JLL, the world’s second-largest commercial real estate brokerage, cut its full-year outlook as severance costs surge, and it expects several months of slow activity ahead before capital markets start to recover.

On a day marked by the Federal Reserve's approval of a record fourth straight interest rate hike of 0.75 of a percentage point to try to tame inflation, the Chicago-based firm joined rivals in posting sharp declines in real estate lending and sales. That's also resulted in severance payments for the first nine months hitting $21 million, up from $2.1 million a year earlier.

The brokerage joined CBRE, the world’s largest commercial real estate services firm by revenue, New York-based Newmark and Toronto-based Colliers in cutting projected earnings growth for the full year. JLL executives said they now expect 2022 earnings growth to be less than the 16% to 19% projected earlier this year.

"For real estate markets around the globe, fast-rising interest rates and significantly widening spreads have created a notable imbalance between overall financing costs and yield," CEO Christian Ulbrich said on the company’s third-quarter earnings call Wednesday.

However, while capital markets deal volume is likely to remain low for at least the next couple of quarters, JLL "is laying the foundation for a strong rebound," Ulbrich said.

"Dry powder remains at near record levels, and once interest rates stabilize and price discovery ends, investors will be eager to deploy capital," Ulbrich said. "While we don’t know how deep or how long this economic cycle will be, our current belief is that the North American real estate markets will begin growing again in the second half of 2023."

On a global basis, all commercial real estate investment sales declined 18% year over year in the third quarter to $234 billion as uncertain buyers and sellers paused to determine whether deal pricing matched their expectations, Ulbrich said.

"The desire for greater price discovery is elongating the time to close deals," he said. "In addition, currency fluctuations are limiting cross border capital flows."

JLL posted net income of $140.2 million in the quarter, down 41% from the same time last year. The company reported revenue of just under $5.2 billion, a 10% increase from the prior-year period, driven by increases in leasing fees and income from property management, consulting and other services.

The company also reported an increase in expenses for the quarter, including a jump in severance costs, which rose to $9.4 million in the quarter that ended Sept. 30, up from $1.2 million in the prior year.

While executives did not directly discuss staff cuts, Chief Financial Officer Karen Brennan said JLL was “focusing on reducing costs, while also being selective about investments and growth initiatives.” CBRE said last week it is reducing its headcount.

Cushman & Wakefield and Marcus & Millichap, the last large brokerages to report results are scheduled to file their earnings this week.