All right, good morning everyone, and welcome to our morning fireside chat with CBRE. I'm Julien Blouin. I cover the residential REITs and the CRE services companies at Goldman. I'm extremely excited this morning to be joined by Bob Sulentic, President and CEO of CBRE. Over his time at CBRE and Trammell Crow prior to the merger, Bob has helped shape CBRE into the global leader in CRE services, you know, operating in over 100 countries and serving over 95% of Fortune 100 companies. So thank you, Bob, for being here this morning.
Thanks for having me, Julien.
Of course, so I have some prepared questions, but then we're gonna open it up for Q& A, so there'll definitely be time for that at the end. But maybe starting with a high-level question, you've put out this expectation that next year earnings will exceed your prior peak 2022 levels without necessarily calling for a steep recovery in capital markets, which I think really speaks to how resilient the business has become. Can you sort of talk us through how you feel about the business today, how you feel about that mix of transactional versus recurring mix today?
So we have, we operate in nine lines of business around the world. We're the global leader by scale in six of them, and one of them, development, we're the leader in the U.S. So all our businesses are big, and we believe in all our businesses. We talk about investing in the resilient businesses, businesses that are either secularly favored or somewhat acyclical, and we have grown those businesses a lot. But we also invest in our transactional businesses. So here's how we think about it. The secularly favored or anti-cyclical businesses that we're in have long-term growth trajectories, and they're very synergistic with other things we do. So we feed them to grow organically. We build those businesses inorganically through M&A, and because they've steadily grown over a large number of years at double-digit rates, they become big relative to the whole business.
60% of our revenue stream is made up of those businesses today, and we believe those businesses are well-positioned to grow at a double-digit rate and then be accelerated by capital investment. We also have some really, really good transactional businesses, so our debt and structured finance business, our development business, our leasing business. We're global leaders in leasing, etc. Those businesses are great for the following reason: if you run them in a risk-mitigated way, and we run them in a very risk-mitigated way, they generate a lot of profits and a lot of cash, and they have extraordinarily good cash conversion. That means if you make a buck, it's at your doorstep the day you make it. You sell a development deal, the cash is there the day you do it, and the margins are great.
And so over time, we've been able to generate a lot of cash in those businesses, and they've supported our long-term growth. They have strong through-cycle growth rates too. Their growth just moves up and down over time. So the combination of those two groups of businesses works really well for us, and as the mix inevitably has shifted toward the resilient businesses, it puts us in a position where we're quite confident about where future growth is gonna be kind of independent of the cyclical impact of certain things going on like interest rates.
Maybe digging into some of the drivers of the strong growth we've seen on the resilient side and specifically facilities management, which just in the third quarter, the growth was very strong, 22% year- over- year. How should we think about sort of the organic growth on that in that business segment, maybe thinking about enterprise versus local regional, and how should we think about M&A sort of supplementing that over time?
So here's, you know, there's so many different ways you can cut it. One simple way to cut it is the total addressable market for us in both the enterprise and local FM business is enormous, and when we do M&A, we generally make the total addressable market bigger, so as an example, we bought this company, J&J. J&J serves the government. J&J serves hospitals. We weren't doing those things before. Try to imagine two things, by the way, hospitals for veterans, so you have military, you have government, you have healthcare. It's hard to imagine a mixture of things that have more secular tailwinds than those. Those are now in our total addressable market. That's a very good company that puts us in a position to grow that business, so not only does that business grow itself, it creates an additional total addressable market.
When you look at the enterprise business, we do in enterprise FM is when we do work largely for multinational corporations, not just corporations now, though, governments, etc., spread across a wide geography and multiple product types. Local is would be more like we service somebody that's got a couple big complex facilities, maybe a museum here in New York or something of that nature. We've got a big position with the Fortune 100 and enterprise, but if you look at the Fortune 500 or the Global 1000, lots of unconquered turf there for us. So that is a huge growth opportunity, that has secular tailwinds just because so much of it hasn't been taken down already. Local is a different business. That business started in the U.K. We bought that business. It was Norland Services 11 years ago or something like that.
