The lagging office leasing market continues to hurt the major commercial real estate brokerage firms, but their capital markets activity has recovered faster than expected.

Cushman & Wakefield Thursday reported a net loss of $27.3M for the fourth quarter and a $220.5M loss for the full year. The company's loss was largely driven by its leasing business, which had a year-over-year revenue decline of 37% in Q4 and 34% for the full year.

But on the capital markets side, the situation appeared to be improving. C&W reported its quarterly capital markets revenue was down 14% from Q4 2019, and revenue for Americas capital markets was down 3%. That was a significant improvement from Q3, when global capital markets revenue was down 35% and Americas capital markets revenue was down 32%.

On the firm's Q4 earnings call Thursday, C&W CEO Brett White attributed the improved capital markets revenue to multiple factors, including a large amount of capital looking for deals and a drop in pricing that has helped deals close. He also said President Joe Biden's election likely played a role.

"We believe that sellers were more active in anticipation of potential changes to tax rates with the new U.S. administration," White said on the call, according to a Seeking Alpha transcript.

The company's earnings beat analysts' estimates primarily because of the capital markets' improvement. The 3% drop in Cushman's Americas capital markets revenue was much better than the 45% decrease JPMorgan Chase had forecast for the firm.

JPMorgan Executive Director Anthony Paolone, an analyst who covers the major brokerage firms, told Bisnow that White's comments on the administration impact stood out to him. He said the comments indicate that there is a chance that the election accelerated the timeline for some deals, potentially bringing down future capital markets volume, but he said the Q4 improvement represents good news for brokers.

Not only are capital markets one of the most profitable segments for brokerage firms, Paolone said, but the increased activity also signals an improved outlook for the overall commercial real estate market.

"It shows a private market that's willing to step up and transact," Paolone said. "If you're going to be willing to transact, then it's giving you an indication there's some comfort in looking ahead and seeing fundamentals that are either stable or improving, or at least at a level that gets people comfortable to do a deal."

The two largest brokerage firms, CBRE and JLL, also experienced stronger-than-expected capital markets revenue and lagging leasing volumes.

JLL reported a net income of $276M for Q4. Its Q4 capital markets revenue was down 15% from Q4 2019, compared to a 43% year-over-year decline in Q3. Its full-year capital markets revenue was down 12% from 2019.

The firm's leasing revenue was down 28% in Q4 and 26% for the full year. JLL Chief Financial Officer Karen Brennan attributed the leasing revenue decline to the weak office market, noting that clients continue to delay significant decisions. She expects this to continue through the first half of this year.

"Based on our leasing pipeline and our overall view of the market, we expect leasing activities to remain tempered in the first half of the year, before gradually starting to recover in the back half of the year," Brennan said on the firm's Feb. 9 earnings call, according to a Seeking Alpha transcript.

CBRE reported a net income of $491M in Q4. Its global leasing revenue was down 29% from Q4 2019, and U.S. leasing revenue was down 36%.

The firm splits its capital markets business into multiple segments. It reported a 5% year-over-year decline in U.S. property sales revenue during Q4, a 49% increase in revenue from commercial mortgage originations and a 17% increase in revenue from loan servicing.

"Leasing is a key line of business for us that has been under pressure," CBRE CEO Bob Sulentic said on the firm's earnings call, according to a Seeking Alpha transcript. "However, other lines of business, such as [government-sponsored enterprise] financing, investment management and facilities management, have all continued to grow."

Large brokerage firms outside the big three showed similar trends in their leasing and capital markets performance.

Newmark Group's leasing revenue was down 45% for Q4 and 40% for the full year. Its capital markets revenue last quarter was up 15.3% from Q4 2019,  and its full-year capital markets revenue was down 16.1%. Colliers International's leasing revenue was down 29% in Q4 and 28% for the full year. Its capital markets revenue last quarter was up 4% from Q4 2019, and its full-year capital markets revenue was down 10%.

The firms' leasing performance numbers include industrial, data centers and other commercial sectors, but office leasing makes up the lion's share of the business. JPMorgan forecasts that leasing revenues won't fully return to pre-pandemic levels until 2023 or 2024, making it the last of the firms' business lines to recover.

"It will be a drag for a bit longer because office is a big part of leasing, and we need to get back to where tenants are making decisions on the office side," Paolone said. "Once people come back to the office and companies have a better handle on how they use space, then you'll start to see them make decisions that they haven't been making since the pandemic started."

Brokerage firms also face the risk that companies downsize their footprints as more continue to work remotely. Sulentic said on CBRE's earnings call he believes office tenants' future in-office headcounts will be down around 15% from pre-pandemic levels.

While this presents a greater threat to landlords, tenants leasing less space would also mean smaller commissions for brokers, Paolone said. But given that the large brokerage firms are service providers with a variety of business lines, he said it likely won't be enough to change the overall outlook for the firms.

"In isolation, absolutely office could be a headwind in terms of the available commission pot," Paolone said. "But the different services they provide gives them the ability to be more nimble. We'd much rather be the service provider than the landlord."