Q3 2022 CBRE Group Inc Earnings Call
Greetings and welcome to the C. B R E third quarter 2022 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your <unk>.
Telephone keypad, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
A reminder, this conference is being recorded it is now my pleasure to introduce your host Brad Burke Senior Vice President of Investor Relations and strategic finance.
Please go ahead.
Good morning, everyone and welcome to Cbre's third quarter 2022 earnings Conference call earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website CBRE Dot com. There you will also find a presentation deck that you can use to follow along with our prepared remarks, and then excel file that contains additional.
Supplemental materials before we kick off today's call I'll remind you that our presentation contains forward looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding cbre's future growth prospects, including our 2022 outlook operations market share capital deployment strategy.
Investments and share repurchases financial performance foreign exchange impacts cost management, the business environment and any other statements regarding matters that are not historical fact, we urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or.
Circumstances.
For a full discussion of the risks and other factors that may impact. These forward looking statements. Please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K, and Form 10-Q, respectively. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most.
The comparable GAAP measures together with explanations of these measures in our presentation deck appendix I am joined on today's call by Bob's Olympic our president and CEO and MLG or Martino, our Chief Financial investment Officer now please turn to slide five as I turn the call over to Bob.
Thank you Brad and good morning, everyone lower core EPS in the third quarter reflected a sharp deterioration in the macro environment, particularly with regard to capital availability for transactions. Nevertheless, core EPS was well above any third.
Third quarter in our history.
For last year's especially strong result.
Even in light of a seven cent drag in this year's quarter from foreign currency effects, just underscores the resiliency, we built into the business.
In contrast, with last year's strong third quarter capital markets environment weakened materially as the quarter progressed.
Property sales performed in line with expectations in July and August However, most debt and equity capital sources moved to the sidelines after labor day, causing both sales and loan originations to fall sharply in.
In addition, as expected and previously communicated we completed four fewer development asset sales.
This year than in last year's strong third quarter, mostly driven by the front end loading of asset sales. This year, we also delayed selling some assets during the third quarter.
As we noted last quarter when market dislocations caused transaction activity to decline those transactions are typically paused and returned to the market when the uncertainty passes.
We took advantage of the temporary market dislocation to continue repurchasing shares at an elevated clip.
In contrast, with sales and financing leasing performed very well.
Revenue was up across all property types led by office.
In addition, as we discussed previously many parts of our business are either cyclically resilient or benefit from secular tailwind.
These businesses, including occupier outsourcing valuations property management loan servicing investment management and project management posted solid results for the quarter.
We plan to further capitalize on our balance sheet to invest and secondarily favorite parts of our business that add differentiated capabilities over the last two years project management Flex office space renewable energy and industrial and multifamily assets have been at the forefront of those efforts.
Going forward. In addition to those areas, we are particularly focused on both enterprise and local facilities management.
Investment management, and the more cyclically resilient advisory business lines, while also continuing our share repurchase program.
As we prepare for a tougher operating environment, Emma will discuss how we have already been identifying cost savings while aiming to continue investments.
That will sustain long term growth.
Many economists, including our own have cautioned that the market outlook is especially difficult to forecast right now because I'm an unusual confluence of high inflation.
Coupled with strong consumer spending.
Juliet employment growth amid tightening credit cycle.
And residual pandemic and Ukraine war related challenges.
With this caveat in mind, we have updated our full year core EPS growth expectations.
To be up mid single digits compared with 2021.
Absent the challenging foreign currency comparisons, we expect our 2022 core EPS growth would achieve low double digit growth.
2021.
While economic downturns are never welcome they present opportunities to consolidate our position as global occupiers and investors gravitate to the industry leader.
We fully intend to make the most of these opportunities.
With that I'll hand, the call to Emma for deeper commentary on the quarter.
And our outlook.
Thank you Bob.
As Bob noted global economic sentiment has deteriorated since our last quarterly update.
Specifically and as you've all been following closely since you last reported the 10 year Treasury rate has spiked 140 basis points.
