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We have recently lowered the long-term recommendation for CBRE Group Inc. (CBG - Analyst Report), the world’s largest commercial real estate services firm in terms of fiscal 2011 revenue, from Outperform to Neutral as we anticipate it will perform in line with the broader market.
CBRE Group is the global market leader in commercial real estate brokerage and advisory services for property leasing and sales, forecasting, valuations, origination and servicing of commercial mortgage loans, as well as project and real estate investment management. The company has extensive knowledge of domestic and international real estate markets that enables it to operate as a single-source provider of real estate solutions.
CBRE Group has hard-to-replicate intellectual capital and technology resources for analytical, research and client service tools that enable it to meet diverse client needs. The company offers a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estate.
CBRE Group reported relatively strong first quarter 2012 results, with recurring earnings beating the Zacks Consensus Estimate by $0.01, primarily due to the gradual revival of the overall economy, albeit at a tepid and inconsistent pace. Management further expects to continue the growth momentum in 2012 with a diverse operating platform, premier brand, and a global footprint. We also remain encouraged by indications of stabilization and recovery of market conditions.
However, CBRE Group faces stiff competition from international, regional, and local players in the market due to which it has to continually invest in value drivers that act as key differentiators against its rivals. This undermines its long-term profitability to some extent.
In addition, CBRE Group has a significant development pipeline totaling $4.8 billion by the end of first quarter 2012, which exposes it to rising construction costs, entitlement delays and lease-up risk amid challenging macroeconomic environment.
The company also faces unfavorable foreign currency movements due to its international presence, which often impact its top-line growth. Any future slowdown in the global economy or the real estate industry as a whole will have an adverse impact on its leasing business, and consequently hamper its long-term growth potential.
We presently have a Zacks #3 Rank for CBRE Group, which translates into a short-term Hold rating. We also have a Neutral rating and a Zacks #3 Rank for NorthStar Realty Finance Corp. (NRF - Snapshot Report), one of the peers of CBRE Group.