Agency leaders grapple with the deal downturn

A full recovery in the real estate dealmaking markets this year is looking increasingly unlikely, according to the bosses of some of the largest agencies. First-quarter results from CBRE, Colliers, Cushman & Wakefield and JLL showed resilience in some business lines, but all suffered another sharp fall in capital markets revenues, where deals are fewer and farther between and taking longer to get across the line. At CBRE, chief financial officer Emma Giamartino said the agency had given up on expectations of an economic recovery in the latter half of this year. “We now expect a delayed recovery due to more constrained debt liquidity and heightened market uncertainties,” Giamartino said. “Our sales and leasing businesses are most impacted by the changed economic environment, and as a result we now anticipate property sales to fall by nearly 20%, which would represent a more than 25% decline from peak 2021 levels. We also expect leasing activity to be down by high single digits this year.” Colliers has lowered its full-year revenue guidance and said that a slump in deal volumes is likely to persist for the rest of the year. Chief executive Jay Hennick sounded resigned to continued problems in the capital markets on a call with analysts to present the numbers. “We all read the paper, this is crystal clear,” he said. “I hate to say it, but any moron should know that this is what happens out there.” Dry powder Agency leaders continue to look for silver linings, many pointing out that the money to do deals is there, even if sentiment is suffering. “Although global fundraising has slowed, elevated levels of capital remain on the sideline, with dry powder in closed-end funds now at $389bn (£309bn) globally,” said Christian Ulbrich, JLL’s chief executive. “It appears that debt cost will become more predictable and bid-ask spreads can begin to compress. This process is already underway, with global real estate asset prices declining around 20% on average from their 2022 peak. Additional price adjustments are likely needed to bring bid-ask spreads back to more normal levels.” Ulbrich said his teams had seen debt-pricing spreads go below 200 basis points on industrial, multi-family and some retail assets, but remained elevated “where we still see some hesitancies around the majority of the office products“. “Overall, the moment we have calmness and predictability… that will provide confidence to the market, and that will lead to transactions,” he added. “There is debt available, there’s enough product available which wants to trade, and that will then lead also to the closure of those deals.” Colliers’ Hennick too pointed to “huge appetite” from buyers and sellers, but acknowledged that repricing is a sticking point. “The problem is, how do you value some of these assets?” he said. “It’s not just higher interest rates, it’s availability of capital, and it’s also the negative sentiment that some people have around mortgages that will come due in the near term… But capital markets transactions are happening, and we continue to think that they will happen more and more as the year goes on, because the best assets are being purchased primarily for cash or very low debt levels.” Return to the office Equity analysts grilled agency executives on the outlook for the office market in particular, questioning the outlook for leasing post-Covid-19 as well as investor appetite. JLL’s Ulbrich offered his own observations on the return to the office in the agency’s own workplaces. In Asia-Pacific, he said, it’s a “non-issue”, adding: “In our own offices in China, where I was just spending some time, we don’t have assigned seats and so we had predicted, when we arranged those offices many, many years ago, a certain ratio on desks we need for the numbers of employees. At the moment, we have more employees in the office than our desk ratio offers us because they are all so keen to be back in the office.” In Europe and the US, he noted, the situation changes country by country and city by city. He estimated the firm’s offices in Europe are back to an average of 65% to 70% of pre-Covid occupation, and in the US 50% to 60%, including “great occupancy in Texas, pretty good in New York and still really, really bad in the San Francisco Bay Area”. CBRE chief executive Bob Sulentic sounded a downbeat note, predicting that it will take the office sector “twice as long to recover the lost value as it did in the aftermath of the global financial crisis”. “This reflects the formidable challenges facing office assets, driven by both the slow progress in employees returning to the office and the shedding of jobs in tech and other sectors,” Sulentic said. “Ultimately, we believe that office portfolios will shrink meaningfully from where they were prior to the pandemic, making offices smaller but still a very large commercial real estate asset class.” However, Sulentic downplayed the systemic risks of that asset class’s struggles. “If you look at the banking system today, something like 1.5% of commercial banks’ asset portfolio is in office buildings. It’s not a huge, threatening circumstance,” he said. “Some of the problem assets will go back to the banks. Some of them will get restructured and worked out, as is always the case with troubled assets… But it’s not going to be an overwhelming circumstance the way certain headlines would suggest it might be.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews View agent activity by region, county, city and sector using our On-Demand Rankings >> Photo © Gerd Altmann/Pixabay