500 has declined by 7% and public REIT prices have fallen by 16%. The futures market is now indicating that the federal reserve will raise rates more steeply and he's done less quickly, resulting in a harsher and longer downturn than when we last reported.
It is worth reiterating that this has all happened in just the last 90 days.
There's more negative backdrop began to impact our business late in the third quarter and there'll be more impacts in the fourth quarter.
CBRE as core EPS down 19% from the prior year to $1.13.
And as Bob noted the drivers are weakening capital market conditions, the timing of development asset sales and a foreign currency headwinds.
Our results were however, supported by the continued growth in our lines of business that as Bob noted earlier, we see a cyclically resilient or secondly favored.
Net revenue from these businesses collectively increased 12% in local currency, excluding the contribution from Turner, and Townsend and 24% in local currency, including Turner and Townsend $284 million net revenue in Q3.
Finally, our GAAP EPS grew by 7% in the quarter due to a one.
$183 million Mark to market gain on our investment in Altice tower, which continues to benefit from demand for renewable energy solutions and its synergy with our CBRE businesses.
I'll discuss the results for each business segment, starting with advisory on slide six.
Total advisory revenue rose, 1% in the quarter or 5% on local currency performance diverged across business lines.
Capital markets weakness emerged immediately following labor day, which historically has been a time of heightened sales activity there.
The decline was most pronounced in our Americas region for property sales revenue was down 16% during the quarter.
While the Americas capital markets revenue, which includes sales and debt origination was relatively flat for July and August September revenue fell by 43% outside of the Americas property sales rose, 3% or 17% in local currency for the quarter.
The decline in U S property sales reflects sharply reduced credit availability typically credit spreads have tightened as rates rise however, higher rates had been accompanied over the past three months by credit spread expansion. Many capital sources have tightened underwriting standards considerably and set pricing at levels that are uneconomical.
For borrowers.
Against this backdrop, our mortgage origination revenue declined by 28% versus last year's Q3, while the value of loans originated fell 34% revenue.
Revenue declined less in loan volumes because more financing in the quarter came from the government sponsored enterprises, which we had expected to occur during periods of market weakness.
The decline in credit availability was broad based with only regional banks lending more than in last year's Q3.
Difficult comparisons further impacted year over year growth, our combined property sales and debt origination businesses grew by 79% in last year's third quarter, driven by a resurgence of activity following the <unk> 2020 recession.
We were encouraged to see our leasing revenue increased 14% or 17% in local currency driven by a large office and industrial transactions in major markets globally leasing revenue increased across all major property types with office growing mid teens off a low base and industrial up high single digits.
Property management valuation and loan servicing all proved to be resilient as expected collectively realizing net revenue growth of 2% or 8% in local currency.
Advisory services segment operating profit declined by 19% or 15% in local currency overall advisory margins on net revenue declined by four two percentage points, including the decline in loan origination related as art.
Slide seven illustrates the drivers of advisory is lower margin versus prior year.
Just over half the decline in advisory segment operating profit margin is attributable to higher cost of services with advisory gross margins declining two two percentage points year over year or one 9% excluding honest art.
Proximately 80 basis points of the gross margin decline is due to higher broker Commission strong growth in the front half of the year resulted in an outsized number of brokers achieving higher splits earlier than we've seen historically.
This will also impact the fourth quarter, albeit to a lesser degree before the annual reset next year.
For context, approximately one third of our U S. Brokers had historically reached higher tranches by the third quarter for 2022, the percentage of U S brokers, reaching higher tranches is almost 50%.
It is important to note that our average commission expense naturally increases during strong years and declines during soft years. For example in 2020 only a quarter of producers had reached a higher tranche for the third quarter.
The remainder of the gross margin decline is due to investments to support growth broker recruitment costs and revenue mix as revenue erosion with steepest in debt origination our highest margin line of business.
Additionally, advisory operating expenses increased by $47 million or 10% with the majority of the increase due to hiring that occurred in late 2021 or early 2022 as he prepared for a more robust growth environment and higher employee compensation, reflecting a tight labor market.
While we have and will continue to invest in targeted areas of growth in our business. We've also undertaken and equally targeted cost cutting program, which I will discuss shortly.
