Big Brokerages Increase Cuts, Lower Forecasts For Rest Of 2023

Interest rates and frozen transaction markets are biting hard at public brokerages’ bottom lines, but company executives are assuring investors they see a path to better times amid the financial hammering — just maybe not until 2024.

Cushman & Wakefield, Newmark, JLL, CBRE, Colliers and Marcus & Millichap reported drops in revenues in their second-quarter results. Profits all but disappeared relative to the second quarter of 2022, additional cuts were announced, and many firms lowered their outlooks for the rest of 2023.

“The focus for everyone is: ‘When does this start to turn a corner?’ So far, that is unclear,” said Piper Sandler Managing Director Alexander Goldfarb, an analyst who covers Newmark, as well as companies like Vornado and SL Green. “Most people are thinking towards the end of this year. That is a moving target.”

On earnings calls with analysts, brokerage heads laid the blame squarely on interest rates, capital costs and seized-up transactional volumes. Last month, the Federal Reserve increased rates for the 11th time since the start of its battle against inflation. The gulf between buyers and sellers remains wide, meaning transactions — brokers’ bread and butter — remain sparse.

“In the Americas, property sales revenue fell 49% more than expected, reflecting limited credit availability and the gap between buyer and seller expectations,” said Emma Giamartino, CBRE’s chief financial officer.

Newmark CFO Mike Rispoli pointed to a 63% drop in U.S. investment sales and a 52% fall in industrywide loan origination. Analysts said many firms have optimistic medium-term outlooks, and the touting of green shoots emerging was prevalent, though the bare facts of the present are clear.

“Looking at the results from the commercial real estate services companies, the results have definitely confirmed that the correction in volumes and transaction volumes is underway,” said Jade Rahmani, the head of commercial real estate finance research at Keefe, Bruyette & Woods. “There's been some pickup in securitization, but I think, by and large, the overall takeaways from the call is that the downturn is still underway in commercial real estate.”

CBRE, the world's largest commercial real estate services firm, posted negative cash flow in the second quarter and revised its earnings guidance for the rest of the year downward.

"Increases in the last 90 days, coupled with expectations that rates will end the year higher than anticipated last quarter, pressured the elements of our business that are sensitive to commercial real estate capital flows, particularly our sales and financing businesses," CBRE CEO Bob Sulentic said. "We expect this pressure to continue through the remainder of the year."

Colliers’ revenues were $1.1B, a 4% drop from what CFO Christian Mayer said was a record quarter last year. The capital markets and leasing service lines at the company reported revenue falls of 38% and 7%, respectively, he said during the company’s earnings call, describing those decreases as “in line” with the challenging market. The Toronto-based firm posted a loss of 16 cents per share on the quarter.

“We expect lower capital markets and leasing transaction volumes to persist for the remainder of the year, with the impact partly offset by cost-control efforts across our company,” Mayer said. 

Colliers wasn't the only firm to ramp up its budget cuts. C&W CEO Michelle MacKay said the firm would slash its budget by an additional $40M after the firm had already announced cuts of $90M earlier this year.

JLL CFO Karen Brennan said on the Chicago-based brokerage's earnings call on Thursday that the company had reduced annualized fixed costs by an additional $70M, bringing the total amount to approximately $210M. That marks a significant jump from Brennan’s comments in March, when she said the firm was pursuing $140M in cost savings.  

"The cost actions are structural in nature and largely focused on nonrevenue-generating roles that we identified as part of the global realignment of our business lines last year,” Brennan said.

JLL’s net income for the quarter dropped to $3.2M, a 99% fall from $335.5M last year. C&W’s quarterly net income was $5.1M, down from $97.2M in 2022.

At Newmark, which reported a 22% drop in revenue and a drop in earnings before interest, taxes, depreciation and amortization of more than 50% for the quarter, CEO Barry Gosin pointed to a recovery beginning in the back half of this year, sooner than some of his peers.

“We are on the cusp of a new market. … As interest rates stabilize, capital markets activity will begin to rebound towards the end of the year, and we expect there will be a robust back half of 2024,” Gosin said. “We expect a significant portion of debt maturities to be resolved not only through refinancings, which will help our mortgage brokerage and origination businesses, but through more complex and sophisticated restructurings and recapitalization.”

Sulentic said CBRE is predicting an economic recovery beginning next year, with a “mild recession” starting a quarter later than the firm originally predicted.

“We are beginning to see signs in our own business that will eventually lead to improved performance likely starting next year,” Sulentic said, adding that the company capitalized 10 new development projects in the second quarter, doube the previous two quarters combined. 

“Our investment management team responsible for capital raising has noted a definitive change in investor sentiment in the last 90 days,” he said. “Many of these investors remain cautious but are now exploring how they can take advantage of the reset in pricing as they develop their 2024 commitment plans.” 

Weighing heavily on the market is uncertainty around the future of the office, along with the slow sales market. New York is on pace to see some $10B of investment sales this year, well off its annual average over the past 10 years of $34.2B. 

Marcus & Millichap CEO Hessam Nadji during the company’s earning call Friday said that comparing Q2 2023 to the prior year was “exceptionally tough” because of “prolonged market disruption.” The firm’s revenue for the period came to $163M, a 59% year-over-year drop. The banking crisis, the Fed’s “hawkish” view on rates and the slowdown in trades made for a difficult quarter.

Still, he said there is significant demand for “appropriately priced” assets and plenty of capital available. The company closed more than 1,400 transactions and nearly 300 financings in Q2.

“As buyers come to realize that a widespread price correction is unlikely and sellers become more realistic on pricing, a realignment in the marketplace will trigger a reversal in trading volume trends," Nadji said, according to a transcript.

Still, he added that previous predictions that the Fed would pull back on interest rate hikes and start lowering its benchmark rate this year are now off the table entirely.

“Everyone has a gigantic hope note for, I would say, maybe the third or fourth quarter of this year,” Rahmani said, adding the general tone from the brokerage heads indicated things are not as positive as they would have hoped. “We were thinking that there would be some more eye-catching defaults. And I would say it's been better than expected, but it's definitely been credit deterioration.”