Bump In U.S. Office Leasing Boosts CBRE Profits
The world's largest commercial real estate services firm saw improving revenue and profits in the first quarter due to stronger-than-expected leasing activity, despite a decline in sales volume due to high interest rates.
CBRE executives said on the firm's quarterly earnings call Tuesday that its profits exceeded previous expectations due to the boost in global office leasing, though the company has pushed cost-cutting measures as sales revenue lags.
Overall revenue increased 7.1% year-over-year to $7.9B in Q1. CBRE's net income increased 8% to $126M.
This bump was bolstered by the rise in leasing revenue, which was up 4% globally and 4% in the Americas, according to the firm's earnings report. It said this was the first time in six quarters the U.S. achieved "solid" leasing revenue growth.
"Leasing outperformed expectations, driven by office leasing growth globally that reflects a resilient economy and companies making progress on bringing their employees back to the office," CBRE CEO Bob Sulentic said in a statement.
The company said it continued to see strong U.S. leasing momentum in April, with demand up 20% year-over-year in gateway markets, driven by financial services companies. However, tech companies lagged behind, with demand 50% below pre-pandemic levels, CBRE Chief Financial Officer Emma Giamartino said.
"Office leasing grew by double digits globally as a resilient economy and progress on return-to-office plans have emboldened tenants to make occupancy decisions," Giamartino said on the earnings call.
Sulentic said that although companies are still contemplating how much space they need, there isn't a single company the firm works with that "doesn't view their office space as a critical asset for the opportunity for the operations of their business."
CBRE also saw strong growth in the loan origination business, with fees driven up 16%, Giamartino said. Property management, loan servicing and valuation together grew revenue by 5%, she said.
Sales revenue saw an 11% year-over-year decline globally and a 15% decline in the Americas last quarter. This decrease was due to the continued uncertainty around interest rates and a tight lending environment.
"At the same time, persistent inflation kept interest rates higher than expected, which led to underperformance in our property sales transaction activity," Sulentic said.
He added that the pressures from the macroeconomic landscape were felt most in the firm's investment management and development arms. CBRE has paused any new sales and development until things begin to improve, he said.
"We've decided to stay on the sidelines longer," he added. "We've got a portfolio with great assets that we're going to sell at some point, but we're not going to sell them until we think the environment is such that we can get the pricing we want, and it's hard to get that pricing when interest rates are higher."
Expectations around interest rates have changed in recent months as inflation is still higher than what Federal Reserve members are targeting. The latest prediction is that cuts aren't likely to happen at the Fed's June meeting.
CBRE's Q1 earnings represent a turning point for the company, which spent 2023 in cost-cutting mode after announcing in late 2022 it was targeting $400M in cost reductions. In Q3 2023, The firm made an additional $150M in cuts primarily targeted at its brokerage business.
The firm projects it will generate core earnings of between $4.25 and $4.65 per share this year, the same guidance it gave in its fourth-quarter earning report.
"Our expectations for profit growth in 2024 are now driven to a greater degree by the cost components of our business, which are within our control," Giamartino said. "As such, we remain confident in our ability to achieve our earnings outlook under a range of critical economic assumptions."