While we began reducing operating expenditures during the third quarter, which showed the lowest year over year growth in Opex in Q1 2021.
Only a fraction of our cost cutting program was implemented during Q3, and thus did not fully reflect the impact of those reductions.
We expect our cost programs to result in a single digit year over year decline in advisory segment Opex in the fourth quarter.
On slide eight our Gws segment posted strong net revenue growth up 8% or 13% in local currency, excluding the contribution from Turner and Townsend and.
And 32% in local currency, including the contribution from Turner and Townsend.
Facilities management and project management net revenue grew organically by double digits in local currency.
We also remain pleased with Turner and Townsend, which is performing in line with expectations.
Facilities management growth was supported by significant expansion work with our existing client base, particularly with technology clients.
In project management growth was driven by phase III designs and fit out often tied to our clients changing use of office space.
Our gws new business pipeline is on pace to end the year above the prior years fourth quarter with our opportunity is coming from new and existing clients across a range of industries.
Gws and segment operating profit margin on net revenue was 11%, excluding the impact of Turner and Townsend down from an unusually strong third quarter of last year.
11% margin represents a sequential improvement and was in line with our expectations as margins continue to normalize from Covid related hi.
Turning to our Rei segment on slide nine segment operating profit of $59 million represents an $88 million decline from the prior year.
You'll remember last quarter, we told you 75% of the Rei segment total operating profit would be realized in the first half of the year due to the cadence of our development asset sales.
Segment operating profit decline is predominantly due to this anticipated deal timing.
Within our AI investment management realized operating profit of $44 million down 12% from last year.
In local currency the decline was 4%.
Beyond FX prior quarter results were bolstered by an $11 million positive mark to market on our $335 million co investment portfolio versus a negligible mark to market in the current quarter.
The overall decline masked continued growth of asset management fees, which increased by 19% in local currency, even though adverse currency movement reduced AUM to $143 9 billion.
Our development business realized $17 million of operating profit against the $100 million in the prior year, reflecting fewer asset sales during the third quarter.
While we expected most of this decline when we provided our last quarterly update we elected to pause on selling certain assets as we wait for capital market sentiment to improve and.
And as we noted last quarter, our development business utilizes highly flexible financing, which enables us to monetize assets when market conditions are accommodating and deposits when appropriate.
Please turn to slide 10.
While we cannot dictate the macroeconomic environment, we can control our costs and how we allocate our capital.
We are targeting over $400 million of cost reductions due to management actions.
This is in addition to the naturally flexible cost reductions when business declines such as discretionary bonuses incentive compensation profit sharing and commission.
As discussed last quarter, CBRE can ramp up cost reduction activities as market conditions necessitate.
Our current cost reduction program is driven by our base economic assumptions, which as we've discussed envision a more challenging economy than we communicated last quarter.
Approximately $300 million of targeted cost reductions will be permanent in nature with the vast majority coming from head count reduction.
Beyond head count reductions, we also anticipate permanent reductions to our cost basis for third party and occupancy spending.
The balance of the savings approximately $100 million is more temporary in nature, but we will continue them until market conditions improve.
These cost savings will come from reduced travel and entertainment promotion and marketing spending and reductions to discretionary compensation plan and to be clear the planned reductions to discretionary compensation are above and beyond the natural flexibility of these plans that are already tied to financial performance.
Against our $400 million cost target, we have identified $175 million to be completed by the end of the year with a significant majority of the remainder to be completed by the end of Q1 2023.
Only a small percentage of the cost reductions taken to date are reflected in Q3 results due to a slight lag between taking action on head count reductions and having those cost savings reflected in financial results.
Given the nature of our cost structure almost all of the planned reduction will be reflected in our operating expenditures, although we do anticipate achieving targeted reductions to some of the more fixed costs within our cost of services.
While we are addressing our cost you can expect us to invest more aggressively utilizing our balance sheet during market weakness.
In the third quarter, CBRE repurchased five 1 million shares for $408 million.
Bringing our share repurchases through Q3 to nearly $1 4 billion.
We expect share repurchases to increase sequentially in the fourth quarter, ranging between $500 million and $700 million.
