Greetings, and welcome to the CBRE Third Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Burke, Senior Vice President of Investor Relations and Strategic Finance. Thank you. Please go ahead.
Good morning, everyone, and welcome to CBRE's Third Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results, which is posted on the investor relations page of our website, cbre.com. There, you will also find a presentation deck that you can use 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 our presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including our 2022 outlook, operations, market share, capital deployment strategy, investments and share repurchases, financial performance, foreign exchange impacts, cost management, the business environment, and any other statements regarding matters that are not historical fact.
We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I am joined on today's call by Bob Sulentic, our President and CEO, and Emma Giamartino, our Chief Financial and Investment Officer. Now please turn to Slide 5 as I turn the call over to Bob.
Thank you, Brad, and good morning, everyone. Lower Core EPS in the third quarter reflected a sharp deterioration in the macro environment, particularly with regard to capital availability for transactions. Nevertheless, Core EPS was well above any 3rd quarter in our history, except for last year's especially strong result. Even in light of a $0.07 drag in this year's quarter from foreign currency effects, this underscores the resiliency we've built into the business. In contrast with last year's strong third quarter, the capital markets environment weakened materially as the quarter progressed. Property sales performed in line with expectations in July and August. However, most debt and equity capital sources moved to the sidelines after Labor Day, causing both sales and loan originations to fall sharply.
In addition, as expected and previously communicated, we completed far fewer development asset sales this year than in last year's strong third quarter, mostly driven by the front-end loading of asset sales this year. We also delayed selling some assets during the third quarter. As we noted last quarter, when market dislocations cause transaction activity to decline, those transactions are typically paused and returned to the market when the uncertainty passes. We took advantage of the temporary market dislocation to continue repurchasing shares at an elevated clip. In contrast with sales and financing, leasing performed very well. Revenue was up across all property types, led by office. In addition, as we discussed previously, many parts of our business are either cyclically resilient or benefit from secular tailwinds. These businesses, including occupier outsourcing, valuations, property management, loan servicing, investment management, and project management, posted solid results for the quarter.
We plan to further capitalize on our balance sheet to invest in secularly favored parts of our business that add differentiated capabilities. Over the last 2 years, project management, flex office space, renewable energy, and industrial and multifamily assets have been at the forefront of those efforts. Going forward, in addition to those areas, we are particularly focused on both enterprise and local facilities management, investment management, and the more cyclically resilient advisory business lines, while also continuing our share repurchase program. As we prepare for a tougher operating environment, Emma will discuss how we have already been identifying cost savings while aiming to continue investments that will sustain long-term growth.
Many economists, including our own, have cautioned that the market outlook is especially difficult to forecast right now because of an unusual confluence of high inflation coupled with strong consumer spending, resilient employment growth amid a tightening credit cycle, and residual pandemic and Ukraine war-related challenges. With this caveat in mind, we have updated our full year Core EPS growth expectations to be up mid-single digits compared with 2021. Absent the challenging foreign currency comparisons, we expect our 2022 Core EPS growth would achieve low double-digit growth over 2021. While economic downturns are never welcome, they present opportunities to consolidate our position as global occupiers and investors gravitate to the industry leader. We fully intend to make the most of these opportunities. With that, I'll hand the call to Emma for deeper commentary on the quarter and our outlook.
Thank you, Bob. As Bob noted, global economic sentiment has deteriorated since our last quarterly update. More specifically, and as you've all been following closely, since we last reported, the ten-year treasury rate has spiked 140 basis points. The S&P 500 has declined by 7%, and public REIT prices have fallen by 16%. The futures market is now indicating that the Federal Reserve will raise rates more steeply and ease them less quickly, resulting in a harsher and longer downturn than when we last reported. It is worth reiterating that this has all happened in just the last 90 days. This more negative backdrop began to impact our business late in the 3rd quarter, and there will be more impacts in the 4th quarter. CBRE's Core EPS fell 19% from the prior year to $1.13.
