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Brokerages Took Big Financial Blows As The Coronavirus Froze Transaction Markets

The indecision wrought by the coronavirus pandemic on global business essentially froze critical revenue streams for commercial real estate brokerage firms during the second quarter.

While brokerage leaders say business will improve toward year’s end, it likely won’t prevent a spike in empty office spaces, declining rents and falling values.

CBRE headquarters in Los Angeles

“We're in an epidemiologically driven world here,” Cushman & Wakefield Chief Financial Officer Duncan Palmer said during the company’s earnings call last week.

Commercial real estate investors are struggling to price buildings, and with sellers still expecting more than buyers are willing to pay, the investment sales market has plummeted, dropping by nearly 70% year-over-year in Q2, according to CoStar data. As companies punt on office decisions, most brokerages saw leasing revenues drop between 40% and 50%, particularly in the United States.

“In the near term, we've seen a precipitous drop in leasing and sales activity. Investment capital has moved to the sidelines as investors begin the process of price discovery,” CBRE CEO Bob Sulentic said on his company's quarterly earnings call. “Occupiers are hesitant to make long-term decisions amid the uncertainty, preferring short-term lease renewals where possible.”

JLL CEO Christian Ulbrich said leases inked during the first half of 2020 were 16% shorter on average. The Chicago-based brokerage giant saw net income shrink from $111.3M in Q2 2019 to $14.3M in 2020 on revenues of $1.8B.

CBRE posted an $82M profit on revenues of $5.3B, nearly $150M less than in Q2 of 2019 when its net income was $223M. It still fared better than Cushman & Wakefield, the smallest of the Big Three brokerage firms.

Cushman & Wakefield lost $100M in the second quarter after turning a $6.3M profit over the same period in 2019, with its revenues falling $378M. Newmark Group, the parent company of Newmark Knight Frank, posted a net loss of $2.1M on revenues of $383.7M during the second quarter.

There were some bright spots in an otherwise gloomy quarter, namely in the non-brokerage side of the real estate services business. Colliers International CEO Jay Hennick said on his company’s quarterly earnings call last week that facilities and project management were more resilient against the effects of the pandemic. Colliers’ project management business is approaching $450M, Hennick said. Colliers posted net income of $14.5M on revenues of $550.2M in the second quarter, compared to $57.2M in profits during the same period in 2019.

“Recurring services now represent the majority of our revenues and earnings, with the balance coming from our highly variable transaction business, leasing and capital markets,” Hennick said.

JPMorgan Chase Executive Director Anthony Paolone said the performance of the big brokerage firms was better than he expected for the quarter, in large part because they have diversified their businesses in the decade since the last recession.

“It was a challenging quarter, but they were able to do better than feared because they're all pretty diversified at this point,” Paolone said. “When you compare these companies today versus, say, going into the global financial crisis, their balance sheets are in much better shape to start with now.”

Chicago's Aon Center, where JLL is headquartered.

Cushman & Wakefield also saw its facilities and property management business hold up, especially as companies resist making changes to their contracts while many of their employees are still working from home, White said.

“Our facility service business, our very large janitorial management business, is killing it right now, as you would expect,” White said. “Snow on the mountain for them, lots of extra work they're doing, and their profitability shows that.”

When the real estate market can make some sort of return to normalcy is still unclear as the pandemic continues to surge in many parts of the globe, particularly in North America. But Ulbrich said the frozen leasing markets will likely thaw through the rest of the year, especially as leases begin to expire, forcing companies’ hands.

“The good thing about the leasing business is occupiers have to do something at some point. You can only wait so long, and then you have to make a decision,” Ulbrich said. “You cannot kind of push it out indefinitely. That's what we have been seeing already.”

Ulbrich said companies are adjusting to operating in a world where the pandemic is a reality, and some bigger deals re-emerged over the past couple of months after being shelved in March.

“Business is coming to terms that this will be the environment we're in for the foreseeable future, and so we have to adjust to that environment,” he said.

Cushman & Wakefield Chief Economist Kevin Thorpe warned that the average U.S. office vacancy rate is likely to reach 18% by the middle of 2022, which will push down rents by as much as 15%. The current national office vacancy rate reached 11.9% at the second quarter, according to Colliers. Toward the end of 2022 is when Thorpe said he foresees rent growth and vacancy decreases to begin again.

While Ulbrich said he expects leasing activity in the third quarter to mirror the second — which is to say, far below the typical level — he said deals in the pipeline make him encouraged that there may be a light at the end of the tunnel.

“If the world is able to prevent a full second wave, we are fairly optimistic we will see an uptick in the fourth quarter,” he said.

White highlighted those same currents during his presentation to investors.

“There's still a considerable amount of activity in the marketplace, lots of [requests for proposals] out in the marketplace,” he said. “We certainly don't see any signal that things are going to get worse than they are now.”