Morning, everyone. My name is Brendan Lynch. I cover several of the REIT subsectors here at Barclays. I'm joined by Emma Giamartino. She has been with CBRE since 2018, originally focused on M&A, and became CFO in 2021. Prior to that, she was with Verizon in a corporate development role, and prior to that, a banker at Nomura. Emma, thank you for joining us.
Thanks for having me.
Yeah, my pleasure. Maybe we could just start, you know, looking at CBRE as an institution. They've been in the real estate business for over 100 years. Maybe you can compare and contrast this cycle to some of those of the past.
Yeah, absolutely. It's a question that we think about a lot and that we're obviously asked a lot. And, you know, every cycle is different. This cycle is obviously very different than COVID. It's different from the Great Financial Crisis. And we don't focus a lot on COVID because we view that as an anomaly. You know, it was a pandemic. There was a time period where we were all wondering if anyone would ever leave their house or go back to the office. And then the recovery, because rates went down to 0, the recovery was much more extreme than we'd expect in this instance.
But going back to the Great Financial Crisis, where we spent a lot of time thinking about how this is different from that, I think we all know that this scenario is, this downturn is much less severe than what we saw in the Great Financial Crisis. But it's also very different. So we're expecting rates to be higher for longer. We're not expecting there to be a severe recession that's gonna drive rates down to zero and drive a significant recovery coming out of this. So it's likely that this recovery is gonna be further delayed than what we were expecting earlier this year. But the biggest difference for us as a company is that we are very different, and we're very different in three primary ways.
So first, if you go back to the GFC, we were very highly levered going into the GFC, and so all the focus was around de-levering, coming out, making sure that we were generating cash, getting our balance sheet into great shape. Now, we're at virtually no leverage. We're generating a lot of cash. We're very confident in how we're gonna perform coming out of this recovery, so it's a very different place. In terms of our, the resiliency of our profit streams, if you go back to the GFC, probably less than 20% of our EBITDA was in lines of business that grow or are stable through a downturn. Now, we expect this year to have over 50% of our EBITDA come from those lines of business, so it's a dramatically different place.
Then in terms of our leadership team, we have a highly experienced, very professional leadership team that's able to manage costs and flex with the business in a way, that we weren't able to do going back to the GFC. So it's a, it's a much different environment. And one of the thought exercises that we put ourselves through is: what if we took the company that we have today with close to $30 billion of revenue across, you know, hundreds of lines of business and hundreds of markets, and you were to put that back through the environment in the GFC? Even in that scenario, we know that our business would perform and be more resilient than, than we were through that downturn.
There's certainly a lot of transition over the past 15 years. If you could touch on some of the economic factors that drive the various components of your business.
Yeah. So the big one is interest rates. We have our lines of business that are most sensitive to interest rates: our Capital Markets business, so our investment sales business, our loan origination business, and then our development business, and the parts of our Investment Management business that benefit from co-investment or carried interest. All of those businesses, when there's uncertainty around rates, they tend to pause or be delayed. So what we're seeing within Capital Markets today is that as rates have been volatile and there's uncertainty around it, transaction activity has slowed significantly. The rest of our business is not significantly impacted by rates. So our outsourcing business, valuations, property management, the recurring part of our Investment Management business, those are our more resilient lines of business.
Even leasing is less impacted by interest rates and is more impacted by the state of the broader economy, which is in generally good shape right now.
Yeah, you certainly position the business to weather economic cycles, efficiently. The stability that comes with some of those transitions in businesses, does that have any costs? You know, is there a trade-off to having resilience in your business?
Yeah. It's an interesting question. It's not one that I get asked a lot. And I think, you know, you don't have the high highs and, but you also don't have the low lows. And so really, I think all that stability gives us is a greater level of confidence and a greater benefit. So we're able to invest in this time when a lot of companies aren't able to. It gives us confidence in our cash flows. It really allows us to weather and come out of this downturn even stronger and with higher growth and to widen the gap between us and our peers than we even had before. I don't see a tremendous amount of downside.
I agree. Maybe we could touch on the advisory services business. What do we need to see for the CRE capital markets to return to normal?
So, it's really all about interest rates, both stability and rates, and then also a path to those rates coming down over time. It doesn't have to be near term, but just any sort of understanding of what's happening in the short term or the long term. And we'll start to see that transaction activity come back. What we saw in the past quarter even, or the past six weeks since we announced earnings, is that rates went up 40-50 basis points, and that created a lot of challenges in the market. Transactions just weren't happening. So, you know, we talked to our multifamily team, and they were saying in Q2, deals were getting done at a 5.25-5.5 cap rate. Cost of debt was pretty much the same, and so deals were happening.