As Bob noted, the drivers were weakening capital market conditions, the timing of development asset sales, and a foreign currency headwind. Our results were, however, supported by the continued growth in the lines of business that, as Bob noted earlier, we see as cyclically resilient or secularly favored. Net revenue from these businesses collectively increased 12% in local currency, excluding the contribution from Turner & Townsend, and 24% in local currency, including Turner & Townsend's $284 million of net revenue in Q3. Finally, our GAAP EPS grew by 7% in the quarter due to a $183 million mark-to-market gain on our investment in Altus Power, which continues to benefit from demand for renewable energy solutions and its synergy with our CBRE businesses. I'll discuss results for each business segment, starting with advisory on Slide 6.
Total advisory revenue rose 1% in the quarter or 5% in local currency, though performance diverged across business lines. Capital markets weakness emerged immediately following Labor Day, which historically has been a time of heightened sales activity. The decline was most pronounced in our Americas region, where property sales revenue fell 16% during the quarter. While Americas capital markets revenue, which includes sales and debt origination, was relatively flat for July and August, September revenue fell by 43%. Outside the Americas, property sales rose 3% or 17% in local currency for the quarter. The decline in U.S. property sales reflects sharply reduced credit availability. Typically, credit spreads have tightened as rates rise. However, higher rates have been accompanied over the past three months by credit spread expansion.
Many capital sources have tightened underwriting standards considerably and set pricing at levels that are uneconomical for borrowers. Against this backdrop, our mortgage origination revenue declined by 28% versus last year's Q3, while the value of loans originated fell 34%. Revenue declined less than loan volumes because more financing in the quarter came from the government-sponsored enterprises, which we had expected to occur during periods of market weakness. The decline in credit availability was broad-based, with only regional banks lending more than in last year's Q3. Difficult comparisons further impacted year-over-year growth. Our combined property sales and debt origination businesses grew by 79% in last year's 3rd quarter, driven by a resurgence of activity following the brief 2020 recession. We were encouraged to see our leasing revenue increase 14% or 17% in local currency, driven by large office and industrial transactions in major markets.
Globally, leasing revenue increased across all major property types, with office growing mid-teens off a low base and industrial up high single digits. Property management, valuation, and loan servicing all proved to be resilient as expected, collectively realizing net revenue growth of 2% or 8% in local currency. Advisory services segment operating profit declined by 19% or 15% in local currency. Overall, advisory margins on net revenue declined by 4.2 percentage points, including the decline in loan origination-related OMSRs. Slide 7 illustrates the drivers of advisory's lower margin versus prior year. Just over half the decline in advisory segment operating profit margin is attributable to higher cost of services, with advisory gross margins declining 2.2 percentage points year-over-year or 1.9% excluding OMSRs. Approximately 80 basis points of the gross margin decline is due to higher broker commissions.
Strong growth in the front half of the year resulted in an outsized number of brokers achieving higher splits earlier than we've seen historically. This will also impact the 4th quarter, albeit to a lesser degree, before the annual reset next year. For context, approximately one-third of our U.S. brokers had historically reached higher tranches by the third quarter. For 2022, the percentage of U.S. brokers reaching higher tranches is almost 50%. It is important to note that our average commission expense naturally increases during strong years and declines during soft years. For example, in 2020, only a quarter of producers had reached a higher tranche for the third quarter. The remainder of the gross margin decline is due to investments to support growth, broker recruitment costs, and revenue mix as revenue erosion was steepest in debt origination, our highest margin line of business.
Additionally, advisory operating expenses increased by $47 million, or 10%, with the majority of the increase due to hiring that occurred in late 2021 or early 2022 as we prepared for a more robust growth environment and higher employee compensation reflecting a tight labor market. While we have and will continue to invest in target areas of growth in our business, we've also undertaken an equally targeted cost-cutting program, which I'll discuss shortly. While we began reducing operating expenditures during the third quarter, which showed the lowest year-over-year growth in OpEx since Q1 2021, only a fraction of our cost-cutting program was implemented during Q3, and thus did not fully reflect the impact of those reductions. We expect our cost programs to result in a single-digit year-over-year decline in advisory segment OpEx in the fourth quarter.
