Q3 2023 CBRE Group Inc Earnings Call
[music].
Greetings and welcome to the C. B R. E Group, Inc, Q3, 2023 earnings conference call.
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It is now my pleasure to introduce your host Mr. Brad Burke head of Investor Relations and Treasurer.
Thank you Mr. Burke you may begin.
Good morning, everyone and welcome to Cbre's third quarter 2023 earnings conference call earlier today, we posted a presentation on our website that you can do.
To follow along with our prepared remarks, and an excel file that contains additional supplemental materials before we kick off today's call I'll remind you that today's presentation contains forward looking statements, including without limitation statements concerning our economic outlook, our business plans and our financial outlook.
Forward looking statements are predictions projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected 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 SEC filings.
We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures together with explanations of these measures in our presentation deck appendix.
I am joined on today's call by Bob <unk>, our President and CEO and Dr. Martino, Our Chief Financial Officer now please turn to slide five as I turn the call over to Bob.
Thank you Brad and good morning, everyone.
Commercial real estate capital markets remained under significant pressure in the third quarter.
As a result, we experienced a sustained slowdown in property sales and debt financing activity, which drove the decline in core EPS.
This decline was exacerbated by delays in harvesting development assets, which we will sell when market conditions improve.
Over the last several quarters, we have detailed the increased importance of our resilient and secular really favored businesses.
These businesses saw continued solid growth in the third quarter led by global workplace solutions.
Interest rates have increased more than 100 basis points. Since we since we reported second quarter results 90 days ago, continuing the sharpest rise in rates in nearly 40 years. The unexpected jump in rates has pushed back the capital market's recovery.
Property prices are gradually declining and we believe this process won't complete.
Transaction activity won't rebound materially until investors are confident that interest rates have peaked and credit becomes readily available.
We now believe this rebound is unlikely to occur until the second half of next year at the earliest.
In the meantime, as we discussed last quarter pockets of opportunity exist and the breadth and depth of our market presence gives us visibility into where we want to be positioned for the long term.
For example year to date, we've committed more than $350 million in co investments to value add opportunistic and development strategies and believe these investments are positioned to deliver quite attractive returns as market conditions improve.
This is the time in the market cycle, and well positioned investors can secure opportunities didn't deliver outsized returns.
We expect to identify and act on more opportunities to deploy capital, especially in co investments and M&A.
While the market is depressed.
In light of continuing challenges in the real estate capital markets, we have lowered our expectations for 2023 core EPS to a mid 30% decrease from the 20% to 25% decline, we anticipated 90 days ago.
The reduced outlook is almost entirely attributable to our interest rate sensitive businesses.
Well, it's difficult to forecast the timing and the capital market's recovery the resilient and secondarily favored businesses. We mentioned earlier had generated over $1 $5 billion of S. O P over the last 12 months and.
And we expect them to represent over 60% of Cbre's S. O P for full year 2023.
We further expect S O P from these businesses to increase by double digits next year.
Emma will walk you through our outlook after she reviews the quarter Emma.
Thanks, Bob Please turn to slide six for a view of advisory services results. This segment's net revenue fell 17% and SRP declined 35% versus the prior year's Q3 across geographies APAC showed the best relative performance with revenue up 3% led by continued strong growth in <unk>.
Japan.
Revenue was weak across EMEA declining, 18% slightly better than the Americas revenue fell 21%.
The revenue decline was most pronounced in property sales, which decreased 38%.
There is in salaries clothing, and that the sharp and unexpected interest rate increases over the past 90 days for.
EMEA sales revenue saw the greatest decline at 47%, while APAC sales revenue was down only 12%.
In the Americas property sales revenue dropped 41%.
Ironically compared with other major property types also saw the least severe decline due to weak prior year comps and seller capitulation in.
Industrial sales were largely eliminated to property is under 300000 square feet and multifamily sales were concentrated in core and core plus properties as investors focus on the highest quality properties to mitigate risk.
