Leasing Bump Buoys Brokerages As Fading Hope For Rate Cuts Sinks Sales

An increasingly active office market helped the publicly traded commercial real estate brokerages post largely positive first-quarter results, although the firms' leaders pointed out that an expected return of capital markets activity has again been delayed.

CBRE posted a $126M profit, leading the pack ahead of $66M in net income from JLL and $43.3M from Colliers. Newmark and Cushman & Wakefield both reported losses of around $29M. 

Executives at the major brokerages said leasing volume is trending positively, lifting a slowdown in the capital markets space that they expect to reverse by year's end. 

“As the world moves on from the pandemic and as interest rates stabilized — that doesn't mean they go up or down, it just means they stabilize — people will resume to normal course transactions,” said Alexander Goldfarb, managing director of research at Piper Sandler who analyzes Newmark’s performance. 

Only JLL was able to grow capital markets revenue year-over-year in the first quarter, up 6% from 2023. CBRE saw the greatest year-over-year decline of 11%, but Colliers was down 9% to $138M while Newmark and Cushman & Wakefield saw activity shrink by 1.6% and 1% respectively. 

Brokerage executives said that a small uptick in investment sales in the beginning of the year has since been squashed by the realization that interest rates are going to remain elevated, keeping investors sidelined. JLL's executives said first-quarter investment sales were at a 12-year low.

“Although the recent uptick in rate volatility will most likely cause a pause in transaction volumes in Q2, the improvement that we experienced in Q1 gives us more confidence that global investment sales pipelines are solid and investors are ready to engage when the time is right,” Cushman & Wakefield CEO Michelle MacKay said on the firm's earnings call last week.

The decline in capital markets revenue was offset by increasing leasing commissions across all the major firms, excluding Newmark, which bucked the trend with a 17.9% decline in leasing and other commissions from a year earlier to $158.8M. All other firms saw year-over-year leasing sector growth between 2% and 5%. 

“Leasing revenue rose in every region and global growth exceeded our expectations,” CBRE Chief Financial Officer Emma Giamartino said on the firm's May 3 earnings call. “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.”

Brokerage executives said industrial leasing has slowed from pandemic levels as geopolitical tensions create uncertainty and cause operators to push for efficiencies.

The office market continues to be driven by a flight to top-tier assets as firms shrink footprints but opt for premium space as they reimagine the post-pandemic workplace. 

JLL CFO Karen Brennan said new tenant requirements were within 30% of striking distance of pre-pandemic levels, but noted that there were fewer large requirements in the market. There are around 50% fewer tenants searching for space bigger than 100K SF today compared to before the pandemic, she said on the firm’s earnings call Monday.

But while there are fewer anchor leases in the market, strong demand for top-tier assets has pushed rent growth at those buildings, while landlords at properties that are less in demand are boosting their broker incentives to attract deals, Goldfarb said. 

“Brokers are sort of like bartenders,” he said. “In good times and bad times, the landlords are either celebrating or commiserating with their brokers.” 

While identifying efficiencies to save costs was still on the minds of executives on their first-quarter earnings calls, none said they were embarking on further job cuts after a flurry of cost savings initiatives in 2023. 

CBRE executives said the company had completed around $550M in cost-cutting that began in late 2022. Newmark executives expect to complete a $75M cost-savings plan by the end of the current quarter. 

Cushman & Wakefield executives said they had completed $30M in cuts. It also made efforts to reduce its debt load after analysts flagged interest payments as a weight, pulling down earnings for the firm. 

As the brokerages look ahead, executives are preparing for what they expect to be a marked increase in capital markets activity in the second half of the year — assuming interest rates come down from their current level.

“We remain cautiously optimistic about improving transaction velocity in the late second half of 2024, contingent on softening interest rates, the narrowing of the price gap between buyers and sellers and improved lending availability,” Colliers CEO Chris McLernon said during the firm’s earnings call Thursday. 

JLL CEO Christian Ulbrich said the market was adapting to the “higher-for-longer interest rate environment,” and that pricing for “the very best assets is beginning to stabilize in the U.S., UK and Australia, but prices have declined 15% to 35% from peak levels.”

Newmark CEO Barry Gosin thinks buildings are going to have to begin trading by the back half of this year regardless of the rate environment. Gosin said on the firm’s earnings call that he is positioning Newmark, which saw revenue rise 4.9% year-over-year to $546.5M, to get a piece of deals from the $2T in U.S. and commercial mortgages coming due in the next three years.

Property owners and lenders have been involved in a “bit of a Kabuki dance” in recent quarters to keep loans from going sideways, Gosin said, but “ultimately it all plays out.”

“The opportunity is there,” he said. “It's just a question of exactly when and how, but it will happen.”

Several firms are looking at the current market dislocation and eyeing strategic acquisitions to make and brokers to recruit. 

Newmark took on $600M in new senior debt in Q1 as it looks for deals like the $115M acquisition of Gerald Eve it executed in May 2023. That acquisition, and the opening of a flagship office in France, helped push Newmark’s noncompensation expenses up 14.4% year-over-year in the quarter to $189.5M.   

“We are at the beginning of a once-in-a-generation opportunity for Newmark to grow its business,” Gosin said.

Colliers is also looking to expand, earmarking $1B to make strategic purchases this year, McLernon said on the firm’s earnings call.

“With the $300M equity offering completed during the first quarter, we are well-positioned with more than $1B in available liquidity to execute on acquisition opportunities as the year unfolds,” he said. 

J.P. Morgan analysts, in a note to clients after CBRE’s earnings call, said they expect leasing growth to continue through the year at all the major brokerage firms as more corporate tenants make decisions that were delayed by the pandemic. But they pointed out that a macroeconomic shift could flip that balance. 

“The continued strength in the economy is an underpinning to better leasing, while that same economic strength keeps interest rates higher and thus potentially delaying more investment sales activity,” the analysts wrote.