It had $40 million-$50 million of EBITDA, mostly U.K. and Ireland. That's where our Data Center Services business came from, by the way. We're managing over 700 data centers today because of that. If you add the Data Center Services business into that, and we moved that into the enterprise business out of local. Now, that local business between those two pieces today is generating $250 million of EBITDA, and they're just getting started in the U.S., which we believe, like so many things in our industry, is the biggest potential market for that business, so they've grown dramatically in the U.K. and Ireland. They've gotten into continental Europe. They've gotten a little into Asia. Now they have a very rapidly growing business in the U.S., so there's lots of growth tailwinds in that business for us now.
That's great to hear. And on maybe sort of switching gears to the project management side, another big highlight for the company recently, especially the growth we've seen out of Turner & Townsend post-acquisition, where we've really seen a pretty meaningful acceleration in the top-line trajectory for that business. Can you help us understand how that acceleration has come to be? Is it sort of the cross-selling into Turner & Townsend that's really driving that?
Yep. Well, first of all, if you wanna understand CBRE as an investor better than you do today, I would urge you to understand that part of our business better because that is an underappreciated, misunderstood business. First of all, going forward, that is a big business. So that business, when we say go on the combined business next year, will be $3+ billion of revenue and $500 million of EBITDA. We're 70% owners of that, and it goes way beyond traditional project management in the real estate business. So traditionally, what we and others in the real estate sector have done is, for our leasing businesses, we do project management when we do a lease. For our property management business, if we have an office building that we property manage, we do tenant finish in that building.
When we do outsourcing, we do moves, adds, and changes for our corporate outsourcing clients, or we fit out various parts of their campus, or we build little branch banks and stuff like that. And Emma, I see Emma Giamartino over here, our CFO. She and I worked on the Turner & Townsend deal for a long time together. And then you look at Turner & Townsend. That is a fully integrated project management, program management, and cost consultancy business that operates at a whole different level of expertise than others in our sector do, and they do different kinds of projects.
So if you went to one of our biggest corporate clients, likely, and you were in the real estate sector, would be doing the tenant finish, would be doing the moves, adds, and changes, and Turner & Townsend would be building their hyperscale data center, okay? Turner & Townsend's doing the program management or project m anagement on 40 international airports around the world. They're doing the first nuclear power plant in the U.K. in 40 years or something like that. Their program or project managing, we heard last night at dinner, their head of the Americas was with us, something now approaching 150 hyperscale data centers around the world, and we believe they have a unique position. That wasn't happening in our sector.
You add all that together, you have a business of that size growing at that rate, and you say, "Why did they grow bigger when they came with us?" I'll give you an example. You look at our development business, Trammell Crow Company. A lot of people just see, "Oh, they build buildings." What they're extraordinary at that makes them so compelling is they're extraordinary at acquiring and developing land, which they then build warehouses on or other types of assets. Now, over the last year, in two major projects in the United States, Trammell Crow Company has done the land acquisition and development, and Turner & Townsend is doing the program management for major, major, manufacturing plants that neither of those businesses could have done alone, $1+ billion projects.
When Turner & Townsend and CBRE's project management are combined together, they'll have 15,000 program managers, project managers, or cost consultants. One of the challenges Turner & Townsend has been faced with, and we've been faced with over the past few years, is that kind of talent is hard to come by. They can move that talent that we have into different kinds of projects in different places. It's really helpful for them in scaling their business. The other thing, that CBRE does for them, just like CBRE did for Norland, is we have a tremendous footprint across the United States. They're just getting started in the United States. So that creates real growth opportunities there. And it is a fact that their growth went from 15% to 20% in the three years that they were part of us right before we combined the businesses.
In that acquisition, you didn't just acquire a great company, but you also brought on a great management team, which will now be taking over sort of the legacy project management at CBRE. What sort of enhancement to the growth profile, the profitability of the legacy segment can we expect going forward?
We expect the combined business to grow up into the mid-teens.
