The largest commercial real estate brokerages are slashing earnings forecasts and talking openly about reducing their headcounts and other deep cost cuts — only about three months after confidently touting 2022 as another record-setting year for profits and deal activity as firms emerged from the worst of the pandemic.
With less than two months left in 2022, executives at CBRE Group, JLL, Cushman & Wakefield, Newmark and Colliers are dealing with cuts in their full-year outlook. Most are planning to clamp down on expenses amid steep declines in investment sales, lending and other activities, inserting a dose of turmoil into what started as a heady year.
“What the major brokerages are experiencing is a huge shock to a major part of their businesses," Tod Lickerman, CEO of tenant representative brokerage Cresa, told CoStar News. "These businesses have very big capital markets and leasing operations that are grinding to a halt. That forces them to go to cost cutting to be seen by the investment community as having reacted to the revenue declines."
Dallas-based CBRE, the world's largest commercial real estate brokerage by revenue, announced $400 million in planned headcount reductions and other cost cutbacks. JLL, the second-largest brokerage, reported a large increase in third-quarter severance payments and other large companies such as Cushman, Colliers, Newmark and Marcus & Millichap announced plans to reduce costs across their service lines.
The declines leading into the end of the year — typically the busiest time for brokers as they race to close deals — come as some analysts say commercial real estate markets have reached a tipping point amid increasing evidence of a global recession.
By announcing cuts now, CBRE is getting ahead of the curve by being proactive, said Lickerman, who has previously held executive roles at JLL and Cushman.
"I don't think brokerages have seen the full effect of the drop-off in the third-quarter earnings," Lickerman said. "There's more pain to come and it will probably go on for a few quarters."
Ripple Effect
The concern expressed by brokerage executives discussing earnings mirrors trends that have been playing out for months at banks and other financial services firms, David Jacobson, an executive director of online education at Southern Methodist University in Dallas, who specializes in real estate risk management and business law, said in an interview.
"The big banks started laying off loan originators six months ago," Jacobson said. "We rode an unrealistic ride to the top at an unrealistic level. Now the market has to correct itself."
Joseph Cahoon, director of the Folsom Institute for Real Estate at SMU, said it's no surprise that the slowdown in office and industrial leasing and investment sales has rippled across the real estate services industry.
"Faced with negative leverage, it's hard to make deals pencil today," Cahoon said in an interview. "The biggest thing driving the uncertainty in the market is the lack of clarity in terms of what the Fed is going to do."
The Federal Reserve just approved a record fourth straight interest rate hike of 0.75 of a percentage point, with even more rate hikes expected as the Fed tries to rein in consumer spending and curb inflation. That unprecedented speed in boosting rates has led to what could end up as one of the fastest shifts in some business conditions across the economy, executives said.
Balancing Act
Several brokerage executives said during earnings calls last week that they need to balance spending cuts with the desire to keep investing in organic growth and compensation, training and support for the brokers and other producers that generate the biggest share of the company's revenue.
“We're certainly being rigorous in terms of pulling back on discretionary spending and being really focused on our costs,” JLL Chief Financial Officer Karen Brennan said during the company's Nov. 2 conference call. “But we also are making sure that we have the talent and the people that are meeting with our clients who are asking for advice right now.”
Chicago-based JLL posted a tenfold increase in severance payments and a 20% decline in adjusted earnings in the third quarter, which fell well short of margins projected by Anthony Paolone, an analyst with New York-based JP Morgan. Unlike larger rival CBRE, JLL did not outline specific measures to reduce costs and how it could protect margins in coming quarters, Paolone said in a note to investors.
“It talked about efficiencies, but we find that hard to put that into the context of [JLL's] financials," Paolone said.
SMU's Jacobson said that while real estate firms may no longer be on a hiring spree, they will always make an exception to land top producers.
"In sales, top talent is always being recruited even in a recession," he said.
While Jacobson doesn't believe that the expected recession will be deep or prolonged, he said real estate has been overpriced for some time and is due for a correction.
"It's happening now, and I expect [prices] will slowly dip over the next 12 months," he added.