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February 28, 2018  

Rivals Loosen Eastdil's Grip in San Francisco

San Francisco isn’t quite the one-brokerage town it used to be.

For a decade, Eastdil Secured had a virtual lock on office sales in the city. It handled an astonishing 71% of the $30 billion of trades valued at over $25 million that closed between 2006 and 2015, according to Real Estate Alert’s Deal Database.

But amid stepped-up efforts by rival brokerages, Eastdil’s share of big San Francisco office trades slipped to 59% in 2016 and then to 46% last year. That was still larger than the combined total of the next three firms — JLL, HFF and Newmark. But it marked the first time in recent memory that Eastdil fell below 60% two years in a row, raising questions about whether the dip is temporary or a sign of a new dynamic.

The year ahead promises more stiff competition. HFF, in particular, has already rolled out a number of high-profile listings, led by the offering of an estimated 45% stake in the iconic TransAmerica Pyramid complex, worth some $650 million.

At the same time, the word is that Eastdil’s team, led by managing directors Jeffrey Weber and Stephen Van Dusen, is quietly working on some under-the-radar deals that could help its market share rebound this year.

Some investment pros say that the overwhelming dominance Eastdil enjoyed couldn’t last forever and that the change is welcome for sellers, who prefer to have brokers compete for their business. “I personally don’t think it’s healthy for one firm to ever have more than 50% of the market,” said one high-level investment executive at a major institution.

In fact, only one brokerage had more than a 50% share of office trades in any top-15 market in the country last year: HFF, in Houston.

Efforts by other firms to beef up their San Francisco teams earlier in the cycle seem to be paying off, market experts say. But their successes have been streaky, and none are providing a head-on challenge.

“Eastdil Secured is like the New England Patriots,” said one veteran of the market. “Whether it’s 50% or 70% market share — the firm is in the Super Bowl year in and year out, and winning most of the time.”

The competition has become intense. “You better be on top of your game when you go into those pitches,” one local broker said. “You really need to differentiate yourself and present something unique or creative and have a well-thought-out and crafted story about who you are and how you are going to sell the asset.”

Eastdil remains the go-to firm for the biggest deals. Last year, it brokered San Francisco’s only two office trades above $400 million. But average deal sizes have been shrinking, from a cyclical peak of $213 million in 2015 to $133 million in 2017.

“Eastdil is still the dominant force, but its bread and butter has always been these large deals,” said one rival broker. “A lot of the recent buyers have been foreign investors, REITs, open-ended core funds that have longer holds and don’t trade like they used to in the past cycle. So the growth is coming in [smaller deals], and a lot of other firms are very active and skillful in that space.”

Even on deals of $100 million and up, Eastdil is facing stiffer competition. Between 2006 and 2016, it closed a whopping 71 of the 98 deals of that size. For the past two years combined, Eastdil brokered 15 out of 28 — just over half — while five other brokerages took pieces of that action.

However, no single firm has emerged as Eastdil’s chief rival for San Francisco office sales. The second-place slot has been held by three different firms in as many years.

Last year, JLL finished No. 2 with a 17.6% share. Its team is led by managing directors Michel Seifer and Robert Hielscher, long-time veterans of the firm and the city. One of its deals, accounting for just over a third of its volume, stemmed from a corporate-services relationship with the seller. JLL handled the sale-leaseback of healthcare company McKesson’s headquarters, at One Post Street, to Brookfield Property of New York for $245 million.

In 2016, the runner-up was HFF, led by senior managing directors Michael Leggett and Gerry Rohm, who joined that firm in 2009 from Cornish & Carey. And in 2015, it was CBRE, led by vice chairman Russell Ingrum, who moved from Houston and began spearheading San Francisco office sales for his firm in 2012.

Rounding out the city’s top six last year were Newmark, led by vice chairman Steven Golubchik and Grant Lammersen, and Cushman & Wakefield, led by executive managing directors Steven Hermann and Seth Siegel.

Newmark is the newest entry in the race. In 2016, it picked off Golubchik from HFF and Lammersen from Cushman. Last year, its volume nearly doubled to $357 million for a fourth- place finish and a 9.3% market share. “Newmark has done extremely well at establishing themselves as a competitor very quickly,” said a broker at a rival firm.

HFF, which placed third last year with a 14.7% share of brokered trades, has made the most waves so far this year. It has five listings worth a combined $650 million, already exceeding its sales total for last year. Those include the offering of a stake in the TransAmerica Pyramid. Insurer TransAmerica directly awarded that listing, citing parent company Aegon’s longstanding relationship with HFF on commercial real estate matters.

Although it trails HFF in listings at the moment, Eastdil is believed to have three off-market San Francisco office deals under contract for a combined $750 million, which could push it back into the lead. In addition, investors are being told the firm has a pipeline of over $1 billion likely to be put up for sale this year.

Eastdil touts its history of handling the vast majority of big San Francisco deals as an advantage for its clients, giving it ongoing access to buyers and knowledge of what they are looking for — which helps it maximize pricing.

Firms that provide a broad array of services, such as leasing and property management, highlight those in their pitches, to distinguish themselves from Eastdil, which focuses entirely on capital markets.

The heated competition among San Francisco brokers comes amid high sales volume: $4.9 billion in 2016, the city’s third-highest annual total, and $4.3 billion in 2017, which ranked fifth. Some of Eastdil’s rivals are still seeking to add to their teams, and there could be more musical chairs in the coming months. But as the cycle progresses, some wonder if the market can sustain so many competitors.

“We’ve been fortunate to work in one of the most-active markets in the world,” said a local broker. “We’ve all enjoyed success and attention from global capital. But . . . if our market slows and transaction volume declines, there is potential that could lead to consolidation.”