Big Brokerages Look To Cut Costs As Sales, Lending Revenue Drop

The rapid rise of interest rates has already taken a bite out of the revenues of commercial real estate brokerage firms, kicking off a wave of cost-cutting as the companies' leaders warn of an extended downturn.

As the Federal Reserve increased interest rates by another 75 basis points last month — and signaled an aggressive stance on rates going forward — the world’s largest publicly traded brokerage firms reported contractions in their investment sales and mortgage brokerage business.

“While rising interest rates were anticipated, the intensity by which the Federal Reserve has acted to fight elevated inflationary pressures has caused a shock to the system," Marcus & Millichap CEO Hessam Nadji  said on his company's earnings call last week.

On earnings calls in recent weeks, top executives at firms like CBRE, JLL and Cushman & Wakefield predicted that economic headwinds are likely to slacken by the second half of 2023. But after the post-lockdown bump in activity brokerage firms experienced the past two years, firms are starting to pull back on capital expenditures, Piper Sandler Managing Director Alexander Goldfarb said.

“[Brokers are] sort of like a bartender. Good times and bad times, people still need to lease,” Goldfarb told Bisnow. “But in good times, people are drinking Johnny Walker Blue. In bad times, people are drinking Johnny Walker Red.”

Investment sales activity led the declines for all the major brokerage firms, according to third-quarter earnings statements. CBRE saw sales revenue fall by 16% in the Americas and global mortgage originations decline by 28%. JLL reported a 13% year-over-year quarterly loss in capital markets revenue despite a third-quarter overall revenue increase of 6%. While reporting an 8% increase in revenues to more than $1.1B in Q3 — buoyed by recurring revenues — interest rate hikes and geopolitical tensions tamped down Colliers’ capital markets transactions by 11%.

Newmark reported revenue declines in investment sales by nearly 37% and a 12% drop in mortgage originations, pushing down Q3 net income to $27.9M compared to $128.5M in the same period of 2021. Marcus & Millichap saw comprehensive net income fall to $20.3M compared to nearly $34M in the third quarter of last year, although its sales volume increased more than 8% in the past quarter to $22.6B.

"In our view, this is essentially a delayed reaction by the Fed caused by missing the window last year to start normalizing financial conditions far more gradually," Nadji said. "This, coupled with the Fed’s hawkish messaging during the quarter regarding the economic outlook, has exacerbated the slowdown in transactions.”

The slowdown in business has brokerage firms playing defense, which includes laying off workers.

CBRE said it plans to reduce costs by $400M in response to deteriorating economic conditions, including $300M in permanent cuts mainly related to staff reductions. While JLL didn't announce workforce cuts during its earnings call, the firm reported a nearly eightfold increase in severance and other employment-related charges year-over-year, up to $9.4M. Executives with Cushman & Wakefield, Newmark, Marcus & Millichap and Colliers told analysts that they either already have or are planning to reduce costs as well.

“Our clients are now asking us more than ever for advice. And so we're certainly being rigorous in terms of pulling back on discretionary spending and being really focused on our costs,” JLL Chief Financial Officer Karen Brennan said on a Nov. 2 earnings call. “But we also are making sure we're balancing that we have the talent and the people that are meeting with our clients who are asking for advice right now.”

Goldfarb said he expects other firms to reduce their headcounts in the coming months as well, especially with Fed Chairman Jerome Powell’s willingness to increase rates further to combat inflation.

“People tend to want to be optimistic. But I think the reality is showing up,” he said. “People didn’t appreciate the Fed.”

James Pitts, a principal at private brokerage firm Greenwood Commercial Real Estate, said he is not surprised by the quick pivot the publicly traded brokerage shops are making to control costs, especially after what they experienced during the Great Recession.

“You can be overly responsive and you can actually start to cause the thing you fear. But I think people are trying to get ahead of [the slowdown] so they don’t get penalized in the markets,” Pitts said. “Nobody is going to cut back on revenue generators. I think they’re going to make support leaner.”

Brokerage executives said they were confident that the economy would turn back positive by the back half of 2023, especially given the amount of money sitting on the sidelines looking for investment opportunities in real estate.

“We see with $400B of capital to invest in commercial real estate, $2.5T of debt maturities coming up over the next few years,” Newmark Chief Financial Officer Mike Rispoli said on an Oct. 28 earnings call. “While there may be a temporary pause or decline in activity, once … there's some stabilization in interest rates and some understanding of where pricing is, we think the activity will start to pick back up.”