On Slide 8, our GWS segment posted strong net revenue growth up 8% or 13% in local currency, excluding the contribution from Turner & Townsend, and 32% in local currency, including the contribution from Turner & Townsend. Both facilities management and project management net revenue grew organically by double digits in local currency. We also remain pleased with Turner & Townsend, which is performing in line with expectations. Facilities management growth was supported by significant expansion work with our existing client base, particularly with technology clients. Project management growth was driven by space redesigns and fit outs, often tied to our clients' changing use of office space. Our GWS new business pipeline is on pace to end the year above the prior year's fourth quarter, with our opportunities coming from new and existing clients across a range of industries.
GWS's segment operating profit margin on net revenue was 11%, excluding the impact of Turner & Townsend, down from an unusually strong third quarter of last year. The 11% margin represents a sequential improvement and was in line with our expectations as margins continue to normalize from COVID-related highs. Turning to our REI segment on Slide 9, segment operating profit of $59 million represents an $88 million decline from the prior year. You'll remember last quarter, we told you 75% of the REI segment's total operating profit would be realized in the first half of the year due to the cadence of our development asset sales. The segment operating profit decline is predominantly due to this anticipated deal timing. Within REI, investment management realized operating profit of $44 million, down 12% from last year. In local currency, the decline was 4%.
Beyond FX, prior quarter results were bolstered by a $11 million positive mark-to-market on our $335 million co-investment portfolio versus a negligible mark-to-market in the current quarter. The overall decline matched continued growth of asset management fees, which increased by 19% in local currency, even though adverse currency movement reduced AUM to $143.9 billion. Our development business realized $17 million of operating profit against $100 million in the prior year, reflecting fewer asset sales during the 3rd quarter. While we expected most of this decline when we provided our last quarterly update, we elected to pause on selling certain assets as we wait for capital market sentiment to improve.
As we noted last quarter, our development business utilizes highly flexible financing, which enables us to monetize assets when market conditions are accommodating and to pause when appropriate. Please turn to Slide 10. While we cannot dictate the macroeconomic environment, we can control our costs and how we allocate our capital. We are targeting over $400 million of cost reductions due to management actions. This is in addition to the naturally flexible cost reductions when business declines, such as discretionary bonuses, incentive compensation, profit sharing, and commissions. As discussed last quarter, CBRE can ramp up cost reduction activities as market conditions necessitate. Our current cost reduction program is driven by our base economic assumptions, which, as we've discussed, envision a more challenging economy than we communicated last quarter.
Approximately $300 million of targeted cost reductions will be permanent in nature, with the vast majority coming from headcount reductions. Beyond headcount reductions, we also anticipate permanent reductions to our cost basis for third party and occupancy spending. The balance of the savings, approximately $100 million, is more temporary in nature, but we will continue them until market conditions improve. These cost savings will come from reduced travel and entertainment, promotion and marketing spending, and reductions to discretionary compensation plans. To be clear, the planned reductions to discretionary compensation are above and beyond the natural flexibility of these plans that are already tied to financial performance.
Against our $400 million cost target, we have identified $175 million to be completed by the end of the year, with the significant majority of the remainder to be completed by the end of Q1 2023. Only a small percentage of the cost reductions taken to date are reflected in Q3 results due to a slight lag between taking action on headcount reductions and having those cost savings reflected in financial results. Given the nature of our cost structure, almost all of the planned reduction will be reflected in our operating expenditures. Although we do anticipate achieving targeted reductions to some of the more fixed costs within our cost of services. While we are addressing our costs, you can expect us to invest more aggressively utilizing our balance sheet during market weakness.
In the third quarter, CBRE repurchased 5.1 million shares for $408 million, bringing our share repurchases through Q3 to nearly $1.4 billion. We expect share repurchases to increase sequentially in the fourth quarter, ranging between $500 million and $700 million. We also continue to maintain an increasingly robust pipeline of M&A opportunities. Current market conditions are increasing the likelihood that we'll be able to act on them. For now, though, buybacks remain the best use of capital, but that may change as we get into next year. Please turn to Slide 11. As we've discussed today, the broader economic outlook has worsened since our last update, necessitating that we revise our expectations for full year performance. As Bob indicated, we now expect full year Core EPS growth to be up by mid-single digits compared with 2021.
