CBRE Group’s profits fell by more than 55% in the most recent quarter as the commercial real estate market continued to struggle under the pressure of higher interest rates.
And company execs don’t expect a significant recovery in the commercial property sector until the second half of 2024.
The Dallas-based global property firm reported $190.6 million in net income in the most recent quarter, compared with $466.6 million in profits in the third quarter of 2022. The company’s net quarterly revenue was down 4.2% year-over-year to $4.4 billion.
“Commercial real estate capital markets remained under significant pressure in the third quarter,” CBRE CEO Robert Sulentic said in a statement. “As a result, we experienced a sustained slowdown in property sales and debt financing activity, which drove the decline in core earnings-per-share.
“This decline was exacerbated by delays in harvesting development assets which we will sell when market conditions improve.”
Increases in interest rates this year have caused commercial building costs to balloon and have sharply slowed investment property purchases across the country. Worries about the economy and changes in the workplace have slowed leasing.
“The unexpected jump in rates has pushed back the capital markets recovery,” Sulentic said.
CBRE’s revenue from property sales dropped by about 39% year-over-year in the quarter ending with September. And the company’s real estate development operations lost $22.1 million in the quarter “reflecting a delay in asset sales amid the uncertain capital markets environment.”
CBRE owns Dallas-based developer Trammell Crow Co.
The commercial property firm’s workplace solutions operations grew revenue by almost 17% in the quarter. CBRE saw revenue gains in its facilities and project management businesses. Loan servicing revenue rose by 4% from a year earlier.
“Property prices are gradually declining and we believe this process won’t be complete and transaction activity won’t rebound materially until investors are confident that interest rates have peaked and credit becomes readily available,” Sulentic said in a conference call with investors and securities analysts. “We now believe this rebound is unlikely to occur until the second half of next year at the earliest.
“It’s going to take longer for interest rates to come down,” he said. “It’s going to take longer for debt in particular to become available for real estate transactions.”
Because of continued industry declines, CBRE said it plans to further trim expenses. The company in the last year has reduced its workforce and delayed some projects — including a new Uptown office tower that was expected to house the company’s headquarters.
“We will be reducing costs across our lines of business,” said CBRE chief financial officer Emma Giamartino. “We have already targeted $150 million of reductions.”
At the same time, the company continues to evaluate merger and acquisition opportunities, CBRE top officers said.
“We are looking at a number of deals,” Giamartino said. “But pricing has become more of a challenge than it was a year ago or even six months ago.”
CBRE isn’t expecting a rebound in its property sales and leasing business until sometime in 2024.
“Transactions are not going to return until the back half of next year where we thought they were going to return late this year early next year,” Sulentic said.
That’s caused CBRE to change its earnings forecast for all of 2023. The company anticipates earnings per share this year to drop by more than 30%.
“About a third of that is related to capital markets and about a third is related to development,” Giamartino said.
Source : TheDallasMorningNews