CBRE Group, the world's largest commercial real estate brokerage, posted a 30% drop in annual profit as slowing property demand across the industry pushes the firm to move into more resilient businesses.
The Dallas-based brokerage reported a 2023 profit of $986 million, with revenue totaling $31.95 billion. CBRE expects this year's earnings to be more heavily weighted to the second half of 2024, with the third and fourth quarters forecast to account for two-thirds of its earnings.
The firm's expectations are shared by its rival, Toronto-based Colliers, the fourth-largest brokerage that was the first major brokerage to report 2023 earnings last week. Both brokerages expect deal activity to improve based on expectations that interest rates will decline later this year and credit conditions will improve.
CBRE has spent the past few months expanding into areas that executives say can better withstand economic shifts, including the launch of its investor portfolio management business with Brookfield Properties as its first client, as well as the pending acquisition of J&J Worldwide Services in a deal that could end up totaling more than $1 billion for the government services company.
“Even though 2023 was a difficult year for commercial real estate, we delivered the third-highest full-year earnings in CBRE’s history," CBRE Chairman and CEO Bob Sulentic told investors during the company's earnings call Thursday. "This partly offset market-driven revenue declines in businesses that are sensitive to interest rates and debt availability.”
The firm reported core earnings per share of $3.84 — the metric used by Sulentic when he referenced this being the third-highest full-year earnings in the firm's history.
CBRE is coming off two record years of profits, with $1.4 billion of annual net income reported in 2022 and more than $1.8 billion of earnings in 2021. That equated to core earnings per share of $5.69 in 2022 and $5.33 in 2021, the spokesperson said.
For 2024, CBRE is looking for core earnings per share to increase from 2023 to between $4.25 and $4.65 but doesn't anticipate a return to peak earnings-per-share until 2025.
Resiliency is expected to remain an important part of CBRE's strategy, Sulentic said. The firm's resilient business includes its entire global workplace solutions division, as well as loan servicing, valuation, property management and asset management fees tied to its investment management business.
“We ended 2023 on a high note with fourth quarter year-over-year operating profit growth across all three of our business segments,” Sulentic added.
Considering Acquisitions
CBRE is planning to add new capabilities to its firm through an active mergers and acquisitions pipeline this year.
"You should expect us to continue to build the business through M&A," Sulentic told investors. "We aren't going to do deals that we don't think are smart either financially or they are too hard to integrate. We won't force M&A. We'll do M&A where we think we can grow our business the way we want to grow it in areas with secular tailwinds. It will likely be over the long term our No. 1 use of capital."
The addition of J&J to CBRE's global workforce solutions business will increase its technical service capabilities for the firm's U.S. federal government clients and "open a mostly untapped channel in a difficult-to-penetrate market," Sulentic said.
The government services market is characterized by steady growth and long-term contracts, leading CBRE executives to consider it a relatively safe bet.
Meanwhile, CBRE's new property management services contract with Brookfield Properties to manage its 65 million-square-foot U.S. office portfolio is among the "largest in history of our sector," Sulentic said, with more opportunities of this kind on the horizon.
Emma Giamartino, CBRE's chief financial officer, said the firm is on track to deploy more than $2 billion of capital for the 12 months ended March 31. The deployment includes mergers and acquisitions in resilient businesses and a record level of co-investment commitments in its real estate investments division as other rival investors have been on the sidelines, Giamartino added.
CBRE has about $4.9 billion of liquidity on its balance sheet as of the end of 2023. Last year, CBRE repurchased nearly 8 million shares of its stock.
Cutting Leasing Costs
CBRE's advisory business, hit by fewer transactions last year, is expected to have its net revenue improve this year — increasing in the mid to high single-digits — due to "ongoing cost reduction initiatives," Giamartino told investors. CBRE's advisory business accounted for two-thirds of the $150 million of cost reductions the brokerage said it would make in October.
The savings will offset costs elsewhere in advisory, Giamartino said, noting higher-than-expected discretionary compensation tied to the improved financial performance of the firm. Meanwhile, she added, CBRE anticipates capital markets revenue to improve this year by mid-single digits with investor sentiment having improved in the past 90 days with a better interest rate outlook.
"We expect leasing to grow modestly in 2024," Giamartino said. "We are cautiously optimistic that the worst is over for office leasing, particularly for Class A properties, where we generate approximately two-thirds of our leasing revenue. A growing consensus about an economic soft landing coupled with the apparent stabilization of office utilization rates may make more employers confident enough to commit to office leases," she said.
CBRE's outlook for this year is contingent on long-term interest rates remaining around current levels, the Fed proceeding with the anticipated short-term rate cuts and the U.S. economy avoiding a recession, Giamartino said.
Development Plans
CBRE's project management arm is making some key moves this year. Turner & Townsend, a United Kingdom-based segment of CBRE's business, is in the early stages of penetrating the U.S. market. Trammell Crow Co., the firm's development arm in the U.S., is making some of its own acquisitions.
"We are taking on a steady stream of new land sites in Trammell Crow Co. that we are underwriting at returns that we think, based on current cap rates, will be consistent with historical returns in that business," Sulentic told investors. "This is one of the things that make us excited about future profitability."
Even with a "tough window" in the multifamily business this year, Sulentic said he's bullish on its outlook with some self-corrections already being made and developers pulling back on projects with the continued elevated cost of single-family housing helping drive the need for apartments.
The office market, while definitely facing some challenges, is also seeing demand for space from companies that want their employees to become more engaged and efficient, Sulentic said.
The office sector is expected to be a "very big asset class" going forward, with some winners and some losers, Sulentic said. Some Class A offices are leasing at record rental rates in several markets, while older buildings are expected to continue to struggle.
Managing office portfolios represents "a very large opportunity" for CBRE's real estate services business, as opposed to the real estate-owning business, Sulentic said.