‘Enthusiasm’ At CBRE As Earnings Reflect Broader Market Rebound

CBRE heralded the resurgence, however slight, in capital markets activity spurred by the Federal Reserve's September interest rate cut on the brokerage's third-quarter earnings call Thursday. The company posted 22% annual growth in revenue from investment sales and expects that number to grow further to end the year.

Executives did offer some temperance on the broader enthusiasm, indicating the return of capital markets activity would take time. Buyers and sellers are coming together on price discovery for most property types, but office remains elusive. 

CEO Bob Sulentic said that while office leasing demand has improved in the U.S., he doesn't expect it to ever return to 2019 levels.

The firm's total revenue was $9B in the third quarter, up 15% from the year prior, with net revenue up 20% to $5.3B, CBRE announced. Global property sales revenue increased for the first time in two years, with 20% growth in U.S. fees. 

Together with new revenue in the firm’s property and project management arm, the earnings beat led CBRE executives to boost full-year projections and predict that steady growth lies ahead. 

“The Fed's start of a new monetary easing cycle has recently heightened investor enthusiasm for the real estate services sector,” Sulentic said on the earnings call. “We share the market’s enthusiasm and expect to benefit from a capital markets recovery over the next several years.”

CBRE’s advisory services arm, which includes sales and leasing, saw $414M in operating profit in the third quarter, up 40% from the same period last year. Leasing revenue was up 24% in the U.S., which together with Canada and Latin America accounted for 68% of advisory revenue. 

Sulentic said he expects U.S. office demand to continue a slow ramp-up but that it won't return to prepandemic levels. CBRE expects to rely on emerging markets in Asia to drive returns in the years ahead. 

“Japan and India businesses have grown to the point where they are the second- and fifth-largest contributors to advisory [segment operating profit],” Sulentic said. “Our success and scale have positioned us for continued outsized growth in these huge economies, and we expect them to be disproportionate contributors to CBRE’s future growth.”

Net revenue generated from capital markets activity hit $585M in the third quarter, up from $477M from a year earlier. CBRE is forecasting a continued recovery of the sector, with recent activity concentrated in retail and multifamily assets. But Sulentic expects a steady uptick in deals rather than a deluge unleashed by loosening monetary policy.  

“It's not going to be a steep capital markets recovery,” Sulentic said. “Buyers and sellers have largely come together for most asset classes or are very close to having come together, but not yet for office. There is debt available now. There is some positive leverage available now.” 

Chief Financial Officer Emma Giamartino said a gradual return to deal flow would provide tailwinds to CBRE’s operating profits. 

“We're expecting our investment sales revenue to grow in Q4 by 30%. That's not a low number,” she said.  

The firm’s global workplace solutions division, which includes project and property management, saw net revenue increase by 19% to $2.6B. The segment saw $318M in segment operating profit in Q3, and CBRE is focusing growth efforts on this side of the business. 

“We expect to deliver our best fourth-quarter core [earnings per share] ever, led by [global workplace solutions], which should exceed its prior [segment operating profit] record by a significant margin,” Giamartino said. 

CBRE plans to fully integrate property management firm Turner & Townsend, in which it acquired a 70% stake earlier this year, into its operations next year to help boost the segment. 

“The integration of the CBRE project management business with Turner & Townsend is proceeding with pace, and the combined business will start 2025 with considerable momentum,” Sulentic said. 

Growth in its property and project management sector helped shield CBRE from value erosion as other parts of the market saw activity slide. CBRE’s core earnings per share fell 30% during the most recent cycle, compared to 80% during the Global Financial Crisis, Giamartino said. 

CBRE’s strong quarterly performance led the firm to boost its year-end outlook across most of its business lines. Advisory services are expected to see a more than 20% increase in profits, up from the mid-to-high teens the firm had previously forecast. 

The firm also modestly boosted its outlook for the property and project management business while adjusting its core outlook on earnings per share upward to between $4.95 and $5.05.

Office leasing will continue to recover as more employees are pulled back to the office, Sulentic said, but it may take a few brave souls to jump-start the capital markets. 

“What would create a sharp recovery is more stability in interest rates — maybe them coming down a little bit — but some thought leaders among the investor community stepping into the market, doing some transactions and causing others to believe they had to get in and move quickly,” he said.

The stock market reacted positively to the earnings news, with shares trading up around 6% premarket and up nearly 10% in early trading Thursday.