The world's largest commercial real estate brokerage has been taking financials hits from the continued lack of capital markets activity.

CBRE posted a negative cash flow of $86M in the second quarter, down from a positive cash flow of $400M in the second quarter of 2022, it said in its quarterly earnings release Thursday morning.

The company also lowered its earnings projections for the year. It now says it projects a 20% to 25% year-over-year decline in its core earnings per share this year, after it previously forecast a drop in the low-to-mid-double-digit percentage range.

It said the majority of that worsening outlook can be attributed to the "delayed capital markets recovery." After the earnings release, CBRE’s stock price fell by more than 5% as of early Thursday afternoon, while the S&P 500 index was up 0.2% on the day.

CBRE CEO Bob Sulentic said on the firm's Thursday morning earnings call that some economic metrics have outperformed expectations, such as gross domestic product and employment, but he said the opposite is true with the interest rate environment. CBRE had projected the economy would enter a moderate recession this year, which Sulentic affirmed on the call but said it would occur "at least one quarter later than previously thought."

The Federal Reserve Wednesday resumed its campaign of hiking rates, lifting them by 25 basis points to the highest point in two decades. Fed Chairman Jerome Powell indicated more hikes are possible this year.

"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," Sulentic said. "We expect this pressure to continue through the remainder of the year."

CBRE's revenue from global property sales was down 44% from the same quarter last year, with Americas sales revenue down 49%. Its global mortgage origination revenue was down 44% year-over-year.

The company's net income of $201M was down 58.7% from the second quarter of 2022, and its core earnings before interest, taxes, depreciation and amortization was down 45.2%.

Executives attributed these sharp drops in part to a difficult year-over-year comparison, as Q2 2022 was one of its strongest-ever quarters, but it also said last quarter's transaction volume was lower than it expected.

"In the Americas, property sales revenue fell 49%, more than expected, reflecting limited credit availability and the gap between buyer and seller expectations," CBRE Chief Financial Officer Emma Giamartino said on the call.

The slow sales activity was partially offset by other segments of CBRE's business: Its global workplace solutions division posted a 10.6% year-over-year increase in revenue, and its property management business saw revenue rise 3%.

When asked by an analyst what he is looking at to signal when capital markets are recovering, Sulentic pointed to three factors.

"It’s the level of rate, it’s the availability of debt, but it’s also the mindset of buyers and sellers as to whether things have settled out and there’s clarity about where values of assets are going, cost of financing is going," he said. "We had all three of those things burdening the market in the last 90 days."

Sulentic said he is seeing some positive signs that point to a coming capital markets recovery.

He said CBRE's team responsible for capital raising has reported an improvement in investor sentiment as buyers look to take advantage of a reset in pricing, and he thinks banks will soon become more comfortable lending. But he doesn't think these improvements will materialize soon enough to be reflected in CBRE's 2023 earnings.

"We’re feeling better about where things are going to be, but we’re probably going to see that happen next year," he said.