Commercial mortgage origination revenue fell less in property sales down 18%.
The decline was tempered by our significant business with the GSE is which is taking share and that the broader pullback in London.
Economic uncertainty continues to delight occupier decision, making particularly for large office and industrial deal.
For example, leasing revenue declined by 23% in the U S. But the number of leases completed was only down 10%.
The remaining lines of business and our advisory segment are relatively flat with growth in both client servicing and property management offsetting weaker evaluations revenue, which is tied to sales and financing activity.
Please turn to slide seven as I discussed the Gws segment.
Gws posted another strong quarter with net revenue, increasing by 14% and 15% respectively.
Facilities management and project management generated mid teens net revenue growth.
Our business continues to benefit from our focus on industry sectors that allow us to meet the unique needs of our diversified client base.
Growth year to date has been notable in three sectors healthcare due to our enhanced capabilities to meet client needs energy spurred by strong expansion with existing clients along with growth in renewable energy and industrial and logistics, an industry that is increasingly embracing outsourcing and their manufacturing plants to reduce costs.
We are also seeing continued strong revenue growth in our gws local business driven by a mix of new and existing clients investment in our U S. Local business, which I discussed last quarter resulted in several new wins and accelerated revenue growth.
In addition, our Turner and Townsend project management business continues to outperform expectations.
Notably through their expansion in the U S.
Our gws pipeline reached a new record in the quarter with a third of our pipeline coming from first generation outsourcing clients.
That is clients, who have not previously outsourced their real estate operations.
The growth in first generation pursuits reflect corporations increase interest in reducing occupancy costs might be uncertain economic environment.
<unk> pipeline is filled with occupiers that are looking to either expand our scope of services with CBRE are switched their service provider to CBRE because of our ability to provide more integrated global solutions.
Margins improved slightly in Q3 due to strong revenue growth and offset the investments made earlier this year, allowing us to achieve operating leverage we anticipate further margin expansion next quarter.
Now I'll turn to slide eight for a discussion of the Rei segment.
Overall S O P totaled just $7 million, reflecting fewer U S development asset sales and lower operating profit and our investment management business within investment management. The decline in operating profit was primarily driven by negative marks on our more than $330 million co investment portfolio compared with positive Mark.
Last year as well.
Our incentive fees.
AAM declined sequentially to $144 billion, primarily due to lower property valuations and negative foreign currency effects, which offset modest net inflows.
Well fundraising has decelerated materially across the sector, including for CBRE investors remain keenly interested in higher target return strategies to take advantage of current market stress and dislocation such.
Such as opportunistic secondaries and value add real estate strategies.
We have committed almost $200 million year to date and co investment capital in support of these strategies. This is a record level of co investment across our funds and a substantial increase in our commitment to higher return strategies. We are focused on follow on funds with strong track records and led by experienced portfolio management teams.
Development results were below expectations due to deals slipping into 2024.
Historically, we've covered the U S development business is operating costs with project fees and we expect this to be the case going forward.
Our in process portfolio was flat with last quarter as we added fewer new projects, but also do not have any meaningful asset sales.
Note that we have refined our development portfolio definition to better reflect projects that are actively under construction. The primary changes about the definition of in process. Now only includes projects that have started construction, whereas the prior definition included projects that are under our control with construction expected to start within 12 months.
The environment for harvesting development projects and recognizing the related games has become increasingly challenging the project sale process is progressing more slowly than we typically see driven by increased caution from buyers.
This is Ben along getting the sell process rather than impacting pricing. However, we're reaching a point where pricing will be impacted and in that case, we are proactively decided to hold well capitalized assets until market conditions improve.
Bob noted earlier, these circumstances, which put downward pressure on our business in the short run and create opportunities to secure assets that will lead to substantial future profits.
But going forward, we've continued to invest in development with more than $150 million committed year to date.
