CBRE Joins Amazon, Microsoft As Fortune 500 Companies Halt Major Office Developments
After months of speculation, CBRE finally came clean Monday about its decision to forgo plans for its new HQ, the latest in a series of cost-cutting moves taken by major corporations hoping to claw their way out of a downturn.
Profits and revenue at the nation’s largest brokerage firms took a big hit in the second half of last year, and CBRE was no exception. The firm’s advisory services business, which includes leasing, capital markets brokerage and debt advisory services, saw a 21% decline in net revenue in Q4, according to its latest earnings report.
Losses sustained in 2022 and the growing costs of new builds prompted CBRE to reverse course on previously stated plans to invest millions into a 27-story global headquarters at the corner of McKinney and Maple avenues, just down the street from its current offices in Uptown Dallas. Instead, the company will move its C-suite into a 67K SF space by Klyde Warren Park.
“What they are doing is being a bit cautious,” said Eric Beichler, managing principal and shareholder at Mohr Partners in Dallas. “When you look at some of the layoffs of their peers, the timing of building the new building is not ideal.”
Across the U.S., commercial development plans have been put on hold or abandoned as executives reckon with runaway inflation and the pressure of rising interest rates. As a publicly traded company, CBRE is being forced to make cost-saving decisions that will benefit both the firm and shareholders alike, Beichler said.
Trimming real estate is a common lever to pull when looking to save money, as evidenced by the slew of publicly traded companies that have taken similar steps over the last few months, said King White, CEO of Dallas-based Site Selection Group.
The company also expects to save $300M by laying off workers, a move which was “largely done” by the beginning of this year, a company spokesperson told Bisnow in a previous interview.
“They are probably under pressure, just like any other large corporation, to control costs, and real estate is one way to do it,” White said. “It’s no different than what you're seeing with Amazon delaying construction on their campus in Virginia.”
Amazon’s decision to halt the expansion of its second headquarters in Arlington, Virginia, came on the heels of Microsoft’s plans to put an indefinite pause on its 90-acre campus in Atlanta. Both companies called off the ambitious development projects in the wake of dwindling profits and slowing growth.
The difference between what a project costs today compared to one or two years ago is often too big a divide to bridge, causing deals that call for more equity than originally anticipated to fall through, Beichler said.
“The pressure comes back to the equity side of the table,” he said. “When you start to underwrite and pro forma that, many of the developers and the investors will rethink, ‘Is the time right when I’m putting much more equity in than I would have six months ago for the same project?’ And the banks don’t want to make up that difference.”
A number of CBRE employees, including CEO Bob Sulentic, have made assurances that the company will move forward with its plans for an HQ at McKinney and Maple at a later date.
“We still believe it’s one of the best office sites in America,” Sulentic told the Dallas Morning News. “And that site is going to get built. It’s a 700K SF office building and it doesn’t make sense right now. But we still need to have a global headquarters.”
The company’s change in direction won’t affect its 2021 incentive agreements reached with the state of Texas and the city of Dallas, CBRE said in a statement on Monday. The city document stipulates that the company must maintain a headquarters in Uptown Dallas, but it doesn’t include a specific address.
The agreement does, however, require CBRE to create 250 new jobs at its new HQ, which would add to the 700 existing jobs it is required to maintain at the property. This may be difficult to achieve given the much smaller footprint the company is now slated to occupy.
“Whatever was agreed upon in those incentives, typically, must be met for them to pay out,” said Maher Maso, principal in Ryan LLC's Dallas office and former mayor of Frisco. “Otherwise there are callbacks or they become invalid … The terms of the agreement are going to drive whether they receive them or not.”
White said his firm has restructured a number of incentive deals for its clients given the changing work environment, and both he and Maso suspect CBRE’s deal will also be renegotiated based on the economic benefit the company stands to bring to the city of Dallas.
“In the end, you’re trying to create jobs,” Maso said. “Some cities are super strict, some understand that the marketplace changes and we shouldn’t throw the baby out with the bathwater. Really, it’s up to the city.”
The purpose of incentive agreements is to deliver quality developments that will create jobs and benefit taxpayers, Maso said. CBRE’s plans may have fallen through, but other major corporations are moving full-steam ahead on their commitments to Dallas’ urban core.
Goldman Sachs is continuing work on its new Downtown Dallas HQ, a project that garnered $18M worth of incentives from the city of Dallas and is expected to draw 5,000 workers.
What CBRE’s decision portends for its incentive agreement, as well as the region’s office market as a whole, remains to be seen, but Beichler believes the news is more indicative of a difficult moment in time than a testament to the region’s growth potential.
“I don’t think they’re pulling away at all on the commitment to Dallas or the region,” Beichler said. “I think they believe the site where the new building will be is a very strong site and an appropriate site for a global headquarters — I don’t think they feel different about that — I think it’s a timing issue.”