We also continue to remain an increasingly robust pipeline of M&A opportunities current marketing conditions are increasing the likelihood that we'll be able to act on them.
For now, though buybacks remain the best use of capital, but that May change as we get into next year.
Please turn to slide 11.
We've discussed today the broader economic outlook has worsened since our last update necessitating that we revise our expectations for full year performance.
As Bob indicated we now expect full year core EPS growth to be up by mid single digits compared with 2021.
Our guidance, most notably assumes that the capital markets remain under pressure we.
We expect leasing to remain more resilient than property sales, albeit with more muted growth than we saw in the third quarter.
Due to the headwinds in our transactional businesses, we expect full year advisory segment operating profit to decline by mid to high single digits with FX driving three to four percentage points of the decline.
We expect our Gws segment will achieve low to mid 20% segment operating profit growth for the full year buoyed by continued strength in the fourth quarter.
Absent foreign currency headwinds, we project segment operating profit growth for the full year in gws would be seven percentage points higher.
Within our <unk> segment, we believe we have realized approximately 90% of our full year segment operating profit largely due to the expectation a few development asset sales in the fourth quarter.
As noted previously our outlook has been negatively impacted by the continued strength in the U S. Dollar at mid year, we forecasted a $100 million full year negative impact to core EBITDA from FX.
We've now raised the expected FX drag to $125 million for the full year with $50 million hitting in Q4.
Absent FX, we anticipate the core EPS growth would have been in the low double digits for the full year.
We remind investors that it is difficult to forecast macro conditions in certain components of our business, notably capital markets, the timing and development sales and to a lesser extent leasing are subject to fluctuations and overall economic sentiment.
In closing while near term headwinds are intensifying, we remain as energized as ever about our long term prospects and are committed to using our scale balance sheet and cash flow to accelerate long term growth and value creation.
With that operator, we'll open the line for questions.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Formation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again Thats Star One to register a question at this time. The first question today is coming from Chad need Lafayette of Goldman Sachs. Please go ahead.
Hi, Good morning. Thank you for taking my question. So I understand that it's too early for 2023 outlook at this point, but if you could perhaps give us some parameters to frame 2023, like what would you need to see engines in capital markets.
You know to get restarted is there a frame is there a way to frame capital market activity in terms of first half versus second half like when do you think the outlook really.
Starts to get better.
Danny.
It's something that we're very focused on and we're working through our budgets right now too to really determine what we're expecting in 2023, but from a macro level.
If you look back to what we said 90 days ago, we view that we would be in a mild recession and that it would rates would peak in Q1 of 2023 and they will start to alleviate through 2023.
And now as the things have materially changed we've seen that impacting our capital markets business directly.
We are getting hit harder and faster than we were we were expecting 90 days ago, and we're expecting a recession to impact our business for longer than we did 90 days ago and so looking to next year, we do expect the capital markets to come back likely in the second half of the year, but that return is going to be more.
Muted than what we initially expected when we talked to you in Q2.
That's actually helpful color. Thank you about that thank you for that switch.
Switching gears to margins a little bit so protein percent margins in the quarter down 450 bps, it's better than 3% to 19, but then of course you know divorced is still ahead of us so help us frame margins in the context of 2019 year at all given that the macro is about to get much tougher and and you know what you framed.
And in your answer just recently, how should we think about margins in the context of 2019 is that a scenario do you think we go all the way or do you think there is some recourse in and the cost cutting.
Plans that you laid out yep.
Yep.
And Tony I'm going to talk about advisory specifically, because that's the most the most relevant piece and I think but what you are speaking to them and hopefully it's clear what happened in Q3, but I just want to go through that.
In Q3, and we have this on slide seven as you as you all saw.
I think it's always important to look at our advisory margin. Excluding <unk> that was 30 basis points of the decline that almost <unk>, our peer margins and when they grow they are adding margin and when they declined a 100% of that margin comes out. The second is we are in because of the phenomenal first half of the year, we had an exceptional growth with growth we delivered our.