These investments are focused on securing multifamily and industrial projects at a time of capital markets dislocation that we expect to deliver historically attractive returns.
Please turn to slide nine.
As we've noted the current environment is providing opportunities to deploy capital strategically with.
With respect to M&A, we continue to evaluate many opportunities across our lines of business. However, we are being disciplined about pricing and thorough in our due diligence just as the rise in interest rates and increased uncertainty impacts real estate transactions. It also affects M&A deals.
We have passed on otherwise attractive deals, where we cannot close the gap in pricing with sellers, our hurdle rates to achieve returns above our risk adjusted cost of capital have increased along with interest rates, but seller pricing expectations for the most part have adjusted more slowly.
In the meantime, we completed over $500 million of share repurchases during the quarter, bringing our year to date total to $630 million.
Volatility during the third quarter allowed us to get close to our share repurchase target for the full year.
I want to reiterate that while we are looking to take advantage of this period of investment opportunity. We remain highly disciplined around pricing and we are fully committed to maintaining an investment grade balance sheet with a leverage ratio of below two turns.
Next I'll briefly touch on cash flow and cost reductions.
Full year free cash flow is tracking below our prior expectation primarily due to lower earnings in.
In addition, several large uses of cash mostly timing related items, such as cash compensation tied to last year's results do not flex down with this years lower earnings as.
As a result, these items are a headwind to free cash flow this year.
These timing impacts reverse next year, we anticipate a significant improvement in our 2020 for free cash flow generation.
We discussed earlier this year that we were prepared to cut costs further if the market environment deteriorated.
Time has come and we will be reducing cost across our lines of business. We have already targeted $150 million of reductions in our run rate operating costs, primarily focused on our transactional lines of tenants that have been most negatively impacted by the market downturn.
Spec to provide more detail on the benefit of our cost savings actions. When we provide 2024 guidance next quarter.
Turning to our outlook as Bob noted earlier, we now expect core EPS for the full year to decline by mid 30%.
Our expectations for double digit revenue and S. O P growth in our Gws segment.
More than offset by capital markets driven S O P declines in advisory and Rei segments.
Looking to next year, while the recovery of transaction activity, particularly in capital markets will take longer than initially anticipated.
Double digit growth of our resilient and secondly favorite lines of business, which combined have exceeded $1 $5 billion of S. O P. On a trailing 12 month basis.
In addition, we will continue to benefit from strategic deployment of capital and our cost reduction initiatives taking into account all of these circumstances. We believe this year will be the trough for our earnings and anticipate meaningful growth next year. However, our return to record earnings will likely be delayed a year relative to our earlier.
With that operator, we'll open the line for questions.
Thank you.
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Thank you.
Our first question comes from the line of Anthony <unk> with J P. Morgan. Please proceed with your question.
Great. Thank you and good morning, My first question relates to leasing and that hesitancy by occupiers to make some decisions there dialed down just the size of deals do you think that's on the front end at this point, where we're that hesitancy is just starting or do you think that's been happening for a while now I'm trying to.
A sense as to.
How we should think about leasing.
As we look the next few quarters.
Tony.
It's been happening for a while.
It's become a little more pronounced and we think it's going to go into next year whats, causing it is.
We don't have a recession everybody knows that we don't have the kind of financial problems. We've had in prior cycles, but we have a lot of uncertainty.
And we have uncertainty around the cost of capital, which causes companies of all types to be careful about their expenditures that would run through their income statement of course, the minute that happens they're cautious about leasing we don't think it's going to become materially more pronounced than it is now and and as we've said we.
Now when we get to the back half of next year things will recover that's where we are I think what's notable is the slowdown.
On behalf of big absorbers of industrial space.
We went through an extended period, where not only were they taking space to support their growth some of them were taking space to hedge against future growth there now burning through that space.