Okay.
I have this view about business, religion, politics, anything. You get very different outcomes with very different leadership. I would argue that in our sector, we really weren't, and we were the biggest in our sector. There are other companies doing good work in our sector. We were all these little attachment businesses. Nobody had an integrated, project management business run by truly top-tier project management, leadership professionals. Vince Clancy, the growth statistics since he took over Turner & Townsend are like mind-boggling. He took it over in the early 2000s and grew it from $250 million of revenue or $200 million of revenue to something approaching $2 billion. He's an extraordinary leader. He's great with strategy. He's great with operations. He's great with risk management.
If you look at the statistics they've had on any kind of litigation losses or anything, it's kind of unrecognizable in our sector. He's great with risk management. They've embedded technology in that business. He's extraordinarily motivational. We were looking for a couple, international, non-U.S.-based executives to put on our board. He's one of them, because we thought he was such an extraordinary executive. So he's now gonna be leading that large integrated business, and we expect several hundred basis points of increased growth in the CBRE piece, and we think he'll use those resources to help him grow the Turner & Townsend piece.
Yeah. We, we've spoken, we've mentioned data centers a few times. You know, you have your capabilities now through Turner & Townsend, but also through acquisitions like Direct Line, which give you additional capabilities. Can you help us sort of frame how important data center, the data center piece could be to CBRE over the next few years? And are there any additional capabilities you'd like to add to the platform?
Yep. Well, I'll tick through what we do in data centers, and you've already hit part of it. So Turner & Townsend manages the creation of lots of data centers, and they're in the hyperscale space. So, they're uniquely compelling in that regard. Trammell Crow Company, through its land development capability and through its industrial land development capability, is able to secure sites that are appropriate for data centers. And what you really need to do there is find land that looks like industrial land that's got a lot of power or has the capacity to get power brought into it. And in addition to having those sites available for our clients or for Turner & Townsend, we just make money securing those sites and, you know, as we call it, land-banked profits. That's what the developers talk about.
We have a Data Center Services business. I already mentioned this, where we service between 700 and 800 data centers, the envelope of the data centers, the physical envelope, for our clients. That grew out of the Norland business. We've acquired this company, Direct Line, that operates inside the envelope of the building, doing small projects, etc., that puts us in a whole different position to serve hyperscale clients, and it's an interesting thing. Their growth was inhibited by the fact that a lot of you I'm not gonna name the names, but they're the names you know, very famous names. They're very careful about taking on small vendors that they were it can't scale with them. These clients were quite excited. We're already in the door with them doing all kinds of work.
They're quite excited to know that now Direct Line is supported by CBRE and CBRE's Data Center Services capability and the Turner & Townsend's capability. So we can grow that. And then we have a sizable, very sizable data center sales brokerage business. So we got all those pieces moving around. We've got some strategic thinking and some things going on about how we might do more, but that's confidential.
Gotcha. Moving over to the Investment Management side, you're a top five player in Europe in terms of AUM, still outside the top 10 in the U.S. I'm curious to know, do you feel like the U.S. is really sort of an opportunity in terms of market share gains going forward? And could you give us a sense of what the current sort of fundraising environment is like right now?
So when I think about where I'm gonna spend my time with the company, I generally spend my time on one of three things: strategy, building our leadership team, or investing our capital to grow the business. I think one of our best opportunities is Investment Management. Obviously, that's a, that's a big field, and there's so much that CBRE does that can assist in the growth of our Investment Management business and in the effectiveness of our Investment Management business. And one thing that gets missed often is we got this big business, 145 billion of AUM, and the statistics about our size are often driven by our presence in the funds market. We also have a lot of separate accounts around the world that would position us bigger. The results of our funds on behalf of our clients have been very strong over the years.