Our guidance most notably assumes that the capital markets remain under pressure. We expect leasing to remain more resilient than property sales, albeit with more muted growth than we saw in the third quarter. Due to the headwinds in our transactional businesses, we expect full year advisory segment operating profit to decline by mid- to high-single-digits, with FX driving 3-4 percentage points of the decline. We expect our GWS segment will achieve low- to mid-20% segment operating profit growth for the full year, buoyed by continued strength in the 4th quarter. Absent foreign currency headwinds, we project segment operating profit growth for the full year in GWS would be 7 percentage points higher.
Within our REI segment, we believe we have realized approximately 90% of our full year segment operating profit, largely due to the expectation of few development asset sales in the fourth quarter. As noted previously, our outlook has been negatively impacted by the continued strength in the U.S. dollar. At mid-year, we forecasted a $100 million full year negative impact to Core EBITDA from FX. We've now raised the expected FX drag to $125 million for the full year, with $50 million hitting in Q4. Absent FX, we anticipate that Core EPS growth would have been in the low double digits for the full year.
We remind investors that it is difficult to forecast macro conditions and certain components of our business, notably capital markets, the timing of development sales, and to a lesser extent, leasing, are subject to fluctuations in overall economic sentiment. In closing, while near term headwinds are intensifying, we remain as energized as ever about our long-term prospects and are committed to using our scale, balance sheet, and cash flow to accelerate long-term growth and value creation. With that, operator, we'll open the line for questions.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to register a question at this time. The first question today is coming from Chandni Luthra of Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for taking my question. I understand that it's too early for 2023 outlook at this point, but if you could please perhaps give us, you know, some parameters to frame 2023. Like, what would you need to see engines in capital markets, you know, to get restarted? Is there a way to frame capital market activity in terms of, you know, first half versus second half? Like, when do you think the outlook really starts to get better?
Chandni, it's something that we're very focused on, and we're working, you know, through our budgets right now to really determine what we're expecting in 2023. From a macro level, if you look back to what we said 90 days ago, we viewed that we would be in a mild recession and that rates would peak in Q1 of 2023, and they would start to alleviate through 2023. Our position now is that things have materially changed. We've seen that impacting our capital markets business directly. We are getting hit harder and faster than we were expecting 90 days ago, and we're expecting the recession to impact our business for longer than we did 90 days ago.
Looking to next year, we do expect the capital markets to come back likely in the second half of the year, but that return is going to be more muted than what we initially expected when we talked to you in Q2.
That's actually helpful color. Thank you about that. Thank you for that. Switching gears to margins a little bit. 13% margins in the quarter, you know, down 450 basis points. It's better than 3Q 2019, but then, of course, you know, the worst is still ahead of us. Help us frame margins in the context of 2019, you know, given that the macro is about to get much tougher and you know what you framed in your answer just recently, how should we think about margins in the context of 2019? Is there a scenario, do you think we go all the way, or do you think there is some, you know, recourse in the cost-cutting plans that you laid out?
Yeah, Chandni, I'm going to talk about advisory specifically because that's the most relevant piece, and I think what you're speaking to. Hopefully it's clear what happened in Q3, but I just want to go through that. In Q3, we have this on Slide 7 as you all saw. I think it's always important to look at our advisory margin excluding OMSRs. So it's 30 basis points of the decline. That OMSRs are pure margins, and when they grow, they're just adding margin, and when they decline, 100% of that margin comes out. The second is because of the phenomenal first half of the year we had and the exceptional growth we delivered, our producers entered higher tranches much earlier than they ever have before.