Producers enter higher tranches much earlier than they ever have before so that was 80 basis points of of the margin decline and those tranches reset at the end of the year. So we don't expect that to be a headwind in 2023.
And then the two remaining pieces are producer recruiting where we are investing in our future growth in the first half we delivered again exceptional growth and we were investing in our cost to support that growth going forward and then on the operating expense side again, we also were investing in new hires we underinvested in 2021.
Simply because revenue accelerated faster than we can pick up our investments and then we also increase we.
We had wage inflation just as every other company had.
So going forward what were seeing looking into Q4.
We should expect that operating expense growth to continue to come down you look at the first half of the year, our operating expense and advisory was up about nine over 19% in Q3, our operating expenses came down to 10% growth year over year and in Q4 that should our operating expense should decline.
Over here and this is with an advisory and that there's two components to how those costs are coming out one is our discretionary cost levers that we can pull and pulling back on travel and entertainment continuing to pull back on new hires.
Pulling back on new hires takes longer for that to come into our cost savings and then our discretionary bonuses.
You'll also see some impact from our $400 million cost savings program, but that is going to be a meaningful lag there most of those savings you'll see in 2023, and that's because we take action on reducing head count and there was a lag in terms of when those costs come out of the system. So not where we expect to end the year and advisory.
We expect our margins to be over 19% with an advisory.
Excluding <unk>, our margins to be over 18% and that's an important number because that is a record margin. Excluding 2021, when our margins were inflated because our costs are not caught up to our revenue growth.
Thank you for that detail.
Thank you. The next question is coming from Anthony Powell of J P. Morgan. Please go ahead.
Thank you and good morning, maybe just sticking on this margin discussion in advisory.
So if I'm understanding this right if on that page seven that 190 basis point drag.
In the third quarter from Opex that actually flipped it becomes a little bit of a benefit in <unk> and <unk>.
And so if I'm kind of understanding and putting some narrative around this is it just that come to <unk>. Some of the drags on the cost side and the margin side, but you are more impacted by maybe the draw down on the revenue side.
Yes, so in Q4 across advisory were expecting net revenue year over year to decline.
Roughly 20%.
And so but we're also expecting margin expansion because of the cost so you're right.
Okay got it and then just within advisory in the quarter.
Just kind of understand mortgage originations and loan servicing a bit better.
Just I would have thought mortgage originations would be a little bit more insulated because people kind of have to refinance do things, whereas investment sales. They maybe don't have the shell.
But that didn't seem to be the case like any thoughts on just you know maybe why that that was worth that reverts.
Yeah, Yeah, Tony that that is just a function of the fact that we had two things go on rates went up.
And spreads went up typically when you see rates go up the way they did spreads will come down a little but both of them went up and it and people just avoided refinancing because it was so expensive it set simple.
We had and we had that circumstance play out in a way that was beyond what we would've expected.
Now here's what I'll say about that.
In the fourth quarter that you will see financing.
Performed better than new sales people are just not going to come back and trade assets until interest rates go down and until they think they can get the pricing they want which will happen. After in our view after the fed starts to go the other direction with interest rates, which we which is M. S.
Said in her prepared remarks, we think may happen later next year, but thats really what you saw happen in Q3, and especially what you saw happen in.
September .
Okay got it and then.
Just last one for me on the leasing side.
You pointed out our offices are having been pretty strong. It's also fairly cyclical property type like how much more runway do you think is left there to get back to normal when you kind of net that against maybe protect perhaps activity slowing because of the more macroeconomic factors.
And Tony when you say how much runway is there until that gets back to normal.
Give a little more on that I want to make sure I understand what you're asking there.
Sure I was under the impression like office, maybe looked particularly good because you were still having some of the post COVID-19 recovery.
And just decision, making book, but maybe that's off.
No no what what's going on is in fact that there was and we talked about this last quarter. There were a abundance of renewals in the marketplace to be done we will see that continue this year and into next year.
But what we also expect to see now is some downward pressure as we go into a recession.
Theres always downward pressure on leasing in a recession because people are looking around trying to find ways to defer cost.
Save money and so what they do you have this dynamic that goes on where they extend for a short period of time.