So, Core Fund in the U.S., our Logistics Fund here in the U.S., our Core Fund in Europe, our Indirect Fund, which is where we invest in operators out of the U.K. We have an extremely strong, value-add, fund in Asia that we're just re-upping. We're just, I just approved an investment to re-up that fund. We've got a whole portfolio of strong funds. We haven't done much in the opportunistic arena, but it's just been one of our businesses where we haven't been quite as aggressive and quite as outfront as we have in our other businesses. One of the reasons we haven't is we haven't had a leader like Vince Clancy in that business or like some of the leaders we have in other parts of our company.
We now have. We just named new co-CEOs, Andy Glanzman, who grew up in that business, who's an extremely strong operator, very, very capable guy. And Adam Gallistel, who I, anybody that's following us knows, ran GIC's business, real estate business here in the Americas and their debt business, real estate debt business globally. He's got an extraordinary reputation as a strategic thinker and investor. The combination of those two is gonna help us scale that business considerably.
Mm-hmm.
So here's another way that you should think about CBRE and the way I think about us. To a degree, we are a delivery system for investment opportunities. And what I want us to do is have, at any given point in time, a portfolio of high-return investment opportunities where we can make investments that other people would make, only we can make them better because of the footprint and real estate we have around the world. So we have our development business. We can do things in development. We pump capital into those deals, and we've, at a time when nobody wanted to put capital, and we're putting more capital.
We have the M&A we can do where we can buy businesses like that Direct Line data center business, plug them into our Data Center Services business, and do more with that business than other people can. We have that Investment Management business. This year, we've, I think we've done three different funds that we re-up, that we co-invested in. So what I wanna make sure we do is we always have a pipeline of co-investment opportunities into either Investment Management or development or M&A opportunities in areas of our business where we can supercharge the returns and, and across that portfolio, grow it over time, get superior returns. If we get to a point where we don't see an investment opportunity or opportunities that we wanna do right now, then Emma can go buy back stock.
Mm-hmm.
That's exactly how the model is supposed to work for us.
Understood. Maybe switching to Capital Markets, it's been a big focus recently within my conversations with investors. You expect a steady rather than steep recovery going forward. Can you help us understand maybe what the downside risks are to that? Which sort of macro inputs are you sort of most focused on in terms of confirming that view? And how has the recent election maybe, you know, changed or reconfirmed sort of that view?
Well, when people talk about the Capital Markets business, the places it really impacts us is on our investment sales business, our mortgage origination business, and then the trading of Trammell Crow development assets or the trading of our Investment Management assets. In the case of the latter two, it's just timing. We've got a portfolio of 110 development deals, all core product in Trammell Crow Company, financed in a way that we have great staying power with them. We have no pressure to sell them. We're gonna sell them when the time is right. So the capital markets cyclical thing doesn't bother us with that too much. By the way, you're gonna see some stuff coming out of that, we suspect, in the fourth quarter, as we've talked about, because things have gotten better.
But what makes the brokerage-related capital markets businesses stop or slow down is if people don't buy and sell assets or people don't finance assets. If they don't buy them and sell them for long enough time, then they have to finance them. And so the debt business works. We think right now things are okay. We think interest rates have gotten to a point where sellers are, or excuse me, buyers are coming off the sidelines. There's some positive spreads out there between cap rates and the cost of debt. There's not much evidence that interest rates are gonna go up, probably come down a little over the long run. And so what we do is we watch the marketplace, and we see there's starting to be a queue of people. We get it from our investment sales brokers.
We get it from the group that raises capital, our Investment Management. People are ready to start investing in real estate again, and they think cap rates, the values have stabilized and the cost of debt has stabilized and probably gonna come down. And so we think we're gonna see activity. But I wanna stress what we stressed at the end of our last earnings call, that's an important business for us. But our results next year, meaning prior peak, don't depend on that thing storming back.
You mentioned the two ways it primarily impacts you, the investment sales side and then the debt origination side. Do you think there could be a difference in the sort of pace of recoveries between those two sides? Obviously, on the debt side, we have this looming wall of mortgage maturities, and we've seen some sort of significant inflections in origination volumes recently.