And when that's done we'll start to see leasing come back by those big industrial users. It is notable that we still only have 4% vacancy in industrial space, So they'll get back to being careful and make sure they have adequate inventory.
Okay. Thanks, and then.
You called out investment management is a focus area on the M&A side our U.
Seeing specific deals that are making more sense, there or is that just an area that that thematic where you like.
I think Tony Youre talking about maybe prior remarks that we made we're looking broad based across the company and M&A.
And we've been focused on the areas of our business that are resilient and in fact really favored.
Those are the types of larger deals we've done in the past and those are the types of deals that we're looking at now one of the things that's happening right. Now is we are looking at a number of deals and we've talked about deals on on the larger end of the range that we've typically looked at in the past or if we typically execute in the past, but pricing has become more of a challenge.
And it was a year ago or even six months ago similar to what's happening in the real estate market with.
With the gap between buyer and seller valuation remaining high or even increasing and as interest rates are increasing somewhat similar impact is happening to M&A. So for us our cost of capital is increasing slightly our risk appetite.
Is where do you think lately and so we need dollar prices to come down for us to be able to execute some of these deals many of these deals.
Okay, and then just one last clarifying item if I can I did you mentioned you thought the recurring businesses like Gws, we're gonna grow double digits in 'twenty four or was that just for 'twenty three I couldn't I didn't catch that.
We expect our resilient lines of business in aggregate, which for the years to generate $1 6 billion of S. O P to grow in the low double digit range.
Going forward into the future and.
In Gws, specifically about US okay for this year is going to grow in the in the <unk>.
The double digit range, so low teens range.
We'll continue going forward.
Okay. So you feel comfortable with that double digit number.
Around Gws for instance for 24 as well.
Yes, absolutely.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Steve Sochua with Evercore ISI. Please proceed with your question.
Yeah, Thanks, and Mike just on the share buybacks I know in the last call. You had talked I think about doing 600 million you guys did a little north of 500 million. This quarter. So I guess are you still still sticking with that 600 number for the back half kind of implying a fairly low fourth quarter number I know that kind of.
And maybe with a.
The lack or less free cash flow. So just any thoughts around buybacks for the rest of the year.
Yes, Steve that's the right way to think about it we were going into the latter half of the year expectation was for 600 million as you said, we did $500 million in this quarter.
So we are on track to deliver the same amount we were thinking last quarter.
Okay and look I know everybody is highly focused on the sales environment that really seems to kind of be the linchpin for the company.
Bob you know, you've obviously talked about maybe a second half.
Recovery, just sort of trying to think through kind of the timing and you know is it more the economy that you think is driving people uncertainty is at the absolute level of interest rates is it. The you know the fact that the banks and insurance companies arent really lending money I know all of it impacts it but is there a one factor that you think is more.
More pronounced than another.
Uncertainty around interest rates.
One really prominent fact, and the and the expectation that they are now going to come down later than we previously thought number two there is still a view that values are going to come down something that private privately held assets haven't haven't come into line yet in may.
Another 5% to 10% decline in asset values.
But Steve I really think it's important to remember this about our business those assets are real and they're held by investors and there's buyers with massive amounts of capital.
Waiting to make trades when those two things sort out we will get back to an active trading environment. It's not like it's not like some things that go away and never come back right. The assets are there the base of assets is actually growing.
And the people that hold the assets Theres, a significant number of them in a significant volume of them that want to trade those assets with buyers ready to go and buyers are watching closely the interest rates and watching closely the valuations and things are starting to come in line to the point, where we think there will be trading again in the second half of next year.
Okay, and then one just small technical one I guess, we noticed that the tax rate and then the quarter came in much lower than expected I think that might have helped kind of EPS just kind of what are your thoughts and what drove that in the quarter and I guess is that sort of a sustainable lower tax rate or is that more of a one off issue in the quarter.
That is a one time tax planning benefits that we had this quarter for the full year, we're expecting our tax rate to come in at about 21% and excluding that benefit this quarter our tax rate is about 20% in Q3.
