financial services brokerage firm in the U.S. Losing so much of its workforce was a titanic setback.
“We managed to rebuild it since 2005 and now we’re currently number two in virtually every category,” he says. “And we’re the most successful in speed of growth, dynamism, hiring—every sort of growth statistic would have us at the top. … The fact that we’ve gone from number one on 9/11 to out of the pack and now are all the way back to number two in seven years from a standing start is amazing.”
Today, Cantor and BGC occupy offices in midtown Manhattan—on the lower floors of an unobtrusive office complex on Park Avenue. Cantor’s offices are lush, but modern. They are full of wood furnishings and finishes. Paintings and sculptures are everywhere. There are also screens galore. Televisions feed in news and financial channels. Terminals display up-to-date market data and analysis.
Lutnick’s office is a grand one on the second floor of the building, with a view of Park Avenue. Like the rest of his company’s quarters, his office includes a mix of décor and technology. Multiple screens sit in a room that includes elegant wood furnishings.
Lutnick is able to talk to NREI in between attending his son’s fifth grade graduation and hours of meetings that will occupy him until 10 PM that night. In that time, he patiently recounts why BGC has opted to enter commercial real estate now and why he thinks, ultimately, it can succeed.
“The biggest market in the world is the equity market. The second largest market is in real estate. And the third largest is the U.S. treasury debt market,” he says. “We’re great in the first and we’re great in the third. And so it makes tremendous sense to build in the real estate market.”
And Lutnick believes BGC brings two unique qualities to the table that will enable it to get a leg up in the commercial real estate brokerage world. The first is the fact that BGC is 37 percent owned by its employees—about a $600 million stake. And the firm pays out hefty dividends to its shareholders, including those employees.
“We keep a high dividend because it’s a model that works for the brokers,” he says. “They are used to getting paid. If they own equity, they get big distributions for that equity, it makes them happy.”
Secondly, BGC for years has employed an approach called “inferential pricing” to its debt and equity brokerage businesses and intends to apply the same kind of modeling to the commercial real estate world, where, historically, data analysis has not historically been as sophisticated.
“The question is what should I be able to find this asset for? ... If I say you want to buy this particular bond and someone else is offering it at $100 and I say you should be able to buy for it $80, but you can’t, it’s kind of silly,” Lutnick says. “You need to be able to say, ‘This is what it should go for,’ and then have the tools to be able to create that deal and bring it to the market. Inferential pricing is an enormous part of what arms our brokers to be the most successful brokers in the financial services world.”
Being able to price and deliver deals is a function of BGC’s massive investment in technology and analytical systems—$1.5 billion to date with $120 million in new investments annually—and its brokers’ ability to understand markets and source transactions.
NREI: What sets up BGC to enter commercial real estate, and why now?
Lutnick: The way you invest in world-class talented brokers is that they own the company. Everyone is pulling their oars in the same direction. While I’m the management, 37 percent of the firm is owned by the employees. So who is working for whom, really?
We are all in it in together. Since that is foundation of BGC, it quickly made the real estate brokers comfortable. They understand we are a real estate brokerage company because we are also a financial services company. We are an institutional based high-end brokerage company. That’s what we do. That’s a foundation.
So if you look at the landscape of when you’re in the brokerage business, we don’t make money when markets go up or lose money when markets go down. We’re all about transactions. So we’re going to focus on the biggest markets.
The commercial real estate market is enormous. We saw an opportunity to bring our technology capabilities, instantaneous market knowledge and a level of precision in market knowledge to our clients. That’s coupled with the ability to create financial tools for clients to hedge themselves and protect themselves and reduce their risk.
Put all those together, coupled with fact that the largest class of clients are financial services firms—either as asset managers or users themselves—and it becomes a perfectly laid out opportunity. It makes complete sense to us to invest dramatically and aggressively in the real estate business.
NREI: BGC has a major commitment to research and analytics. That’s something that’s been less sophisticated in the commercial real estate world. How will that inform your approach?
Lutnick: In commercial real estate, market analysis is called research. On Wall Street, there are two classes of information. There is research, which is thoughtfully written, long-term view expressive and analytical. And then there is market data, which is the information that you need to make a financial decision at your moment of financial decision.
While you are thinking about what to do, research is an excellent idea. Once you’ve decided what to do, that market information, which we call on Wall Street market data, is, as a class, missing in the real estate business.
So we plan to bring that class of data to the real estate market so our brokers will be armed with a set of financial tools, models and real-time information that is not available elsewhere that will be very valuable when people are at the point of decision making.
We’ve been very successful in the financial markets with something called inferential pricing. ... Inferential pricing is an enormous part of what arms our brokers to be the most successful brokers in the financial services.
In commercial real estate, I can imagine a tenant saying, “I’m interested in 125,000 sq. ft. of space in this market,” and most brokers would say, “This is available at this price and that is available at that price.”
But you only can do that if have a precise knowledge of the marketplace and place enormous technological tools at your fingertips and enormous experience with those tools. That creates real market outcomes that must be able to be executed. That’s the art of our business.
NREI: Talk about Newmark and Grubb. Why those firms? And how are those pieces coming together?
Lutnick: Newmark had two sensational characteristics. Number one, they are a New York power. In the world of commercial real estate, the largest and most important market is New York. To start with a power in the best market was fundamental. That’s number one.
Number two, they had built what they call a consultative approach. Another way to say that is a holistic approach.
What Newmark had built and what we are investing in enormously is to, rather than just say, “Great, we’ll go find you your 125,000 sq. ft. in just the way we’ve discussed,” it’s, “Before we do that, do you mind if we do a complete analysis of your business and work flows to find what do you really need?”
Our [having] resources to do that creates an entirely different vision of what they should be doing in real estate. It may well be that they don’t need 125,000 sq. ft. in this market at all. Maybe they need less space in this market and more space in this other market, which is both cheaper for them and a better workflow. It may be we make much less money. So what? We have a much happier client and we are in this for the long, long run to win.
The only way you win in the long run in real estate is to have clients walking around saying, “I worked with those guys and they were awesome.” That’s it.
What Newmark was missing on its own was a large national presence. While it had an excellent national footprint, it wasn’t as big as other players. ... Grubb & Ellis solved that plainly, boldly and completely.
We’re driving business across the platform, which is fantastic for the people from Grubb. It made a huge difference to them. Grubb employees are now both in a strong financial institution with a powerhouse New York and a strong global platform.
You add to that Knight Frank’s global position and you see that we can now stand toe-to-toe with anyone in the world in terms of physical presence and I don’t think anyone can stand toe-to-toe with us any longer in terms of technical prowess.
NREI: Will we see any more acquisitions?
Lutnick: BGC is a serial acquirer. We clearly state we hire and acquire accretively. We are always looking to add talent and that includes great brokers and all of these markets across the country. And there will be definitely be places where we buy additional companies.
You should see us add and grow dramatically in capital markets. That should be a strong expectation of growth.
Even if you look, in the last couple of months, at the hires we’ve made, you’ll see they were relentless in the capital markets. But that would make sense. BGC, of course, is going to be in capital markets.
NREI: How about the technology piece? How do you build that?
Lutnick: BGC spends over $120 million a year on technology and we have invested well over $1.5 billion in the infrastructure already. … That’s why real estate is so exciting—because there’s a certain amount to spend on understanding the information, collecting the information and driving the information into our systems.
But we don’t need to need to invest in systems to analyze the information and generate the answers.... It’s really scale and leverage, which makes for great businesses.
Our goal and objective is to have the most successful brokers. The way is to hire talented people and arm them with extraordinary data and information, which just makes them better.