But as rates went, the cost of debt went up to 6, sellers aren't willing to sell at a 6 cap rate. Buyers aren't willing to take on negative leverage, so deals are just being delayed, and that bid-ask spread widened again, even though it had closed. So that's just really a testament to the fact that as long as rates are going in directions that are increasing and they're volatile, it's really hard to get deals done. It's really hard to underwrite.
You, you touched on some of the subsectors there. Maybe you could talk about what you're seeing in terms of different regions and different capital markets activity.
Yeah. So it's changed a little bit. What we talked about through the first half of the year is that the US has been performing the worst. I think we all know that. APAC generally has been performing the best. Japan has been performing very well. China, a little less so. And then EMEA, through the first half of the year, had been performing slightly better than the US. What we've seen in the past six weeks is that's deteriorated, and it's performing pretty much at the same level as the US. So from an investment sales perspective, activity is down about 50% year to date across both the US and Europe.
Maybe we could switch gears a little bit and talk about the recruiting of brokers. You kind of alluded to having the balance sheet strength to go out and make changes in a difficult environment. Maybe you could talk a little bit about the recruitment of brokers and how that's going.
Yeah. So we're seeing more and more inbounds from brokers, I would say. And it's changed somewhat from what we were seeing even a year ago. Given that activity has slowed, this is a time when brokers can look up and think about what platform they want to be on, where they're going to have the greatest opportunity to grow their platform going forward. So they're looking to think about: Do I want to be on a platform that has greater financial health? Do I want a better brand? Do I want—Do I want to be with a company that I know is going to invest in the resources provided to their brokers? And so we're having more and more conversations about that.
Actually, our head of IR has been brought into a number of conversations to talk about the financial health of our company, so our cash flow and our balance sheet. It's actually really becoming a part of the conversation in terms of where brokers want to be. The big change that we've seen over the past year and even the past few months is that more and more brokers and their teams are coming to us to initiate conversations about coming over to our platform.
Maybe just going back over the past couple of years of the pandemic, has the talent pool among the brokers changed, have people left the industry because it's become more challenging?
We haven't, we haven't seen that significantly. The top tier of talent has remained and probably even extended their tenure in the industry. And it's really about building out that new talent base, especially in, you know, industrial, multifamily, probably less so in office.
I know office is a huge topic of conversation, and you get a lot of questions on this. Maybe you can point to some of the areas where you're seeing strength and also where you're seeing some weakness.
Yeah. So this story is pretty much unchanged. You know, we're seeing the greatest strength at the top end of the market. The top 10-20% of office assets are performing very well. Those Class A, extremely high-quality assets have, like, some of the highest demand they've ever had. Rents are increasing. Some of those spaces have record level of rents. Demand in areas where there's a large number of those Class A assets is very high. So for example, in Midtown East, occupancy is at 90%. The tenants in the market is, has almost recovered entirely. I think broad-based 80%, we're at 80% of where we were pre-pandemic in terms of tenants looking for new office space. In New York, it's over 100% of what it was pre-pandemic.
So that demand is growing, and we're starting to see that pickup in activity. On the bottom end of the market, in the Class B and Class C space, especially the bottom 10%, there's little happening, and it's very unclear what the future of that space will be. For us as a company, we spend most of our time with that Class A space. So, office leasing makes up at about 50% of our leasing revenue, and two-thirds of that office revenue is for Class A space. So we're focused on that higher end of the market. I don't want to imply that we're not impacted by what's happening at the lower end, but we are benefiting from what's happening at the higher end.
Maybe some of those changes that you alluded to, do you see those as more structural, or are they temporary changes that just need a little, a couple more years to work themselves out?
So there's the temporary, which is what we'd expect to see in any cycle, as occupiers are looking for opportunities to save costs, as they're uncertain about what the future is, and they're uncertain about what they're going to do with their employee base, whether they're, you know, looking to expand or contract. That's naturally embedded in what's happening with office leasing. But you also have the structural component, which I think most of us don't know the answer to. The return to office is this constant discussion. We've been talking about how the mandates are increasing post-Labor Day. We're now a few days post-Labor Day. I don't think any of us know if that's really happening. But one of the things that I think-...
is increasing the uncertainty, you know, we were talking about a mild recession at the end of this year. Now we're talking about likely a soft landing or, you know, somewhere between a soft landing and a mild recession maybe next year. And the impact that's having to, in my mind, to the return to office, is that it's not shifting that power dynamic from the employees to the employer and allowing them to provide them, the employers, with more leverage to get employees back to the office. So it's still remaining. It's very uncertain, and we'll have to see how it plays out probably over the next year. I feel like we had the same exact conversation last year. We were talking about return to office post Labor Day, and that didn't happen, so we'll see.