That was 80 basis points of the margin decline. Those tranches reset at the end of the year, so we don't expect that to be a headwind in 2023. The two remaining pieces are producer recruiting, where we are investing in our future growth. In the first half, we delivered, again, exceptional growth, and we were investing in our costs to support that growth going forward. On the operating expense side, again, we also were investing in new hires. We under-invested in 2021, simply because revenue accelerated faster than we can pick up our investments. We also had wage inflation just as every other company had. Going forward, what we're seeing looking into Q4, we should expect that operating expense growth to continue to come down.
You look at the first half of the year, our operating expense in advisory was up about over 19%. In Q3, our operating expenses came down to 10% growth year-over-year. In Q4, our operating expense should decline year-over-year, and this is within advisory. That's 2 components to how those costs are coming out. One is our discretionary cost levers that we can pull, pulling back on travel and entertainment, continuing to pull back on new hires. Pulling back on new hires takes longer for that to come into our cost savings, and then our discretionary bonuses. You'll also see some impact from our $400 million cost savings program, but there is going to be a meaningful lag there.
Most of those savings you'll see in 2023, and that's because we take action on reducing headcount, and there's a lag in terms of when those costs come out of the system. Net, where we expect to end the year in advisory, we expect our margins to be over 19% within advisory. Excluding OMSRs, our margins should be over 18%, and that's an important number because that is a record margin excluding 2021 when our margins were inflated because our costs had not caught up to our revenue growth.
Thank you for that detail.
Thank you. The next question is coming from Anthony Paolone of JP Morgan. Please go ahead.
Thank you and good morning. Emma, maybe just sticking on this, margin discussion in advisory. So if I'm understanding this right, if on that Page 7, that 190 basis point drag in the third quarter from OpEx, that actually flips and becomes a little bit of a benefit in 4Q. If I'm kind of understanding and putting some narrative around this, is it just that come 4Q, you lose some of the drags on the cost side and the margin side, but you're more impacted by maybe the drawdown on the revenue side?
Yes. In Q4, across advisory, we're expecting net revenue year-over-year to decline roughly 20%. But we're also expecting margin expansion because of the cost. You're right.
Okay. Got it. Just within advisory in the quarter, just to kind of understand mortgage originations and loan servicing a bit better. I would have thought mortgage originations would be a little bit more insulated because people kind of have to refinance and do things, whereas investment sales, they maybe don't have to sell the asset. That didn't seem to be the case. Like, any thoughts on just, you know, maybe why that was or if that, like, reverts?
Yeah. Yeah, Anthony, that is just a function of the fact that we had two things go on. Rates went up and spreads went up. Typically, when you see rates go up the way they did, spreads will come down a little, but both of them went up and people just avoided refinancing because it was so expensive. It's that simple. We had that circumstance play out in a way that was beyond what we would have expected. Now here's what I'll say about that. We think in the 4th quarter that you will see financing perform better than new sales.
People are just not gonna come back and trade assets until interest rates go down and until they think they can get the pricing they want, which will happen after, in our view, after the Fed starts to go the other direction with interest rates, which, as Emma said in her prepared remarks, we think may happen later next year. That's really what you saw happen in Q3, and especially what you saw happen in September.
Okay. Got it. Then just last one from me on the leasing side. I, you know, you pointed out offices having been pretty strong. It's also a fairly cyclical property type. Like, how much more runway do you think is left there to get back to normal when you kind of net that against maybe perhaps activity slowing because of the more macroeconomic factors?
Tony, when you say how much runway is there till that gets back to normal, give a little more on that. I want to make sure I understand what you're asking there.
Yeah, sure. I was under the impression like office maybe looked particularly good because you were still having some of the post-COVID recovery in just decision-making, but maybe that's off.
No, no. What's going on is in fact that there was, and we talked about this last quarter, there were abundance of renewals in the marketplace to be done. We'll see that continue this year and into next year. What we also expect to see now is some downward pressure as we go into a recession. There's always downward pressure on leasing in a recession because people are looking around trying to find ways to defer costs, save money. What you have this dynamic that goes on where they extend for a short period of time, et cetera. We expect to see some of that come in and leasing to be more flattish in the fourth quarter.
We still expect some of the benefit from the built-up number of renewals that need to be dealt with to occur in the fourth quarter and into next year.