Great. Thank you.
Thank you. Our next question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
Thank you very much.
On leasing.
If new tenants are taking 10% to 20% less space and there is some pressure on net effective rents on the office side.
As well as the overall uncertainty around demand for office space.
And then you mentioned some of the slowdown in industrial and then I would characterize retail is mixed.
Do you think that leasing.
Would be negative.
2024.
It could be in some areas J, but we think that what's going on with office spaces has kind of settled out right rates have come way down.
Users of office space have backed off people that want premium office space for us.
The experience.
Side of things for their employees are going after it and we think they'll continue to go after it into next year.
We think industrial has slowed down for a time being it will come back the back half of next year and I think you've commented already retail is mixed but theres a lot of retail activity in the economy now and there is.
Reason to believe that that will kind of sustain the way it is now.
And then on Gws.
No I understand the long term opportunity.
Gaining the penetration rate by passing on cost savings to those that don't currently.
Outsource, but they're all friction costs associated with this as well as execution complexity and uncertainty.
Without the macro.
Backdrop create headwinds in gws as well.
And thereby it put some pressure on the <unk>.
Level digit growth I mean, if the economy is slowing down or teams.
That business is double digit growth profile could be at risk can you give some reasons why that's not the case.
Well when the economy slows down companies focus intensely on cost.
And when they focus on cost they think about having somebody like us us more than anybody else has.
And all their real estate facilities for them, because we save them money that is absolute front and center dimension of that business.
Where do you see things slow down is capital expenditures, which can hit project management, but there's so much momentum around various parts of our project management business related to enhancing the experience for clients in this in the office space that come.
Companies have which is a big deal for them now and we think thats going to continue to be a big deal, we think that will offset.
The focus on reducing capital expenditures also that project management business. As you know does a lot of stuff in the infrastructure of green energy et cetera areas.
And so we think that there is offsetting factors there that will allow that business to continue to grow at a double digit rate. So the bottom line is I don't think what we're seeing in the economy.
And the uncertainty in the economy would push that down below being a double digit grower next year.
Thank you very much.
Finally, just on Rei.
Have you changed.
These underwriting.
Toward the capitalization and acquisition of new projects to account for potentially rates remaining at current levels.
Does the outlook for asset sales depend more on timing or a moderation in interest rates in order to refinance those deals and sell at attractive cap rates.
Yeah.
Our underwriting that we do across our resi business for.
The acquisition of existing assets and for the investment and the co investment and development.
Deals.
Is all driven by interest rates that we think will be available to us when we capitalize those projects. Its theres great attention paid to that in a lot of study around that by our research people and our chief economist office et cetera. So what's in those underwriting is reflective of that view.
What's what's going on.
We commented a little earlier, what's going to drive the sale of assets is the stabilization or a decline in interest rates and the general view that values have bottomed out and again, we now think that timing is second half of next year and we do think prices are going to come down a bit more maybe as much as 10%.
Thank you for taking the questions.
Thank you.
Thank you. Our next question comes from the line of Stephen Sheldon with William Blair.
Please proceed with your question.
Hey, good morning. Thanks.
Wanted to ask another question on the advisory leasing side.
Curious how different are the revenue trends may look between office versus industrial is one side theyre holding up better than the other as we think about growth. So far this year and then and then maybe how youre thinking about it heading into next year.
So office leasing this year has been performing in line with our expectations are as can be noted some drop off in the larger office deals that we were anticipating a decline.
I mean, 15% decline across all the sleeping on the industrial side and that is industrial leasing is performing slightly below expectations, but as Bob alluded to that is primarily driven by the largest industrial transactions and the largest occupiers of industrial space, who took on a lot of states over the past couple of years.
And are resetting, we don't expect that to be a continued trend going into next year.
And in terms of mix I think.
Leasing has grown.