Et cetera, So we expect to see some of that come in and leasing to be more flattish in the fourth quarter, but we still expect some of the benefit from the built up number of renewals that need to be dealt with to occur in the fourth quarter and into next year.
Okay. So it sounds like maybe it's a it's a net kind of flattish number between sort of the you know the renewals getting cleared and the headwind from the macro.
That's what we think.
And may be may be a little down, but that's that's how we think it's going to play out.
Yeah, I'm, Tony for Q4, specifically, we're expecting leasing to be flat.
Okay, great. Thank you.
Thank you. The next question is coming from Steve Sochua of Evercore ISI. Please go ahead.
Great. Thanks, just a couple of them are just on that last point, you said Q4 leasing to be flat in office is that I. Just wanted to be clear is that year over year be clear that that was that's flat that's flat globally across all product types.
And that's year over year.
Okay. Thanks.
I was wondering if you just provide any comments on the industrial sales market I know that's an area that you guys have been fairly active in.
It's obviously been one of the more favorable asset types within REIT land, but we have seen a pullback in that leasing market as well. So I'm. Just curious if you have any comments on kind of industrial cap rates are and the appetite today.
Yeah.
<unk> cap rate cycle, all cap rates have gone up.
Industrial fundamentals have remained very strong they've backed off a little bit.
<unk>.
We've seen a little bit of downward pressure on rental rates in some areas.
We've seen slightly more vacancy although the fundamentals are very very strong the market has held up very well in the major markets very little vacancy.
Strong demand still.
So that has that has created a circumstance where there are buyers.
For the assets and there are owners of assets and developers investors and developers that want to sell but they're just not going to sell in the current environment because cap rates have ticked up.
Finance is expensive and our own portfolio as a developer we've made the choice to the first sales.
For some of our assets some of our industrial assets and I think what happened is we've already comment or what will happen is we've already commented when that circumstance eases and we think that likely will be the second half of next year those assets in the pipeline will get sold pipelines are very strong pipelines of assets the sellers want to sell and buyers want to buy.
<unk> are strong and we think starting in the second half of next year Youll see all of that free up to a degree and start to that market activity start to happen again.
Great just I guess one more question if you could provide any comments around sort of the industrious and and you know office.
Leasing business that you guys have and I'm just curious you know what.
<unk> seen in that business I'm, just kind of the short term office leasing business.
We will office leasing and industrious.
They share some dynamics.
But theyre different industrious provides.
Our capability in the marketplace that unique you can get in and out quickly.
You can get in and out without capital expenditure.
You can adjust the amount of space you have very quickly you can go into places that you don't intend to be long term and with all the uncertainty around the use of office space and where it's going to go.
Industrial <unk> business has done quite well and we believe it will continue to do quite well and.
And we're very excited about that investment and the performance of that investment. We've already commented today on office space Theres, there as what Youre seeing in leasing on office space.
Pent up.
Out of renewal activity and uncertainty about the about what's going to happen long term with offices. There is also a big bifurcation in how different parts of the office market are performing.
The best buildings to premier buildings doing quite well with rents up in.
Less quality less favored buildings suffering much more.
Yeah, sorry, Bob Mike My question wasn't clear I wasn't trying to follow up on Tonys question I was really asking specifically about the trends and industrious in just what maybe market share you're seeing the the Wee works. The reduces the industrious is taking in the industrial it's already in the office leasing business against kind of traditional office.
Leasing.
Yes that was my comment that's where I started with industrious the trends that industrious is seeing in the marketplace are very positive.
Unity to get into.
A smaller amount of space and more convenient locations that you may not want to commit to long term and as a result.
Doing extremely well.
Thank you. The next question is coming from Jade Rahmani of K B W. Please go ahead.
Thank you very much.
What are you seeing in the GSE multifamily lending business historically, they've been counter cyclical providers of capital they don't price to a securitization exit at least private label.
And so their spreads may not be as wide.
And they do have ample capacity.
FHFA governed lending caps are you seeing them step up.
This point of time.