Yeah, at Barclays, we've had a few iterations of come back to the office, and-
Yeah
We'll probably have a few more.
Are you in the office?
I'm in the office, probably, I'd say four days a week.
Nice. Good.
Maybe you could talk a little bit about the urgency for leasing among some of the companies that are driving the push to return to the office. I know amenitized space and high-quality space is kind of a driver there, and I'd imagine they're recognizing that the current situation is not gonna, you know, exist in perpetuity, so they want to take that space while it's available. Maybe you could talk a little bit about that.
Yeah. So it's both, both timing and then also the quality of space. So that demand, like I said, for that higher quality space with the amenities that can bring employees back in a location that is close to employees' homes, so reducing the amount of time it takes to commute. The demand for all that space is extremely high. And many occupiers may be taking smaller space, but they're, they're paying higher rents to be in that location where they know they can have a higher likelihood of getting their employees back. And occupancy in, in that space, I mean, we've seen in our own properties, in those locations where it's a very high-quality space, it has amenities, great meeting areas, that's, and it's close to employees' homes, that's where they're coming back on a consistent basis.
And that's broad-based across our clients.
Let's talk a little bit about flex space. What trends are you seeing there, and how is the demand for flex space evolving, and how is the flex space itself evolving?
Yeah. So it's... As you can imagine, it's very similar to what's happening with traditional office. The flex space, and we have a very strong relationship and investment in Industrious, so we're seeing what's happening across their portfolio. And what they're seeing is that in those locations that are very high quality space and in a central location, whether that's close to a central commuting hub or it's close to employees' homes, that's where they're seeing the greatest demand. But there's a sweet spot. So employees will be willing to go a little bit farther for that really great space, and they'll, they'll be willing to go to a less, a space that's not necessarily as, as high quality as they'd like, but it's very close to their home, whether it's walking distance or biking distance. So they're...
Industrious itself is focused on finding that balance and of those locations, and building out a number of new units, and they're performing very well across their portfolio. You mentioned flex, and I probably can't answer that question without talking about WeWork, at least briefly. But they're obviously constantly in the headlines, and we're constantly asked how Industrious and our investment is performing compared to WeWork. And for us, they're just, they're very different stories. WeWork has a very different business model. They signed a lot of fixed, very long-term leases that everyone knows that they're trying to work out of.
Industrious is a very different business model, focused on asset light, focused on almost all of their units are revenue shares or profit shares or management agreements, where they don't have that large lease liability, which allows them to have the flexibility to weather, to weather COVID, to weather sort of downturn.
Great. Let's talk a little bit about Global Workplace Solutions. You alluded to earlier about the resilience of your business, and GWS is a part of that. Why does GWS continue to grow kind of irregardless of the economic cycle?
Yeah. So GWS is. I think about it in two major pieces. You've got your facilities management portion and your project management portion, and even with there, it's broken down into pieces. So we'll talk about facilities management first. There has been a long-term trend towards outsourcing real estate, and we're really in the early stages of that. We estimate that across the facilities management market, I think 30% is outsourced today, and that's slowly increasing. But there's a huge opportunity to grow into that white space, to onboarding more and more first-generation clients. And then there's still an opportunity to grow, which we're consistently seeing within that existing outsourced client base, for us to grow wallet share and take share from our competitors.
The growth in that facilities management business typically is split 50/50 between those new first-generation clients and then increasing wallet share within the existing outsourced space. And then on the project management side, we've seen a tremendous amount of growth. A big driver of that is our Turner & Townsend acquisition. They're doing, for those that don't know, longer-term portfolio management, project management, program management for big projects globally. They do it for infrastructure clients, for airports, for energy, global energy clients. And then within real estate, they're doing big projects. They may be doing data center work and others. So it's not that without doing small office tenant cutouts. So it's very. It's much less affected by a downturn or a slowdown in office leasing.
Maybe you could talk a little bit about the value proposition that you offer to your clients in GWS and what they're thinking about considering outsourcing?