Okay. It sounds like, you know, maybe it's a net kind of flattish number between sort of the renewals getting cleared and the headwind from the macro.
That's what we think. Maybe a little down, but that's how we think it's gonna play out.
Yeah. Tony, for Q4 specifically, we're expecting leasing to be flat.
Okay, great. Thank you.
Thank you. The next question is coming from Steve Sakwa of Evercore ISI. Please go ahead.
Great. Thanks. Just a couple. Emma, just on that last point, you said Q4 leasing to be flat in office. Is that? I just wanna be clear, is that year-over-year?
To be clear, that's flat globally across all product types, and that's year-over-year.
Okay, thanks. I was wondering if you just provide any comments on the industrial sales market. I know that's an area that you guys have been fairly active in. It's obviously been one of the more favored asset types within REIT land. You know, we have seen a pullback in that leasing market as well. I'm just curious if you have any comments on kind of industrial cap rates and the appetite today.
Yeah. Industrial cap rates, like all cap rates, have gone up. Industrial fundamentals have remained very strong. They've backed off a little bit. We've seen a little bit of downward pressure on rental rates in some areas. We've seen slightly more vacancy, although the fundamentals are very, very strong. The market's held up very well. In the major markets, very little vacancy, strong demand still. That has created a circumstance where there are buyers for the assets and there are owners of assets and developers, investors and developers that wanna sell, but they're just not gonna sell in the current environment because cap rates have ticked up and financing is expensive. In our own portfolio as a developer, we've made the choice to defer sales for some of our assets, some of our industrial assets.
I think what will happen, as we've already commented, when that circumstance eases, and we think that likely will be the second half of next year, those assets in the pipeline will get sold. Pipelines are very strong. The pipelines of assets that sellers wanna sell and buyers wanna buy are strong. We think starting the second half of next year, you'll see all of that free up to a degree and that market activity start to happen again.
Great. Just I guess one more question. If you could provide any comments around sort of the Industrious and, you know, office kind of leasing business that you guys have. I'm just curious, you know, what, you know, uptake you've seen in that business, in just kind of the short-term office leasing business.
Well, office leasing and Industrious, they share some dynamics, but they're different. Industrious provides a capability in the marketplace that's unique. You can get in and out quickly. You can get in and out without capital expenditure. You can adjust the amount of space you have very quickly. You can go into places that you don't intend to be long term. With all the uncertainty around the use of office space and where it's gonna go, Industrious' business has done quite well, and we believe it'll continue to do quite well. We're very excited about that investment and the performance of that investment. You know, we've already commented today on office space.
There's what you're seeing in leasing on office space is a pent-up amount of renewal activity and uncertainty about what's gonna happen long term with offices. There's also a big bifurcation in how different parts of the office market are performing with the best buildings, the premier buildings doing quite well with rents up and the less quality, less favored buildings suffering much more.
Yeah. Sorry, Bob. My question wasn't clear. I wasn't trying to follow up on Tony's question. I was really asking specifically about the trends in Industrious and just what maybe market share you're seeing, you know, the WeWork, the Regus, the Industrious taking in the office leasing business against kind of traditional office leasing.
Yeah. That was my comment. That's where I started with Industrious. The trends that Industrious is seeing in the marketplace are very positive. We would characterize it as a record level of interest in that type of space. It's being subjected to some different dynamics than regular office space. It creates flexibility. It creates the opportunity to get in and out of office space without capital expenditure. It creates the opportunity to get into a smaller amount of space in more convenient locations that you may not want to commit to long term. As a result, it's doing extremely well.
Great. Thanks. That's it for me.
Thank you. The next question is coming from Jade Rahmani of KBW. Please go ahead.
Thank you very much. What are you seeing in the GSE multifamily lending business? Historically, they've been counter-cyclical providers of capital. They don't price to a securitization exit, at least private label. Their spreads may not be as wide, and they do have ample capacity on the FHFA-governed lending caps. Are you seeing them step up in this point of time?
