Don't Look Now, But Brokerage Stocks Are Red Hot Again

Commercial real estate brokerage firms have gained billions of dollars in value over the past month amid jitters in the tech sector and predictions of an impending interest rate cut.

CBRE's share price was up 23% over the past month after markets closed Thursday. JLL's shares were up nearly 18% over the same time span, Cushman & Wakefield's stock is almost 17% higher than it was a month ago, and Newmark, Marcus & Millichap and Colliers are up 21%, 20% and 19%, respectively.

Over the same time period, the S&P 500 index has fallen in value by nearly 5%, the Dow Jones Industrial Average is flat and the Nasdaq is down nearly 10%.

The improving outlook for brokerage firms is being driven in large part by the expectation that the Fed will finally cut rates in September, said Himanshu Gupta, the director of real estate and REITs research for Scotia Capital Inc.

Economists are predicting the Fed will trim rates by as much as 50 basis points at the September meeting after a year of rates being held at the 5.25% to 5.5% target, the highest they have been in two decades.

That optimism has been boosted by the fact that most brokerages' second-quarter results showed a turnaround in their business, and transaction activity is on the rise.

Prices are rising based on “the excitement on the interest rate moves and excitement that earnings estimates can go higher,” Gupta told Bisnow. “The market is excited that there’s upside for these numbers.”

Almost universally, executives at the publicly traded firms, buoyed by improved earnings and stronger leasing and sales activity, predicted that business would improve through the rest of 2024, especially if the Fed cuts rates as expected in September. JLL, Colliers, CBRE and Newmark all turned profits in the second quarter and saw revenue increase.

“We passed the inflection point,” Newmark CEO Barry Gosin said during an Aug. 2 earnings call. “We hit the trough. We’re on our way to better times.” 

Newmark reported net income of $14.2M in Q2, more than double the $6.4M profit it turned a year prior. The New York-based firm said revenues increased across all of its three main business lines: management, capital markets and even office leasing.

“People are making commitments for longer term, whereas before, it was much more of a shorter-term commitment,” Newmark Chief Revenue Officer Luis Alvarado said. “We're certainly not back to where we were, but we're certainly making good strides and good growth and the pipeline looks good and activity looks good going forward.”

Improved leasing activity, led by office, was also a theme with other CRE firms. Colliers reported office leasing increased more than 30% in Q2, propelled by a return to office. The firm posted net earnings of $72M, up more than 50% from Q2 2023 on revenues of $1.1B.

JLL saw its net income surge by more than 3,000%, posting net income of $84.4M on revenues of $5.6B in the second quarter, much higher than the net income of $2.5M and revenues of $5B in the same period last year. The company reported a healthy uptick in leasing activity as well. 

CBRE saw U.S. leasing jump 13% year-over-year, fueled by increased activity in New York City, which CBRE Chief Financial Officer Emma Giamartino called a bellwether for the brokerage firm.

The Dallas-based firm, the world's largest CRE brokerage, was a little more muted than its competitors, and its company's earnings per share fell 34%. But it also raised its earnings outlook for the remainder of 2024.

“It's very early, so we're not going to call anything,” Giamartino said. “But we're starting to see an uptick in activity in the U.S. sales market.”

Cushman & Wakefield also saw leasing increase 2% in the Americas in the second quarter, with New York City and other gateway markets standing out, CEO Michelle MacKay said during an earnings call last month.

“Even in areas like San Francisco, you're starting to see some positive progress there, too,” MacKay said.

Even if the economy turns south and the job market continues to soften, brokerage leaders said that would give corporate leaders the cover to push back against hybrid work schedules and have employees at the office more often — a boon for the real estate business.

“The CEOs have always, for the most part, wanted to bring their people back to the office,” Gosin said. “The one positive of a lower employment [rate] is the fact that it provides a lever of the power between employee and employer, and that gives CEOs a little more power to bring people back to the office.”

James Pitts, the founder of the Atlanta-based commercial real estate firm Greenwood Commercial Real Estate, said brokerage firm executives are banking on a rate cut “that will juice the market.”

But he noted that layoffs continue to mount in the job market, with Intel alone announcing 15,000 cuts worldwide earlier this month.

“It’s their job to be optimistic. But until companies say to come back and stop cutting people, we’re still in an upward slog,” Pitts said. “I hope it’s not wishful thinking.”

Capital markets activity remained muted but showed signs of improvement under the umbrella of interest rate cut expectations and stabilizing real estate values, executives said. 

Marcus & Millichap, which specializes in capital markets and investment sales transactions, remained the earnings outlier in the second quarter, posting a net loss of $5.5M. But the loss narrowed year-over-year from $8.7M.

Marcus & Millichap CEO Hessam Nadji said Wednesday the California-based firm's private client business has been slow to recover due to a lack of bank lending, forcing its clients to remain on the sidelines to wait for clearer pricing discovery with assets. 

“There has been a resistance to selling at a discount, certainly for the first 12 months of disruption and even in the last six months or so,” Nadji said on the earnings call.  “That's slowly starting to change as the values reset. And usually, we see a little bit more rapid response to realism in most downturns. This one has been particularly slow.” 

Nadji said recent layoffs point to the Fed potentially cutting rates by 50 basis points next month. This would bolster a soft landing scenario for the economy and help prompt more capital market transactions in real estate.

“We believe the cycle heading into 2025 will be more favorable as the market gets a lift from lower interest rates, recalibrated real estate values, a slower yet still healthy economy and the conclusion of the election cycle,” he said. 

But Gupta is concerned that the commercial real estate market could experience another false start, as it did late last year when, contrary to many expectations, the Fed didn’t cut rates. Brokerage activity was on an upswing prior to that, then lost steam when the Fed held its rate.

“Who knows? This could be a head fake as well,” Gupta said. “If the September rate cut is pushed out by the Fed, that will again be a negative for these real estate brokers.”