Two large commercial real estate brokerages said they are cutting more costs as they warn that the industry will have to wait longer for an eventual rebound in deals.
Newmark Group posted an 18% drop in leasing revenue for the first quarter as it increased expenses by acquiring companies and staff to prepare for what CEO Barry Gosin said will be a burst of capital markets activity as up to $2 trillion in commercial real estate loans are due in coming years.
CBRE, the world's largest brokerage firm, reported higher revenue and profit in the quarter as it began the year with a rebound in office leasing activity that exceeded the firm's expectations, while reporting that one of its divisions took what CEO Bob Sulentic called "aggressive action" to mitigate rising expenses.
The firm's chief financial officer, Emma Giamartino, told investors she doesn't anticipate the firm returning to peak earnings until 2025, and that the firm is "taking a hard look at corporate costs." Analysts said cost cuts across brokerages are helping as those businesses realize they have a longer wait in store for deals to pick up.
“Commercial real estate executives are looking for the green shoots in the market, including job growth and stabilized vacancy rates," Walter Bialas, a senior insight analyst in Avison Young's Dallas office, told CoStar News. "But I don't think there will be a return to normal for brokerages and real estate firms until interest rates decline and there's more certainty in property performance."
Newmark has issued $600 million in new debt and renewed its existing credit lines as the company adds brokers and other staff to prepare for what Gosin called “enormous opportunities for Newmark's service lines across origination, recapitalizations and sales” as distressed owners and lenders restructure loans or offload their properties.
“We are at the beginning of a once-in-a-generation opportunity for Newmark to grow its business,” Gosin said during Newmark’s earnings presentation, adding that the company has started to see the impact of $929 billion in U.S. commercial and multifamily mortgages maturing this year.
The two brokerages join Colliers and Cushman & Wakefield in reporting first-quarter earnings, with JLL and Marcus & Millichap set to release results in the coming week.
Revenue Boost
CBRE posted an 8% increase in year-over-year revenue in the first quarter for its so-called resilient businesses that include global workplace solutions, property management, valuations and loan servicing. Sales, leasing, mortgage origination and other transaction-related business ticked up 1%. Overall, revenue was up 7.1% in the first quarter year-over-year to $7.9 billion.
Last quarter's revenue increase follow a slight bump in sales during the prior-year period, with 2023 first quarter revenue up 1.1% from 2022.
CBRE CEO Bob Sulentic said that leasing outperformed expectations in the first three months of 2024, driven by office deals that reflect a resilient economy and companies bringing employees back to the office. The U.S. has lagged the rest of the world in seeing a return to office leasing, with CBRE, Newmark and other real estate services firms grappling with elevated interest rates and weakening property sales.
"We don't have a single client that I'm aware of that doesn't view their office space as a critical asset for the operations of their business," Sulentic said, adding that CBRE works with some of the biggest tech companies and financial services firms. "They are trying to get people to spend more time in the office and less time at home."
Mike McDonald, a senior managing director in JLL's capital markets group, said he's seeing more activity this year compared to last year, with an uptick of broker opinion of values, or a formal opinion on the valuation of a property completed through a broker analysis.
"It's been choppy with what the Fed and interest rates are doing, but most people have accepted a higher-for-longer rate environment," McDonald told CoStar News. "There's distress out there, especially in the office sector, and a lot of capitulation on where the real market values are. We are seeing more engaging conversations and the need to offer more strategic advice."
Gosin framed the potential opportunities for Newmark regarding the record amount of commercial loans coming online in coming years, with the executive noting a third of the maturing loans would result in the sale of the loan or the property, another third would be recapitalized or restructured and the remainder would need advisory services from Newmark or others brokerages to find new lenders or investors.
Like Gosin, McDonald said this is a "generational buying opportunity," in certain markets as distressed assets hit the market. He likened the environment to that he saw in the late 1990s, and again in the aftermath of Great Recession.
"There was a hedge fund in the northeast U.S. I haven't talked to since 1996, with them asking if it was the time to buy," he said, adding bid activity has also grown as high-net-worth individuals, hedge funds and other institutional capital seeks potential deals.
Bulking Up
Containing costs while investing to acquire and retain talent has also been an issue for brokerage firms. Newmark, for example, invested a record $161 million in the first quarter to acquire talent, with most of the new hires on the financing and advisory side, Gosin said.
"There’s a substantial investment in talent in the improving environment," Gosin said, adding that Newmark's target is to generate over $3 billion in annual revenue in 2026, driven in large part by growth in asset management and servicing.
And, recently, CBRE has been bulking up in areas executives say can better withstand economic shifts, such as its investor portfolio management business that launched with Brookfield Properties as its first client, with the real estate services firm set to manage 65 million square feet of office space in Brookfield’s U.S. office portfolio, as well as its recent acquisition of J&J Worldwide Services in a deal expected to total more than $1 billion. Earlier this year, CBRE’s leadership team told investors they expect to continue adding to its acquisitions.
Rising costs have hit the bottom line of CBRE's global workplace solutions, a more than $5.5 billion business that has seen double-digit growth in revenue, even as costs rose to what Sulentic called an "unacceptable rate" in the quarter, leading to margins that fell short of expectations.
"It's a little bit of cost here and there, but it's something we stay on very closely, and we've taken aggressive action in that business to already address it," Sulentic said.
The firm's expectations for core earnings per share remained unchanged in 2024 from the last quarter at $4.25 to $4.65.