Jade, we are seeing the GSEs pick up in this past quarter. They contributed a larger portion of our volume than they did in the prior quarter, so picked up from 20% of our volume to 25% in this quarter. They are offsetting some of the declines from private lenders, but the entire market is down. Even though they are picking up, it's not as material as you might expect.
Thank you. In terms of REI's prospects, how sensitive is the outlook to where interest rates are? Meaning if projects, once stabilized, need to finance at a mortgage that's in the sixes, is that gonna inhibit sales out of that segment for potentially a longer than expected period?
Jade, are you asking through the remainder of this year?
Just say for next year. I mean, the timing of the outlook isn't that important, but I'm more concerned about, you know, if mortgage rates were stickier at, say, something in the 6% range, would that really inhibit a lot of those projects that are, you know, waiting to be sold?
Yep.
Would that inhibit the ability to sell them?
The way we think about development, you know we provided a range of conversion in that we take our in-process portfolio, which is currently over $19 billion, and typically that converts to SOP in the range of 1%-2% in any given 12 month period. Going into a recession, this is what we said last quarter, going into 2023, we'd expect that in a mild recession, we should get to the bottom end of that range, into the 1% range. That's driven by 2 pieces. One, cap rate expansion, so that we're monetizing the assets at a lower return, but also, the ability for us to choose to wait to sell the assets until the environment improves. We have a really strong balance sheet.
We have really flexible financing, so that allows us to make the decision if we don't want to monetize in a challenging environment, and we don't wanna wait to sell. It'll be at the low end of the 1%. If the environment is very challenging, it could dip slightly below that 1%. I wanna remind everyone that that doesn't mean those asset sales and monetizations are going away. Those should then appear in 2024 or whenever the market recovers.
Yeah, I mean, Jade, I'm gonna.
Go ahead. Sorry.
Yeah. I'm gonna add to that. That's true of our portfolio, and that's true of everybody else's portfolio in general. Those asset sales will happen, eventually. The assets are there. They're ready to be moved from one party to another. But the parties aren't gonna do that until they feel like they're confident in the fairness of the pricing on the sell side and the buy side and the availability of financing that works.
Thank you. Just more broadly speaking on investment management. I mean, as long as I've covered this space, the theory has been institutionalization, increased allocations to real estate from LPs, sovereign wealth funds, et cetera. For the first time, we're starting to hear chatter that's in the opposite direction, that there's an over-allocation because of decline in equity markets and fixed income, and that LPs are, you know, getting nervous about allocating to CRE. Has anything really changed on that long-term secular trend in your view?
Not in the long-term sense. Nothing at all has changed in that regard. In the short term, you're describing the denominator effect, which we haven't seen it for a long time, but we have seen it before. I think we will revert back to the trends we saw previously over the last decade. We're quite confident that'll be the case. We're very actively engaged with capital sources around the world, and that's where their head is at. But we do have this short-term circumstance that's precipitated by the debt markets and also the denominator effect, and that's really what we're seeing here and hearing about.
Thank you very much.
Thank you. The next question is coming from Stephen Sheldon of William Blair. Please go ahead.
Hi. Good morning. I first wanted to dig in more on the GWS new business pipeline. I think you said it increased significantly in the third quarter. Is there anything specific, I guess, driving that? And is macro uncertainty having any impact there in terms of delaying decision-making, or could it actually be creating more urgency to outsource to vendors?
Like CBRE in this type of environment, but just lots more detail on what you're seeing there.
Yeah. Stephen, there's a number of factors at play there. Whenever you go into periods of financial stress, companies everywhere look for opportunities to save costs. Our outsourcing offering helps them save costs. It's demonstrably able to do that, and so that's helping that capability sell in the marketplace right now. The other thing in times of economic uncertainty is sometimes decision-making is slower. While we have a large pipeline, you may see some slower decision-making. The third thing that's going on is we are continually adding to our capability in that area. Our procurement capability is getting better. The data that we can provide clients to help them make decisions is getting much better.
