How CRE brokerages are responding to i-sales slowdown

Budget managers at big commercial brokerages have traded in their kitchen scissors for industrial chainsaws.

What was a delicate approach to cutting costs in the first half of the year became much more aggressive this fall as surging interest rates curbed property sales, slicing into brokerages’ revenues and throwing off their expectations for end-of-year marks. 

Nationwide commercial real estate investment plummeted 24 percent in the third quarter compared to the same period last year, according to data from CBRE. No asset class was spared from the slowdown. Office investment volume fell 35 percent. Multifamily sales fell 19 percent. Industrial real estate — the darling of the investment world for much of the pandemic — saw sales volume decline 24 percent. 

Each of the major publicly traded commercial real estate brokerages, including CBRE, JLL, Cushman & Wakefield, Colliers and Newmark, have seen their stock prices plummet significantly since the start of the year. As of Nov. 23, the declines ranged from as little as 30 percent for CBRE to 55 percent for Newmark. JLL’s stock was trading the highest at around $162 per share, down 40 percent on the year, while Newmark stood at just $8 per share.

As the broader economy grapples with inflation and fears of an approaching recession, commercial brokerages have been forced to act to maintain their margins. Much of the extra weight, it seems, will be trimmed from payrolls.

So far, CBRE has been the most forthcoming about its planned cuts, outlining $400 million in cost reductions and indicating that much of that will be achieved through layoffs. JLL was next, announcing last month that it would reduce its workforce by an unspecified number of roles. 

Although the other publicly traded brokerages such as Cushman & Wakefield, Colliers and Newmark had not yet — as of this writing — informed investors of staff reductions, there’s little doubt among Wall Street analysts that such measures will be taken across the industry.

“We think these companies will all take a similar tact to protecting margins, even if fewer details were provided at this point,” JPMorgan Chase’s Anthony Paolone said. “The bulk of cost cutting is likely to be on the people side, though we expect to see tighter controls on travel and entertainment.”

“[The firms] are all probably looking at staffing reductions,” added KBW’s Jade Rahmani. “I think that some are temporary and some are permanent. But I think they’re all following the same course of action. They’re going to be reducing staff.”

Hunkering down

When CBRE reported its third-quarter earnings in late October, it said its capital markets business was “getting hit harder and faster” than expected by higher interest rates. 

In response to a 43 percent year-over-year freefall in capital markets revenue, the Dallas-based firm said it would implement a $400 million cost-cutting strategy over the next six months. About $300 million would represent permanent cuts, and roughly $175 million in reductions are expected to be completed by the end of the year.

“That’s the number we believe we can cut without impacting our ability to grow the business and serve our clients in the future,” CEO Robert Sulentic said on the call.

The majority of those cuts are expected to be made through layoffs, as well as by scaling down discretionary bonuses, incentive compensation, profit sharing and commissions.

Roughly two weeks after JLL indicated on its third-quarter earnings call that cost-cutting measures were on the table, the firm instituted an unspecified round of layoffs in New York and Chicago, Bisnow reported.

JLL did not disclose how many employees were let go or what other actions were being considered, but it referred to “measures which were already underway” to “reinforce our focus on managing costs” in a statement.

“These actions may include the difficult but necessary decision to make specific roles within our operation redundant,” the statement continued.

The predicament facing CBRE and JLL is one being felt across the industry. Several brokerages outlined a pessimistic short-term view of the impact of higher interest rates on their revenues. 

“We’re expecting the recession to impact our business for longer than we did 90 days ago,” CFO Emma Giamartino said on CBRE’s third-quarter earnings call. “We do expect the capital markets to come back, likely in the second half of [next] year. But that return is going to be more muted than what we initially expected.”

JLL said it expects capital markets revenue and transaction volume to continue declining and disclosed that it spent $9.3 million in severance costs in the third quarter, eight times more than in the same period last year.

“The overall outlook for the global economy in the coming quarters is not favorable,” CEO Christian Ulbrich said on JLL’s third-quarter earnings call.

Cushman & Wakefield expects its capital markets revenue to decline in the fourth quarter and fall short of last year’s total “as a result of the slowdown in transactional activity due to economic uncertainty.”

“We’re already taking action to strip out costs in line with the volume changes that we’re seeing in our transactional business,” Cushman & Wakefield CEO John Forrester said on the firm’s third-quarter call. “It is reasonable to assume that recessionary conditions will continue to permeate the real estate sector, particularly in transactional businesses.”

“Like a bat out of hell”

Rahmani said that KBW, which tracks CBRE and JLL, estimates that both firms will see investment sales plunge by 45 percent in the fourth quarter. But while acknowledging the short-term pain, brokerage executives have expressed long-term optimism for their ability to bounce back.

“We came out of the pandemic like a bat out of hell. We’re going to come out of this like a bat out of the hell the same way we did in the pandemic,” Newmark CEO Barry Gosin said. “Because we’ve attracted talent, our people are creative.”

Executives at CBRE and JLL said they expect deal volume to ramp back up by the end of next year. Cushman & Wakefield, meanwhile, said its $1.5 billion in liquidity will allow it to withstand the slowdown.

“We remain well-positioned to navigate through this,” Forrester said.

As investment sales falter, further diversification may be vital. CBRE, JLL and Cushman & Wakefield all pointed to increases in leasing revenue in the third quarter in their respective earnings reports as well as growth in their property management arms.

CBRE’s global leasing revenue rose 14 percent year-over-year in the third quarter from the same period last year, which the brokerage said was consistent across all property types, including offices. Cushman & Wakefield said its global leasing revenue was up 27 percent through the first nine months of 2022, citing an improvement in the office sector. JLL’s was up roughly 20 percent through the first three quarters, the brokerage said.

While it is natural for executives to take a rose-colored view of their own businesses, some market analysts agree with the positive long-term sentiment.

“I think the story here really is kind of a near-term uncertainty,” said William Blair’s Stephen Sheldon. “The pipelines are so big and there’s so much institutional cash on the sidelines… I think there’s a lot of favorable tailwinds when you look at the layers in the space.”