Well, we think debt originations is gonna come back faster than sales. I mean, as I said a minute ago, if you don't sell your product for long enough, you gotta refinance it, right? You gotta do something. That's going on. There's a lot of activity with the GSEs. That's a really important business for us. The other thing about our capital markets business, our debt and structured finance business, which is meaningfully bigger than our sales business, we have a big mortgage servicing business that storms right through when things slow down. It is a very resilient business. It has great cash conversion. And so that's part of that picture as well.
Got it. The other transactional piece is obviously leasing. We've seen sort of an interesting reversal where we're feeling like office seems to be on stronger footing, and actually we've seen a little bit more softness on the industrial side. Can you help frame for us the trajectory for industrial leasing over the next year? And what are you hearing from your largest clients in that space, the biggest users of warehouse space in terms of their requirements going forward?
I think everybody knows that some of the biggest users of warehouse space, the 3PLs, the big e-commerce companies, etc., didn't just take down what they needed. They took down, first of all, because they had the financial power to do it, they took down space on a defensive basis, when we got into COVID with all the supply chain problems, etc., etc. And they're burning through that space. And the fact that they have that space is what's caused a little bit of downward pressure or flattening of rents, a little bit of pressure on occupancies. But they're burning through that, and we think that's coming to an end, so we think rates will stabilize for the next year or so and then start to go up. We think leasing activity will start to go up.
And all that's going on with trade protectionism around the world, we think, is gonna have some of the same impact that the supply chain challenges had during COVID. So we think for the future for that business is quite good. The other thing that's very relevant to us as a developer, when we, we're a big industrial developer, we've just gone through a period where people have stopped developing because of those dynamics. They can't get their developments financed. They don't wanna put their own money into it. And I'm now in my 41st year in this business, and it is one of the most true things that you could imagine. The money gets made at times like this. Everybody thinks the money's made when you sell stuff. The money's made when you secure opportunities when nobody else is willing to secure them.
So this year in our development business, when everybody else was on the sideline because of our balance sheet, we've done a group of multifamily projects and a group of industrial projects on our own balance sheet that we are highly confident are gonna harvest into the market at a time when there's very little new product coming into the market. So because of all the different things we do and because of our financial strength, when you see those kind of dynamics like you're talking about in the leasing market, there's opportunities that we are willing to and able to go after.
Interesting, and I think that connects to, to sort of my next question here, which is capital allocation priorities going forward. How should we think about your, your big priorities over the next two years? Are there additional capabilities or investments you'd really like to make, over the next two years? And how do you balance that first with, you know, share repurchases? Obviously, there was the recent announcement of the expanded authorization.
I commented earlier on. One take on it is we're a great sourcing of investment opportunities machine because of the way we're set up across the lines of business and our ability to do acquisitions and help them perform better than just a financial investor could be. With that in mind, there are two big things that we look at. Number one, having a pipeline of those investment opportunities that are gonna generate returns way above our cost of capital. Number two, making investments that build our business strategically, and not necessarily in number one and number two orders. Turner & Townsend is a huge strategic move forward for our company. Direct Line in that Data Center Services business is a huge strategic move forward for our company.
Our J&J acquisition, where we serve U.S. government, military hospitals, is a huge strategic move forward. So those are the kind of things that they not only have great returns, they're strategic. So we go right to those. And we have our operating people and our corporate development team always out in the market trying to find opportunities that are a good fit. On the real estate investment side, either co-investments in development or co-investments in our funds in the Investment Management business, we operate like any other real estate investor. We believe we have advantages because of all the different things we see and all the different knowledge we have, you know, combining land development capability with project management capability, etc. So we always wanna have a portfolio of those opportunities.
But if we get to a flat spot where we just don't think either of those is out there at return levels that we are excited about, and we believe our company's valued at meaningfully below its intrinsic value, and we watch that very closely, we model that and watch that very closely, we will aggressively buy back CBRE shares. And that's why we did the $5 billion allocation approval.
Okay. I'm gonna open it up for Q&A in a moment. I have one last sort of high-level question. You know, out of all the exciting things we've just gone through, in CBRE's business, where are you spending most of your time? Where are you most focused right now?