Industrial has grown as a percentage of our overall leasing and oftentimes declines about isn't that isn't out of what we were expecting going into the year and into the quarter.
Okay, great. Thank you.
And then just on Capex.
It sounds like Youre ramping investments into Ireland, and I am in development. So can you give me more detail on the opportunities you're seeing there and why this could be the right time to make those investments.
Well, it's what what typically happens in an environment like this and what is definitively happening now on the development side, where the investments we make.
Our largely acquiring land for future development.
Landholders.
Often landholders that bought that land to develop it doesn't you can't develop it because they can't get the capital to develop it.
Or they don't have the capital themselves to make the co investment needed to develop it and so good land sites that otherwise wouldn't have been available become available and because of our position in two ways our balance sheet.
Plus the stable of really strong developers, we have in local markets, we identify opportunities.
Of this nature, we are in the market all the time up and down cycles. We know the land sites that are good we know the land sites that we would've liked to have gotten that we didn't get.
And what we do is we go back because we now have the capital to take those land sites down we go back and try to secure some of those sites and cycle. After cycle. What you see is that it is the acquisition of those land sites and the development deals that result from those land sites that become your best.
Profit deals and as Emma said earlier, we're focused on multifamily and industrial there.
On the <unk>.
Investment management side, we think this is a good point in the cycle to look at value add and opportunistic so we have.
And opportunistic fund a run out of the U K and it's got a very very strong track record that we've made a significant commitment to with our own balance sheet to raise the next fund.
To do investments in real estate secondaries, and we're very excited about that opportunity and then we have three.
Value add businesses, one in each region of the World U S.
EMEA and Asia Pacific all of which were.
Providing co investment to do our next fund in all of which we see lots of opportunity and so that's our core investment strategy. That's what when we talk about $370 million year to date, that's where we've invested.
And we're well positioned to continue to invest.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Patrick O'shaughnessy with Raymond James. Please proceed with your question.
Hey, good morning, what are you hearing from asset owners in terms of allocating capital towards commercial real estate and a higher interest rate world as opposed to allocating capital towards asset classes with perceived lower risk.
Well, there clearly theres movement into cash in cash.
Return you can get returns on that that you couldnt get previously so.
Secured debt et cetera, there's no doubt that that's that dynamic as it play and what's going on with the non traded REIT et cetera.
Core assets.
But people are ready to get back into real estate when things sort out there's just no doubt about it the amount of capital that's on the sidelines that wants to get into commercial real estate is enormous.
And what's gonna have to happen as we said as interest rates are going to have to stabilize in the belief that valuations have come down is going to have to be there. There is an increasing interest in I just walk through what we're doing on the development side and opportunistic investment side. There is an increased interest in people getting into those.
Areas that have a longer horizon for returns on their capital and to have a higher risk appetite and there's always of course, a big chunk chunk of capital without orientations. So that's what's going on.
Got it helpful. Thank you.
And then circling back to your earlier comments on leasing so if I'm understanding correctly. Your view is that even if there is an economic slowdown in 2024, there's really little incremental downside risk to leasing revenues going forward.
There is potentially some but we're not expecting the decline next year to be greater than what we saw this year.
And I think what's important to note.
We provided some high level remarks around what we're expecting over the next couple of years.
And that's not to provide any sort of guidance around what we will expect because we all know that it's very difficult to anticipate how the broader external factors will impact the company.
But to put context around it.
We are very confident that our gws business will continue to deliver double digit growth and if it delivered double digit <unk> growth over the next couple of years and the remainder of our segments remained flat in <unk> and 'twenty 'twenty four and get back to you don't even need to get back to 2020.
2019 levels of earnings we will get back to our record levels of of EPS.
So.
I just want to emphasize that even if there is a slight decline next year, we still have a path to growth over the next two years.
Understood. Thank you.
Thank you. Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.