Yep. So right now we're getting a lot of inbound from first-generation clients. So corporates, as they're trying to weather this challenging environment, just like we all are, and there's a tremendous amount of uncertainty, they are thinking about reducing their costs. And real estate and their facilities are typically one of the larger components of their costs. So they're coming to us, and they're saying, "Can you help us reduce our costs?" And because we provide this service for on a global scale basis, we're able to provide that service to them at a much lower cost than they're able to do it themselves. And then on top of that, the reason that we're winning that service away from clients, not just from from competitors, is not simply because we're providing a lower cost. That's why the clients first come to us.
The reason that we're winning is because we're providing a differentiated service. Either whether that's a specific capability that they're looking for, like sustainability, like energy management, smart building services, we're providing something that's incremental to what competitors can provide, in addition to providing that lower cost.
What do you think it's gonna take to chip away at the TAM that you haven't already addressed? It seems like there's still a lot of companies that are insourcing these activities. What does it take to convince them?
So, a market like this is helpful. It's a good impetus for them to start thinking about that cost base. But it's really about getting in front of them and making that case. A lot of times you'll see in with a management change, you have a new CFO in place. They'll look for opportunities to cut costs, and that's when you'll see those clients outsource. But I think it's really about getting in front of them and really framing the value proposition. Once those clients do outsource, they almost never bring it back in-house. I think we can't come up with an example of a multinational client taking that work back in-house. So it's really about just penetrating the market and having more and more of those conversations.
Great. Talk a little bit about your REIT segment. How is the current market environment now impacting development and your investment management?
So within our development business, we've talked about this a lot. We structure those projects to allow us the greatest flexibility to choose in time when we monetize those assets so that we're getting the best return that we believe that we can get. And we're building high-quality core assets that there is high demand for. So what we're seeing this year is that, and we've talked about this a lot, we are holding on to assets and delaying monetization just like sellers, buyers and sellers are doing within the broader capital markets. Waiting for the time where we have a little more certainty around where rates are, and so we know we can get the return that we want.
And so it's all about timing within our development business. And once things start to stabilize, we'll start to see a greater monetization of the projects that we have under construction today, and then more and more will start to get capitalized over the next few quarters. Within our investment management business, that's relatively unchanged. It's a pretty resilient business. Over 90% of our AUM is in core, core-plus assets. So we haven't seen a tremendous amount of impact to the valuation across our funds. And then globally, across our funds, less than about 20% or less is invested within office. And of that office, it's high quality, Class A space. And so broadly, investment management is a resilient business.
There is a small component that benefits from carried interest and co-investment gains. What we expect to see coming out of this downturn is, you know, continued gains from that effect.
In the development portfolio, you can talk a little bit about the types of assets that you have in there and how you're shifting that over time.
Yeah. So the vast majority, as you can imagine, of our projects have been in industrial and then second multifamily, and then to a much, much lesser extent, office. We are still building office, but all of that is pretty much build to suit or fee work.
Talk a little bit about the balance sheet. You're targeting 0-2 turns of leverage. I think you're in the midpoint there. What governed the decision to set that range, and what governs where you fall within that range at any given time?
Yeah. So, what governs the range is that we are highly committed to remaining Investment Grade. So it's really important for us that we can stay within that range or have a... If we do lever up to 2 turns, we have almost immediate path to delevering. And what you can expect to see from us is, barring M&A, we'll remain pretty much where we are in the leverage neutral range, you know, 0.5 turn or less. For M&A, we'll probably approach 1 turn, but it's very unlikely that we're going to exceed 1 turn or go near 2 turns of leverage, in the near or medium term.
You mentioned Investment Grade there. Obviously, that's important for your cost of capital. What other advantages do you see in terms of, you know, dealing with your client base?
Yeah. It is really important to clients, and it's a big part of the conversation. When we're working with, you know, these large global occupiers, they do care what their service providers, what our credit rating is and our ability to continue to provide those services. So it's a part of the conversation. When things are great, it's obviously not a part of a conversation, but now it has become more and more a part of the conversation. So it's not just important to our cost of capital, but it's important to our relationship with our clients.
You also mentioned the M&A opportunities. I think some of these that you're looking at are north of $1 billion. Maybe you can talk a little bit about what you're trying to expand into, what types of markets or either potentially new products.
Yeah. So it's difficult to provide details just by nature of, you know, the confidentiality of M&A. But we're very focused on building a pipeline of potential targets and cultivating those targets takes a long period of time to do that, that can build out capabilities across our company. So all three segments primarily focus on the more resilient lines of business, which again, is a large portion of our EBITDA. So there's a huge opportunity there. But what's important to emphasize is that it's all within our core. We're not looking to expand outside of real estate services. There is. We see a big opportunity to increase our capabilities even within what we already provide. There isn't a need to go, you know, acquire a software company, for example. So, we had a lot of feedback.