I have three areas where I spend the vast majority of my time. Number one, on our strategy. We are a strategy-driven company. We do not make investments that are not consistent with a very well-developed strategy we have. In our strategy, what we talk about in developing our strategy, we're very, very attentive to this marketplace we operate in. In our view, the market opportunity for us is defined by the base of commercial real estate assets around the world, all asset classes, all geographies around the world, the base of those assets, and what's going on with those assets at any given point in time. Then we look at what we call our right to win. We got a real right to win in Data Center Services right now.
We will invest in a right to win and things that move us forward strategically. Working on constantly working on renewing that strategy, being attentive to that broad base of assets around the world and our right to win. Number two, investments. I spend a lot of time on investments. Ultra-involved in the Turner & Townsend deal. We got some other stuff we're working on, very involved in our real estate principal investments. Number three, and again, not in this order, I would say I'm obsessively focused on the evolution of our leadership team, and have a very well-defined philosophy about how that should go.
Got it. So yeah, any questions from the audience? Oh, they'll bring you a mic. Yeah.
How are you and your hyperscale customers thinking about power constraints as it relates to the data center business in this rapid?
About what now?
Power constraints.
It's a huge issue. This is a little superficial, I'm gonna acknowledge this, but there is no doubt with what's going on in artificial intelligence and all the data center capacity and computing capacity that that takes, which is enormous and growing, that the need for hyperscale data centers is just gonna grow. It's just hard for anybody that, you know, I'm not a, I know very little about artificial intelligence. I read a lot about it, but I know that it's coming, and we see it everywhere, so the data centers are gonna need to be there. So the power issue is gonna need to be solved, and there's a lot of land that could be good data center land and probably will be good data center land when the power issue gets solved.
Exactly how that gets solved in different jurisdictions around the U.S. and around the world, we'll have to watch that play out.
Bob, with the signing, with the Mets signing Soto, I think it's appropriate to use a baseball metaphor. But when you look at your Global Workplace Solutions business, what ending are we in, in the U.S., EMEA, APAC in terms of opportunity?
You know, we're in New York, right? So I just read that the Mets have now become the Yankees with the signing of Soto. So I don't know how many Yankee fans are in the room. You know, I don't know what ending we're in because I think, again, to stick with the baseball analogy, I think because of the things we and others, but particularly things we are doing to grow the total addressable market. I commented on that earlier with the technical services capability we're adding so we can do manufacturing work, with the data center capability we're adding so we can do data centers, with the healthcare capability we're adding so we can do data centers.
It's almost like we're sitting here in the third inning, but we've virtually guaranteed it's gonna be an extra inning game, which is a really good thing. And so, we are really early still, and in part because so much has not been outsourced, in part because the total addressable market is growing by the actions we're taking.
Okay. Thank you. Just a quick question. In terms of if we look five to seven years out, in terms of your resilient businesses, 60% of revenues today, what type of range would we expect to see five to seven years out in a normalized environment?
That we believe those resilient businesses, which again, they're resilient for one of two reasons. It's because they're in a secularly favored part of the business or because they're acyclical. If we believe we can grow those businesses indefinitely at a double-digit rate. Parts of the transactional businesses we're in won't grow at a double-digit rate through cycle. You know, they'll grow, they'll come out of a down cycle and grow 25%, and then they'll do what they do during going into a down cycle. We think we're investing in the growth of both. We're not growing the resilient businesses disproportionately by putting a governor on the cyclical businesses.
The long-term through cycle growth trajectory of those resilient businesses, because of the secular benefit associated with them, is stronger than the long-term through cycle trajectory of the cyclical businesses. So I can't give you the exact math five years from now. If it's 60, you know, 30 now, it's gonna be 67. 3. But it's gonna continue in that direction through cycle where, as each cycle plays out, you should expect the relative portion of our businesses that are resilient to be bigger than it was in the last cycle.
Thank you.
All right. That's all the time we have today. Thank you very much.
Thank you, Julien.