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CBRE To Earn Majority Of Profit From Nontransactional Services In 2023 Amid Cuts To Brokerage

A seismic shift is underway for the largest commercial real estate services company in the world.

A CBRE for-lease sign outside an office building in Markham, Ontario, Canada.

Last year, CBRE's nontransactional businesses, including its global workplace solutions division, accounted for 45% of the company's operating profits, a number that is expected to exceed 50% in 2023 and going forward, Chief Financial Officer Emma Giamartino said on CBRE's fourth-quarter earnings call Thursday.

Two main factors are driving the switch, Giamartino and CEO Bob Sulentic said. The first is the drop in transaction activity, with capital markets and leasing advisory both experiencing quarterly and year-over-year profit declines.

Second, CBRE is gaining market share and business for global workplace solutions, which includes facilities and portfolio management for occupiers and project management for developers and landlords. GWS net revenue grew 13% in 2022, according to CBRE's quarterly filing.

CBRE projects double-digit revenue growth from GWS again in 2023, Sulentic said on the call. The growth in management business, despite economic headwinds that tamped down transaction activity for the past few months, is a sign that it can be more bankable as a secular change.

"Even if the work you do for a client in a specific portion of their portfolio is shrinking, it likely would result in project management work, potentially transaction management work, portfolio management work, so even if you have some shrinkage within an account, there are opportunities for revenue," Sulentic said.

CBRE's advisory services business, which includes leasing, capital markets brokerage and debt advisory services, saw a 21% year-over-year decline in net revenue, per its earnings report. Giamartino attributed the steepness of the decline to lower-than-expected transaction volume and the historically hot market in 2021.

The company's projections call for a short, mild recession that begins to lift in the back half of this year, when CBRE expects to make two-thirds of its annual projected revenue. As the severity of interest rate hikes has already eased, Sulentic said he expects capital markets activity to begin to recover.

“You have this very human thing with sellers being ready to sell and buyers being ready to buy, with capital sitting on the sidelines for a long time,” Sulentic said. “With talk in the market that maybe the recession won't be as bad as we thought, things start to shake loose a little bit, and as soon as one or two buyers go into the market, others start to get into the market because they're afraid they'll be left behind.”

The $400M in cost reduction CBRE announced in its Q3 earnings report is well underway, though the $80M in cuts it made in Q4 was off the $100M pace it projected in October. CBRE expects to realize a further $300M of savings this year, with the final $20M waiting until early 2024, Giamartino said.

The CBRE headquarters building at 2100 McKinney Ave. in Dallas.

Of the initial $400M savings estimate, $300M was expected to come from staff reductions, which are "largely done," a CBRE spokesperson told Bisnow in an emailed response to questions. Though the savings will come off the books gradually, the "vast majority" of cost-cutting actions have already been taken.

Neither Sulentic nor Giamartino commented specifically on where reductions have been made on the call.

"Cost reductions have been made as far away from the 'point of sale' as is possible," the CBRE spokesperson said in the email. "We have not cut back on broker support, rather we continue to invest in this area. This includes support for brokers focused on office transactions. Overall we would expect to increase our broker headcount in 2023, for sales, leasing, and debt brokerage."

The company doesn't project the office leasing market to improve anytime soon and will only develop build-to-suit projects in office until further notice, Sulentic said. 

"We’ve sized our business and our capital allocation strategy consistent with the assumptions that we’ve talked about here today, about where that business is going to be," Sulentic said when asked about headcount reduction in the office sector.

Mike Lafitte this month stepped down as CEO of Trammell Crow Co., CBRE's development-focused subsidiary, and won't be replaced. CBRE Global CEO of Real Estate Investments Danny Queenan assumed Lafitte's duties.

CBRE recorded a 6% operating loss from its development activity in Q4 as it was all but unable to sell off assets, but its full-year profit from development was $333M, the second-best year in the company's history.

The company entered the year with $16.9B in projects either under construction or set to begin within 12 months, down $2.6B from the end of Q3. The reduction stemmed from CBRE delaying projects to wait for better financial conditions.

One such delayed project looks to be CBRE's new Dallas headquarters, which appears no closer to getting underway than it did in February 2022, when it was scheduled to break ground.

CBRE expects to grow its investment in office in at least one way: Industrious, in which it purchased a 35% equity stake in 2021. Ever since, Industrious has been in expansion mode, with a notable part of its growth coming from taking over spaces formerly operated by competitors like WeWork.

UPDATE, FEB. 23, 5 P.M. ET: This article has been updated to clarify the changes to CBRE's operating profits and include comments from CBRE.

CORRECTION, MARCH 1, 10:15 A.M. ET: This headline has been changed to better reflect the source of CBRE's profits.