The verdict is in.

The financial markets don't care about real estate. At least one major industry player has decided not to take Wall Street's abuse any longer, instead seeking refuge in private life. Are other real estate companies poised to follow suit?

Last month, CB Richard Ellis turned conventional wisdom on its head. The company, which is one of the world's largest providers of real estate services, decided that enough was enough. With a market cap of only $310 million on annual revenue topping $1.3 billion, CB Richard Ellis decided to go private.

The news was contrary to say the least. After all, every company's dream over the last few years has been to go public and bank a wad of cash. Struggling firms invest hundreds of thousands of dollars on bankers and lawyers just to get the paperwork done for the public markets.

But this isn't 1999. Once-overvalued firms, many of them in the technology and telecom sectors, now are struggling to stay listed on the Nasdaq. Many are seeing their float valued at less than $5 million, which spells expulsion to the Bulletin Board or, worse yet, the Pink Sheets.

Some of these firms now are undervalued. Several have cash positions that are higher than their market values.

Unfortunately for solid firms, the underperformers and over-valued have dragged the rest of the market with them on their trip to penny-stockdom.

Such is the case with CB Richard Ellis and just about every other publicly traded real estate firm. The company last year earned more than $150 million on net margins of 11.4 percent. Not shabby, especially considering that this was a 28 percent increase over the prior year.

And how did the financial markets reward CB Richard Ellis? With a market cap of less than one-quarter its annual revenue, not to mention a price-to-earnings ratio of just over 9. Currently, the stock is valued at near $16, a price pegged to the company's privatization.

But before the deal was floated last November, the stock had ranged between $9 and $13 per share. The deal is expected to close some time in the second quarter.

So why the move to go private? CB Ellis executives believe it was the best way to obtain some real value for shareholders, many of whom are frustrated insiders and corporate executives. The stock-and-debt buyout deal, worth about $750 million, is being led by Blum Capital Partners and some of CB Richard's executives. Shareholders will receive $16 per share, near the company's 52-week high of $15.88.

The entire CB Richard Ellis situation creates nagging questions about the future of publicly traded real estate companies. Most sectors of the industry continue to turn in revenue and earnings increases, yet already-undervalued shares are being pummeled on Wall Street.

So far this year, real estate investment trusts have seen a slight decline in stock prices. Only mortgage and hybrid REITs have seen shares increase, according to the National Association of Real Estate Investment Trusts.

Even worse, analysts now are citing slowing results for real estate firms in the fourth and first quarters. Any more unfavorable statistics surely would threaten to send the shares of other quality real estate firms even further into the abyss.

What makes this so frightening is real estate's traditional position as a hedge against poor performance on Wall Street. This time, investors are not seeing the sector as a safe-haven, leaving share prices stagnant despite strong fundamentals and performance.

The question now, of course, is who -- if anyone -- will give up on the public markets next?

For more articles by Lesley Hensell, please press here.

Published: April 11, 2001

Use of this article without permission is a violation of federal copyright laws.

Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net