Yes, Hey, good morning, everyone, maybe starting with a little bit of a housekeeping question, but a M. I think this quarter you didnt give any specific outlook anymore for a by segment. So given how important the fourth quarter is maybe you can give us a little bit more color in terms of the various business lines of what we should be expecting and it was kind of implies but.
More color would be appreciated.
So for.
For the full year we're.
Expecting within Gws that our <unk> growth will be in line with that low double digit that we've been talking about throughout the year.
Advisory overall will be down about in the 70% range on Rei.
A little over 50% for the full year in terms of what's guided our.
Reduced outlook from what we saw in Q2 to what we're saying now from that $20 to 25% and EPS decline down to Amit.
Amit <unk> decline and about a third of that is related to capital markets and about a third is related to development and the remainder is is done across the rest of the business.
Okay, Great and then.
Secondly, and maybe this is a quick one because I think you just addressed this when you ask Patrick's question, but you know thinking about the multiyear outlook again, maybe I'm, stating the obvious but like if I look at my numbers to get to 2025 record year basically if you grow in gws.
And.
You know you you maybe get more aggressive on the buybacks like and and then potentially the did the transactional businesses. If you just grab a little bit of market share. Even if this environment stays like this you could get to record I mean is that what you were just trying to say I mean, maybe just state and you're obviously again, absolutely that and that is the point that were.
Trying to get across is that there is a reasonable path to getting back to record earnings we're not anticipating a sharp recovery.
Especially not next year and we don't require a sharp recovery in 2025 to get to that record level.
Again, our resilient and secular your favorite lines of business, which include Gws, but also include property management. The recurring elements of our investment management team valuations and loan servicing that in aggregate aggregate is $1 6 billion of that therapy, so that growing at low double digits over the next two years will create meaningful.
The value and then again, our transactional lines of business development.
The development and the portion of investment management that is more transactional loan servicing loan origination and sales origination those elements only need to get back to just shy of 2019 levels for us to get to a record earnings.
Excellent. Thanks for clarifying and then just maybe one quick one on the on the Gws business you called out. These are first time Outsourcers I guess can you just talk about how the sales cycle. The first they are it because I think it's a meaningful part of the pipeline now and then overall.
Al can you just remind us when you think about the white space here.
That's the first time outsourcing opportunity is in the context of the size of your business. I mean is there still a very meaningful Tam of companies really have never outsourced before.
So on your first question.
Our pipeline across Gws and that includes both facilities management and project management is continues to be at record levels.
We have a large and growing pipeline, it's split between about 50% new clients and 50% existing clients and new clients about half of the first generation clients.
A third of our overall pipeline is first generation outsourcers.
But the important part is that our overall pipeline is building and yes. Those first generation generation outsourcers to take a longer the sales cycle is longer to convert them to convert them over to outsourcing, but it's a huge opportunity and it's a growing opportunity and it is and it is building our pipeline.
To your second question around what the opportunity is it's hard to.
Really estimate it but we believe that only 30% of the overall market is outsourced today. So there is 70% of white space.
Fantastic Thanks very much.
Thank you. Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Great. Thanks wondering if you can comment on CBRE view of the background and kind of how that might have shifted and in turn kind of shifted your outlook kind of heading into 2024, if at all possible.
Well we.
The biggest thing Michael that's shifted in our view is that it's.
It's going to take longer for interest rates to come down.
It's going to take longer for that.
That in particular to become available for real estate commercial real estate transactions.
And as a result.
Transactions youre 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 secondly, we have introduced this notion that we're seeing particularly with <unk>.
Industrial tenants.
The uncertainty is just causing them to pause and we think that's going to go through the first half of next year.
But we really don't think that's going to be a big deal because they are burning through inventories of space that they took down for defensive purposes, I guess for lack of a better term and so that's what we see where if you were to sum it all up the recovery that we thought would start towards the end of this year. We now think is going to start.
Six or so months later, maybe a little longer and for us that pushes back our assumptions about you know the return to peak earnings.