We used to talk about strategic M&A, transformational M&A, and that raised concerns that we were trying to go out of what we know. There is a massive opportunity within what we already do to increase those capabilities.
When we look at geographic, your geographic exposure, I think you're in, in north of 100 countries. Do you feel that you have fully penetrated all of... any of those markets, or are there still a lot more room to grow in each one of those?
There's pockets everywhere. So within we are in over 100 countries. Some where we, you know, don't have a tremendous amount of presence, in some we may only have presence in one product or just we have capital markets and leasing services, but we may not have outsourcing or investment management. So there is absolutely opportunities to fill in those gaps geographically.
At the beginning of the conversation, you mentioned that rates were up 40 basis points or so since you reported earnings. Maybe you could talk a little bit about the impact that is having on your business.
Yeah. And that just happened over the last six weeks since we announced earnings. So, coming out of Q2 and moving into Q3, from a capital markets perspective, so investment sales and loan origination, we were expecting that revenue to increase sequentially from Q2 to Q3. We're now, you know, six weeks in, I think, and we now we no longer expect that to increase sequentially. So the recovery has clearly been pushed back. That rise in rates really stalled transaction activity in a way that I don't think the market was expecting. It's just been much more challenging to do, to transact. And I think it's become much more challenging for all of us to determine when that inflection point will actually come, and we'll see transaction activity rebound.
We started this year talking about that happening in the second half of this year. It's clearly not happening in Q3. We don't think it's happening in Q4. And in Q2, we started talking about that happening early next year. Now, we believe that may get even pushed back into the second half of the year. But I want to make clear that it's very hard to predict, and the main thing we're focused on is being ready to pivot when we do see that inflection point coming. So in terms of what will happen, we think is going to happen broadly in Q3 based on this slowdown in capital markets activity, which is also impacting our, we as a seller, are interested in monetizing some of our development assets and is delaying that.
We're expecting our EPS from Q3 to Q2 to decline in the high teens range.
Okay. I think if I've done the math right, you're, you're guiding core EPS to be down 20%-25% for 2023, but your outlook for 2024 suggests that it will be above your past peak. Maybe you just walk through some of those considerations and what gives you the confidence to get such a robust outlook?
Yes, and this is something that we get a lot of questions on, and I just want to reframe why we started talking about 2024 earlier this year. And the reason we did that is because we want to give a framework around what the consistent earnings or recurring earnings of our business are and how the different components of our business behave coming out of a downturn. It wasn't to provide explicit guidance around where 2024 will be. And, you know, I just talked about how we see the recovery continuing to be delayed. The longer that gets delayed, the less likely you're going to see that record level of earnings in 2024.
But what I do want to make clear is that once we hit that inflection point, and we have 3-4 quarters of growth within our transactional lines of business, within capital markets, we do see that recovery over that 4-quarter period. If it starts in the second half of 2024, between 2024 and the first half of 2025, we will hit that record level of earnings. If it gets pushed out into 2025, we'll hit that record level of earnings in 2025. And I wanna frame why the point around, like, how achievable our GWS business will be over $1 billion of EBITDA this year. That business continues to grow at a double-digit rate on a consistent basis.
If that grows at 10%, if our REI business grows at 10%, which would not get it anywhere near the peaks of 2022 or 2021, and if our advisory business grows at 10%-15%, which in a recovering market, is not a significant amount of growth, in EBITDA, we'd be able to get to that record level of earning.
It's coming? We just don't know when.
It's coming, yes, we just don't know when.
Great. Maybe I'll just open it up to the audience to see if there's any questions out there. Okay, maybe just one more from me then. What do you think investors underappreciate about CBRE?
I think it's all about what our future growth coming out of this downturn is going to look like. So the power of our balance sheet, we are... I've talked about, we're leverage neutral. We're gonna put that to work, and the amount of growth that that will drive, coming out of this downturn is very meaningful, and it's gonna help separate us even farther from our peers. The growth in GWS, we kind-- US, that we're constantly asked, is what is driving that business? That business will continue to grow at a double-digit rate, for the foreseeable future. And I think the other piece is our, our leadership team.
Leadership team that Bob's put in place over the past five, 10 years, is ready to drive this growth forward and is able to manage the operations of this business in a way that we haven't been able to before.
Great! Well, Emma, thank you very much for doing this with us. We greatly appreciate it.
Absolutely. Thank you.