We have a product called Vantage Analytics that they like a lot that helps them make decisions that causes them to be attracted to us. Our ability to connect our offering around the world and serve them in a way that's consistent is getting better. That is all playing to our favor, and that's some of what you've seen come through this year in the buildup of the pipeline and the landing of new business. The cost factor is always at the top of the list when you dig into that business and figure out what clients really want.
Got it. That's really helpful. And then, you know, the follow-up, I guess, just wanted to ask as we kinda think about FX headwinds. You know, you're I think you report your currency exposures in the SEC filings for revenue, but just curious if your expenses would also, your expense exposure would also closely correlate to that or would call out anything there where there's a material mismatch?
It's generally aligned. Our cost is being impacted in a very similar way to our revenue.
Okay, great. Thank you.
Thank you. The next question is coming from Patrick O'Shaughnessy of Raymond James. Please go ahead.
Hey, good morning. After the global financial crisis, it took, I think, probably seven or eight years for industry sales activity to rebound to peak levels. Then after the pandemic, it obviously just took one year. Given kinda what you're seeing in the macro right now, how are you thinking about, you know, the pace of recovery of the sales outlook and, you know, whether we're seeing deals just delayed or whether deals get canceled?
You know, Patrick, one thing that's interesting is how long it's been now since the financial crisis. The cycles that we had previous to that were shorter, and so that kind of impacts people's thinking. The other thing that impacts people thinking is they forget how deep the financial crisis was and how unusual it was compared to other downturns. I can tell you what we're seeing now, and we've used this term multiple times on this call, pipelines. There is a definitive, identifiable pipeline of projects across property types that want to be sold by the owners. There is a lot of capital out there that wants to buy, and neither of them think this is the right time to transact. That's what you're really seeing.
We believe that when interest rates start to go the other direction, when the Fed reverses course because they think that the economy has gotten to a point where continued upward pressure on interest rates goes from being a problem-solving circumstance to a problem-creating circumstance, that we will see that pipeline start to transact, and it'll recover. We can't give an exact number of years, but it'll recover considerably more rapidly than it did coming out of the financial crisis.
Great. That's helpful. Thank you. As to your expense reductions, obviously you guys took some expense actions during the pandemic. How much more room do you have to cut before you get into the muscle and maybe you start, you know, potentially losing market share?
Yeah. Well, Emma commented on the $400 million number. That's the number we believe we can cut without impacting our ability to grow the business and serve our clients in the future. A lot of work went into from the grassroots level up and from top down to identify that $400 million number. I wanna stress again something Emma said. We have a massive amount of our cost basis that flexes automatically when revenues go down. Commissions, profit sharing and development and investment management, incentive equity, bonuses, all of that is completely independent of this $400 million, $300 million of which we think will be permanent and $100 million of which we think will come back when things get better.
We don't think that $400 million will create problems for our business at all.
Great. Thank you.
Thank you. Our next question is a follow-up coming from Jade Rahmani of KBW. Please go ahead.
Thank you very much. You know, a question investors often ask is where are commercial, or let's just say capital markets overall versus some prior period, say 2018, 2017. I know that you all are constantly hiring producers. Could you give any sense for what the growth rate in number of producer headcount has been on the brokerage side relative to some past period so that we could adjust for that? I think even if commercial real estate prices decline, the absolute nominal dollar of commercial real estate value is probably significantly higher than it was in 2017. You know, hard to compare next year versus 2017, but any color on that would probably be helpful. Thank you very much.
Yeah, Jade, we'll give a conceptual answer to that. We don't have specific numbers on brokers, but we have had a strong year for brokerage recruiting, and it was intentional because we believe that the opportunity to grow that business in the long term is there, and we believe it was the right time to get into the market and bring some new brokers on. Relative to history, it would stack up well relative to our good brokerage recruiting years in the past, but we don't have specific numbers for you on that.
Did you have any other questions?
No. Thank you very much for taking the questions.
Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Sulentic for closing comments.
Thanks, everyone, for being with us, and we look forward to talking to you again when we report our year-end results.
Ladies and gentlemen, thank you for your participation and interest in CBRE. This concludes today's event. You may disconnect your lines and log off the webcast and enjoy the rest of your day.