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Brokerages On The Ropes As Pandemic Troubles Continue

The biggest commercial real estate brokerages in the country reported deep impacts from the coronavirus pandemic in the third quarter, most of which were the result of a persistent lack of certainty. 

“There has been an incredible deferral of activity, particularly in leasing, where companies have opted to make short-term decisions, and ultimately that's not really where they want to be,” Colliers International Chief Operating Officer John Friedrichsen said in an earnings call last week. “They just need a bit more clarity.”

Empty streets and empty commercial buildings are wreaking havoc on real estate companies.

JLL reported leasing revenue in the U.S. for Q3 2020 was $313.6M, a 32% drop from Q3 2019 leasing revenue, and its net income increased from $128.9M in Q3 2019 to $131.9M in Q3 2020, when it saw revenues of $3.98B. The company said strong earnings and cash flow management allowed it to pay down $320M of net debt, bringing it to a leverage amount that is below what it was before it acquired HFF in 2019

In JLL’s quarterly earnings call on Monday, CEO Christian Ulbrich noted the company had expected leasing, as well as capital markets, to see notable declines “as activity remains suppressed due to the uncertainty caused by the pandemic.” 

Cushman & Wakefield's leasing revenue dropped 32% to $321.6M, compared to $470.5M the same time the previous year. Revenue for the brokerage was $1.9B, down 9% from the previous year, but it posted a $37.3M loss for the quarter, an improvement from the $100M loss it posted in Q2.

Cushman & Wakefield's lower profitability, along with its higher debt load, was part of the reason it was considered a strong candidate for a merger. But despite the rumors, there haven't been any official takers so far, and Cushman & Wakefield touted its liquidity, which includes $916.8M in cash, during its earnings call.

“Overall, the Company maintains sufficient liquidity to continue business operations during these uncertain economic conditions,” the company said in a release.

Competitor Newmark saw leasing revenue decrease from $213.2M in Q3 2019 to $114.9M in Q3 of this year, a 46.1% change, and reported a $103.6M profit on revenues of $435.9M for Q3 of this year, a 25.7% change from $586.6M in revenues the same time last year. The company also said it generated $62M of cash flow from operations this quarter (excluding loan originations and sales) and saw its capital markets and debt volumes rebound by 50% from the previous quarter. 

“We expect leasing revenue to remain challenged through the end of the pandemic as clients continue to defer long-term decision-making,” Newmark Chief Financial Officer Michael Rispoli said. 

Still, the third-quarter performance of JLL, CBRE and Colliers were all strong or better than expected, Stephen Sheldon, an equity research analyst for William Blair who tracks the companies, wrote in stock reports for the three companies.

Executives for all three brokerages said they expect leasing to bounce back eventually but couched that by saying that post-COVID offices will likely be quite different.

CBRE reported a $184M profit, roughly $73M less than in Q3 2019, when its net income was $257M. Revenues for the quarter were $5.645B, down from $5.925B, which the brokerage attributed in part to declines in advisory services. The company did see leasing revenue nosedive 31% and predicted that sales and leasing revenue together would be down about 30% to 40% through the end of the year. 

CBRE CEO Robert Sulentic said in the company’s quarterly earnings call last week a significant number of the changes to the office market that resulted from the pandemic will be permanent. 

“For instance, our work with occupier clients confirms that companies will continue moving towards a hybrid model that combines working from the office and from home,” Sulentic said, adding that CBRE will rent space but fill it with fewer employees, be more flexible about when they are there and manage its space more intensely.

As in the previous quarter, there were a few bright spots to report. 

CBRE Chief Financial Officer Leah Stearns said that the company expects Q4 to be the company’s highest revenue-generating quarter, “as it usually is.” Facilities management, which totals 4.2M SF of industrial and multifamily, U.S. project management and data center management were all growing areas for the company and fairly resilient during the pandemic, Sulentic said. 

Colliers posted a $32M profit, an increase from the $28.7M it reported in the same period last year, though revenues, at $692M, were down 6%. The company attributed its better-than-expected Q3 in part to recurring services, which now account for almost 60% of its earnings, CEO Jay Hennick said in the company’s earnings call. It also reported that leasing revenues were $169.7M, down 22% from the previous year.

“The results are a testament to the resilience of our business model, a business that is also diversified by geography, service and by asset class,” Hennick said.