So into the following year.
Okay.
That's helpful. And then just on the advisory business I know you called out Japan, and APAC is a relative outperformer compared to America's Arabia, but was there any other drivers that led APAC it'd be pretty notable outperformer this quarter.
Okay.
For us specifically, we just have a very good business in Japan.
And it's obviously, that's a huge economy in Tokyo is a huge real estate market in.
Over the years, there has been a struggle around the notion of intermediation. There there was a lot of business done directly by buyer and seller tenant landlord et cetera that intermediation has become more accepted.
There has also been a struggle.
To have.
Non Japanese domestic companies are in the mix so to speak.
That is it as it relates to be the designated intermediary intermediation.
Intermediation happens and also being a home for talent, we have really changed our profile as a recruiter there over the last few years.
And we have really changed our profile over there the last few years as somebody that's a recognized intermediary as a result.
We used to talk about what we've got good growth in Asia, but good growth on on.
Basis of business that weren't that needle moving to our overall results Japan's now our second most profitable market in the world behind the United States for advisory business. So when Japan does relatively well as it's doing now.
You get the result, we're getting it's big enough to be needle moving for US and then in general as you know the return to the office across Asia and Pacific is ahead of where it is in either the the United States Europe or EMEA.
Great. That's it for me thanks for the time.
Yeah.
Okay.
Thank you. Our next question comes from the line of Jade Rahmani with <unk>. Please proceed with your question.
On the M&A front.
Would you confirm that investment management is the key focus.
And would you also be able to provide an updated comment as to how how infrastructure fits in your overall <unk>.
Cedric framework, if you see this potentially emerging as a new business line alongside your others.
And potentially an additional diversified.
Yeah and in terms of M&A.
We made this comment we look across our whole business.
We have a very capable corporate development team that partners up with a group of geographic and business line leaders across the whole business around.
Around the world and across our lines of business to seek out M&A opportunities, where we think we can enhance our offering to our clients. We just you just saw today, we announce something in the <unk>.
For our capital markets business and the investment banking capital Advisors area that was an area, where we thought we had a bit of a hole we went out and.
Brought on a business that was very substantial global and additive.
Lots of areas of interest.
Management has been an area of interest for us, but so of others. We have several areas of interest in our in our <unk>.
<unk> business, we have select areas of interest in our advisory business, we even have some areas. We're looking at in the development business.
But one of the things that's going on right now and Am I mentioned this is the pricing for M&A has not moved quite as quickly as we hoped or thought it would and we're just showing a lot of developed or excuse me a lot of discipline around what we're going to do in terms of acquiring other companies. We're just simply not going to pay prices that we.
Thank her unreasonable just to get businesses that we like.
We think pricing is going to come into line, we see some signs of that.
We've got a pipeline across those businesses and geographies that we like.
But we're being disciplined.
As it relates to infrastructure, there's two areas of our business, where we are active with infrastructure, we have a nice size infrastructure.
Infrastructure investment management business, it's small relative to our overall investment management business, but it's in the upper single digits.
In terms of billions of dollars of a AUM and we're looking for opportunities to grow that because we think it's.
We think it's got great long term.
Secular profile the other place where we have a very significant infrastructure business is with the Turner and Townsend acquisition. They do a lot of infrastructure program management cost consultancy.
And <unk>.
Project management, and they are well positioned there.
Very well positioned in geographies around the world will that work's going on they do a decent amount of work and significantly growing amount of work.
As it relates to sustainability, so we have a pretty strong.
Infrastructure profile with them.
Yeah.
Thank you.
Thank you we have reached the end of our question and answer session and at this time I would like to turn the floor back over to CEO, Bob <unk> for closing comments.
Thanks, everyone and we look forward to getting back together with you when we announce our year end earnings.
This concludes today's teleconference. You may now disconnect your lines at this time.
You for your participation.
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