Jade we are seeing the GSE is pick up in this past quarter. They they've contributed a larger portion of our volume than they did in the prior quarter they'll picked up from 20% of our volume to 25% in this quarter. So they are offsetting some of the declines from private lenders, but the entire <unk>.
Market is down and so even though they are picking up.
It's not it's not as material as.
You might expect.
Thank you in terms of ARIA Ari is prospects how sensitive is the outlook to where interest rates are meaning if projects one stabilized need to finance out of mortgage debt in the sixes is that going to inhibit sales out of that segment.
Or potentially.
A longer than expected period.
Are you asking through the remainder of this year.
Isn't that important but I'm more concerned about.
If mortgage rates were stickier at say something in the 6% range would that really inhibit a lot of those projects that are waiting to be sold.
<unk> inhibits the ability to sell.
So the way, we think about development and we provided a range of conversion and that we take our in process portfolio, which is currently over $19 billion and tip.
Typically that converts to S&P in the range of 1% to 2% in any 12 month in any given 12 months period going into a recession and this is what we said last quarter going into 2023, we would expect that in a mild recession.
We should get to the bottom end of that range into the 1% range and that's driven by two pieces one cap rate expansion.
So that we're monetizing the assets at a lower return but also.
The ability for us to choose to wait to sell the assets until the environment improves.
We have a really strong balance sheet, we have really flexible financing. So that allows us to make the decision that we don't want to monetize in a challenging environment and we don't want to wait to sell and so it'll be at the low end of the 1% and then if the environment is very challenging it could dip slightly below that 1%, but that's but I want to remind everyone that.
That doesn't mean, those those asset sales and monetization or going away. Those should then up here in 2024 or whenever the market recovers.
Yes.
Go ahead, sorry, yeah, I'm going to add to that that is true of our portfolio and that's true of everybody else's portfolio in general those asset sales will happen. Eventually the assets are there they are ready to be moved from one party to another.
But but the parties aren't going to do that until they feel like they're confident and.
The fairness of the pricing on the sell side and the buy side and the availability of financing that works.
Thank you I'm just more broadly speaking on investment management, I mean as long as I've covered this space. The theory has been institutionalization increased allocations to.
Our real estate from Lps sovereign wealth funds et cetera, and for the first time, we're starting to hear chatter. That's in the opposite direction that there is an over allocation because of the decline in equity markets and fixed income and that Lps are getting nervous about allocating to theory has anything really changed.
That long term secular trend in your view.
Not on the long term since nothing at all has changed in that regard in the short term, you're describing the denominator effect, which.
We haven't seen that for a long time, but we have seen it before.
And then I think we will revert back to the trends we saw.
Previously over the last decade.
We're quite confident that will be the case, that's what we are very actively engaged with capital sources around the world and Thats, where their head as that but we do have this short term circumstance.
That's precipitated by the debt markets.
And also the denominator effect and that's really what we're seeing here.
I'm hearing about.
Thank you very much.
Okay.
Thank you. The next question is coming from Stephen Sheldon with William Blair. Please go ahead.
Hi, good morning.
Just wanted to dig in more on the Gws new business pipeline I think that'd be increased significantly in the third quarter.
Is there anything specific I guess driving that and as macro uncertainty, having any impact there in terms of delaying decision, making or could it actually be creating more urgency to outsource to vendors.
CBRE in this type of environment, but just love some more detail on what you're seeing there.
Yes, Steven there is there are some.
A number of factors at play there whenever you go into periods.
Of financial stress.
Companies everywhere look for opportunities to save cost.
Our outsourcing opportunity.
Offering helps them save costs.
Demonstrably able to do that and so thats, helping that capability.
Sell in the marketplace right now the other thing in times of economic uncertainty is sometimes decision, making is slower and so while we have this large pipeline you may see some slower decision making.
The third thing that's going on as we are continuing it continually adding to our capability in that area, our procurement capability is getting better.
The data that we can provide clients to help them make decisions is getting much better we have a.
Product called vantage analytics that they like a lot that helps them make decisions that causes them to be attracted to us our ability to connect our offering around the world and serve them in a way that's consistent is getting better. So that is all playing to our favor and that's some of what you've seen come through this year and the buildup of the pipeline.
