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Slumping property sales slash CBRE profits

A steep decline in commercial property sales contributed to a drop in Dallas-based CBRE Group’s quarterly profits.

The commercial real estate services firm saw a 70% decline in net income during the first three months of the year. CBRE’s profits declined from $392 million in first quarter 2022 to $117 million in the most recent quarter.

Net revenues for the global property firm were down 4.5% year over year.

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“Our first quarter results were slightly better than we expected going into the year, but still down significantly from last year’s strong first quarter,” CBRE CEO Bob Sulentic said in a statement.

Sulentic said the company experienced a “greater-than-expected decline in property sales.” The company said the reduction in transactions was “due to severely constrained capital availability.”

CBRE’s property sales revenue in the Americas dropped by 43% from a year ago.

Nationwide office building sales fell by more than 60% from first quarter 2022, according to a recent report by Yardi Systems. Higher interest rates and tougher lending standards have taken a big bite out of commercial real estate sales during the last few months.

“Although we anticipate pressure on our transactional businesses to intensify further this year, we are maintaining our earnings outlook for full-year 2023, with core earnings per share expected to decline by low-to-mid double digits this year, but then exceed the prior peak in 2024,” Sulentic said in CBRE’s first quarter report.

Sulentic told analysts on a conference call that he thinks negatives about the commercial property sector are overstated.

“We believe sentiment has deteriorated more than the fundamentals that underpin our business,” he said. “This pattern is typical with commercial real estate investors and occupiers, becoming overly bearish in anticipation of and during early stages of a down cycle.”

He predicts commercial real estate credit conditions “should gradually improve starting later this year, driving a turnaround that will significantly impact 2024 performance.”

CBRE saw a 10% quarterly increase in its revenue from its workplace solutions, loan servicing, property management, valuations and asset management business lines. Those operations are expected to generate more than 50% of the company’s business segments operating profits this year.

Global leasing revenues were down 8% year over year.

Nationwide office leasing also has slowed this year due to slower-than-expected return to office practices following COVID-19 and expectations of an overall economic slowdown.

“Looking at the office market, we estimate it will take this asset class twice as long to recover the lost value as it did in the aftermath of the global financial crisis” in 2008 and 2009, Sulentic said. “This reflects the formidable challenges facing office assets, driven by both the slow progress employees return to office and the shedding of jobs in tech and other sectors.

“Ultimately, we believe that office portfolios will shrink meaningfully from where they were prior to the pandemic, making offices a smaller but still very large commercial real estate asset class.”

CBRE’s real estate development business reported a $17 million decline in operating profits. The company had a $13.1 billion development pipeline at the end of the first quarter.

Dallas-based developer Trammell Crow Co. is owned by CBRE.

“We have pulled back only slightly on planned construction starts for 2023,” CBRE CFO Emma Giamartino said. “We do anticipate that well-conceived projects we’ve got in the current environment will come online in supply-constrained markets, most notably for industrial.”

CBRE has trimmed operating expenses by reducing its workforce. The company recently paused plans to build a new headquarters tower in Uptown Dallas.

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