CBRE Pushes New Business Lines, Predicts Fourth-Quarter Recession

CBRE Group, the world’s largest commercial real estate brokerage, pushed to develop new business in the second quarter as it predicts a recession by year’s end that could disrupt portions of the industry.

The firm’s forecast for the second half of the year — an economic slowdown in the third quarter followed by a recession in the fourth quarter — comes after CBRE reported the highest net per-share increase in stockholder equity in its history. Equity increased more than a third to $1.83 per share in the second quarter from a year earlier, revenue rose 20% to nearly $7.8 billion, and it boosted its expectations on per-share earnings for later this year.

“All three business segments posted double-digit revenue and segment operating profit growth, despite the significant currency headwinds that affected all US-based global companies,” Bob Sulentic, president and CEO of Dallas-based CBRE, told investors during Thursday’s earnings call. He said core earnings per share rose 37% from last year’s second quarter and were slightly higher than last year’s record fourth quarter, reflecting “the benefits of our diversification strategy and an economic backdrop that was still generally supportive despite heightened macro concerns.”

CBRE isn’t the only global brokerage preparing for a slowing economy. Newmark and JLL recently told investors they also expect a slowdown in deal activity as businesses delay decisions. Morgan Stanley stock analysts following the brokerage industry are forecasting “a fundamental shift” in the commercial real estate industry in the second half of the year as leasing, property sales and financing activity decline as companies pull back on decisions and rising interest rates add to the cost of borrowing capital.

The brokerage signed a record number of new occupier outsourcing contracts and had strong growth in project management and leasing and record real estate development profits in the quarter, Sulentic said, ending “the quarter with excellent new business pipelines across numerous lines of business.”

Those lines of business with a history of growing consistently even in down cycles include the firm’s outsourcing business, valuations, property management, loan servicing and some parts of its investment management and development business.

Sulentic said the firm’s increase in expectations of core earnings per share percentage growth for the rest of the year is to the high teens from its earlier expectation for mid- to high teens in part because a larger portion of CBRE’s revenue and profit is generated from businesses that perform “particularly well” in down times. In addition, the company has become “adept at cutting discretionary costs while continuing to thoughtfully invest in growth,” Sulentic said.

Occupiers and investors tend to rely more heavily on the insight from global brokerages such as CBRE during down cycles, Sulentic added.

CBRE Chief Financial and Investment Officer Emma Giamartino told investors the firm continues to see “healthy activity across property types” with office being an outperformer.

“Office is growing from pent-up demand against a relatively low base of activity and higher than normal lease expirations,” Giamartino said. “We’re expecting more leases to expire in the next 18 months than any other 18-month period over the last five years.”

CBRE’s executive team expects to see an influx of leasing activity in the next 18 months as leases expire and office tenants must make decisions. (CBRE)

CBRE has “baked into its thinking” that corporate tenants will consolidate their office space to a degree, offering good news and bad news for CBRE, Sulentic said. “If there’s less office space leased, we’ll lease less office space ourselves on behalf of our clients, but we’ll also do more project management work.”

However, even as some requirements for office space may change, Sulentic said those corporate tenants will still “take a significant amount of space” and “there’s a large backlog of renewals that need to be dealt with.”

“It’s a factor of that huge volume of renewals coming, even if the space they take is somewhat smaller than it was before, it gives us confidence in talking about the numbers,” he added.

Even as some real estate investors are sitting on the sidelines, waiting for more certainty in the economy, Sulentic said industrial and multifamily properties are still being actively traded.

CBRE is also adding to its investment pipeline for future merger and acquisition activity, with an undisclosed sum being put aside as executives prepare for opportunistic M&A activity in a recessionary environment.

During the quarter, CBRE repurchased more than $600 million of its own company’s shares — the most it’s ever bought back in any quarter — bringing its year-to-date share repurchases through July to nearly $1.1 billion.

“While we continue to build an M&A pipeline, share repurchases are likely to represent the most significant use of our capital for the balance of the year,” Giamartino said. CBRE ended the quarter with $4.2 billion of liquidity.

“Over the next year, especially, if a recession continues, we expect to see opportunities in M&A arise,” Giamartino said.