And the landing of new business.
But the cost factor is always at the top of the list when you dig into that business and figure out what clients really want.
Got it that's really helpful.
And then.
The follow up I guess I just wanted to ask as we as we kind of think about FX headwinds.
You report your currency exposures in the SEC filings for revenue, but just curious if your expenses would also.
Your expense exposure would also closely correlate to that or would you call out anything there where there's a material mismatch.
It's generally are aligned.
Our cost is being impacted in a very similar way to our into our revenue.
Okay, great. Thank you.
Thank you. The next question is coming from Patrick O'shaughnessy of Raymond James. Please go ahead.
Hey, good morning Al.
After the global financial crisis. It took I think probably seven or eight years for industry sales activity to rebound at peak levels and then after the pandemic and obviously just took one year.
Given kind of what youre seeing in the macro right now how are you thinking about the pace of recovery of the sales outlook and whether we're seeing deals just delayed or whether deals get canceled.
Well.
Patrick One thing Thats interesting is how long it's been now since the financial crisis. The cycles that we had previous to that where were shorter and so that kind of impacts people's thinking the other thing that impacts people thinking is they forget how.
Deep the financial crisis was and how unusual it was compared to other downturns.
But I can tell you what we're seeing now and we've used this term multiple times on this call pipelines. There is a definitive identifiable pipeline of projects across.
Property types that want to be sold by the owners and there is a lot of capital out there that wants to buy and neither of them think this is the right time to transact that's what you're really seeing we believe that when interest rates start to go the other direction when the fed reverses course, because they think that the economy has gotten to a point.
We're continued upward pressure on interest rates goes from being.
Problem solving circumstance to a problem creating circumstance.
That we will see that pipeline start to transact and it will recover.
Can't give an exact number of years, but it'll recover considerably more rapidly than it did coming out of the financial crisis.
Great. That's helpful. Thank you.
And then as to your expense reductions. Obviously, you guys took some expense actions during the pandemic how much more room do you have to cut before you get into the muscle and maybe you start.
Potentially losing market share.
Yeah.
Emma Emma commented on the $400 million number that's the number we believe we can cut.
Without impacting our ability to grow the business and serve our clients in the future go a lot of work went into from the grassroots level up them from top down.
To identify that $400 million number and I want to stress again, something Emma said, we have.
A massive amount of our cost basis that flexes automatically when revenues go down commissions profit sharing and development and investment management incentive equity bonuses all of that is.
All of that is completely independent of this $400 million $300 million of which we think will be permanent and $100 million of which we think will come back when things get better and we don't think that that $400 million will create problems for our business at all.
Great. Thank you.
Thank you. Our next question is a follow up coming from Jade Rahmani of K BW. Please go ahead.
Thank you very much.
A question investors often ask is where are.
Commercial or let's just say capital markets overall versus some prior period say 2018 to 2017, but I know that you all are are constantly hiring.
Producers.
Could you give any sense for what the growth rate in number of producer head count has been on the brokerage side relative to some past period. So that we can adjust for that and also I think even if commercial real estate prices decline the absolute nominal dollar of commercial real estate value.
Is probably significantly higher than it was in 2017, so hard to compare.
Next year versus 2017, but any any color on that would probably be helpful. Thank you very much.
Yes, Jade, we will give a conceptual answer to that we don't have specific numbers on brokers, but we have had a strong year for brokerage recruiting and it was intentional.
Because we believe that we believe that the opportunity to grow that business in the long term is there and we believe it was the right time to get into the market and bring some new brokers on.
So relative to history, it would stack up well relative to our good brokerage recruiting years in the past, but we don't have specific numbers for you on that.
Okay.
So did you have any other questions.
No. Thank you very much for taking the questions.
Thank you this brings us to the end of the question and answer session I would like to turn the floor back over to Mr. Sullivan for closing comments.
Thanks, everyone for being with Us and we look forward to talking to you again, when we report our year end results.
Ladies and gentlemen, thank you for your participation and interest in CBRE. This concludes today's event you may disconnect your lines and log off the webcast.
Enjoy the rest of your day.
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