Many real estate companies are feeling the sting of a weakening market, leading to hiring freezes and mass layoffs. But one firm that seems to keep on rolling is CBRE Group Inc., the world’s largest commercial real estate services and investment firm. Coldwell Banker Richard Ellis employs more than 100,000 people worldwide and continued to add employees earlier this summer, despite the headwinds in the industry that have some major players shivering. The massive brokerage had posted more than 250 jobs in the United States in early August, and the company is still riding high after a great year in 2021.
CBRE, which moved its headquarters from Los Angeles to Dallas in 2020, set an annual company record by posting nearly $28 billion in revenue in 2021, capitalizing on the strength of the multifamily and industrial markets. As the company expanded its headcount over the summer, other real estate companies announced major staffing cuts. The cooling U.S. housing market led to layoffs for firms like Redfin and Compass, and the mortgage industry just saw another wave of layoffs. JPMorgan Chase, America’s biggest bank, laid off hundreds of home-lending employees in late June, while Blend Labs, a digital lending platform, laid off 200 employees in April (10 percent of its staff). Its second-quarter earnings call indicates that CBRE has slowed hiring a bit as the market weakens, but at least as of early August, the reports were that they were expanding.
Another move that reflects CBRE’s confidence in its financial position is after the firm recently received the board of directors’ blessing for a $2 billion increase in its stock repurchase authorization. The latest authorization will maximize shareholders’ wealth, but it also shows that CBRE is assured in its ability to generate sufficient cash flows. CBRE is rich in cash, with about $4.2 billion in total liquidity as of June 30, 2022.
Based on 2021 revenue, CBRE is the world’s largest commercial real estate brokerage by far. CBRE was the top-ranked company for commercial real estate investment sales worldwide in 2021 for the 11th consecutive year, according to Real Capital Analytics. CBRE was credited with a 24 percent market share in 2021 across all property types worldwide, nearly double the number two and three firms combined. Over the years, CBRE has grown organically and relied on strategic acquisitions to bolster its service offerings and geographic reach. How they got to the top of commercial real estate brokerage’s Mount Rushmore is interesting, but the more compelling story is how they maintain their dominance. As the market becomes more uncertain, the resiliency of CBRE’s business will be put to the test.
Deep institutional knowledge
CBRE stays dominant in commercial real estate because they invest heavily in talent and recruit from other national and regional firms. Every big real estate firm does this, but CBRE has earned a reputation for its recruiting tactics, according to industry insiders. The company is hiring heavily in the Sun Belt, a region experiencing massive real estate growth. CBRE also pays very well, so they get the cream of the crop talent-wise. For example, salaries at similar positions at JLL and CBRE are pretty close, but CBRE offers more for most jobs, according to the job website Glassdoor. A senior VP at JLL can expect to earn about $250,000 annually, while the same position at CBRE earns nearly $263,000. That extra $13,000 makes a difference sometimes.
An example of a recent high-profile move by CBRE is the appointment of Blake Hutcheson to its board of directors. Hutcheson serves as president and CEO of the Ontario Municipal Employees Retirement System, one of Canada’s largest pension funds. Hutcheson was a former top CBRE executive in Canada. He joined the CBRE board on September 1st and will serve as director of the board until his stand for re-election at the firm’s 2023 annual shareholders meeting. CBRE’s non-employee directors received a compensation package that included a $100,000 annual cash retainer in 2021 (in U.S. currency) paid after the full commencement of board service. Board members also got a restricted stock grant valued at $200,000 on the annual meeting date.
CBRE recruits heavily, but executives at their firm also get poached. At the very top in commercial real estate brokerage, it becomes a game of musical chairs, with new hiring announcements every week and people jumping from one top firm to another. But for the most part, people want to work at CBRE because of its sterling reputation. CBRE is widely known as a tough place to work because it’s so competitive, but they have an excellent brand that provides the trust brokers need when working on big deals. At its roots, CBRE also goes back to 1906, when they were founded in San Francisco, so they also have deep institutional knowledge and an excellent understanding of how to ride out economic downturns, similar to firms like Newmark Group, which was founded in 1929 in Manhattan.
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Bigger, but are they better?
Some in commercial real estate have a more nuanced take on CBRE and the big brokerages and services firms. Ashkahn Pajoohi, a Professor at the NYU Schack Institute of Real Estate, has worked at many top real estate firms over the years, including CBRE, Newmark, Colliers, and CRESCO. He acknowledged that CBRE has “the broadest capabilities on paper.” But he also told me CBRE might not necessarily be better than the other big firms but simply larger. And by size, they are significantly larger than the other top firms of Cushman & Wakefield, JLL, Newmark, and Colliers. “CBRE is no better or worse than the other brokerages,” Pajoohi said. “They’re all kind of the same at the highest level, similar to what you’d expect in the banking industry.”
Pajoohi noted that CBRE decided that flexible office space would be front and center for them, so they built an internal platform, doubled down, and bought a stake in Industrious, a flex-office provider. In May, CBRE announced it was investing $100 million in Industrious after acquiring a 35 percent stake in the company early in 2021. CBRE transferred its own flex workspace brand, Hana, to Industrious after the 2021 investment, and the brokerage is the lead minority investor in the startup. CBRE’s further investment in the flex-space firm could be because of what its own occupier surveys have revealed, which found that 59 percent of corporate occupiers say flex space will become a significant part of their office portfolio within the next two years. While JLL is focused on technology and could be considered the industry’s tech leader, CBRE leads the way in flex office and its dominant capital markets teams.
Many top brokers at CBRE are also nearing retirement age, so the brokerage is active in bringing in new, younger talent. This is generally the case throughout the commercial real estate industry, and every firm is doing things differently. Many firms, including CBRE, are focused on diversity and inclusion with new hires. “From a hiring standpoint, it’s always been so white and male in commercial real estate,” Pajoohi said, “so there are many more diversity efforts at the big brokerages right now.”
Pajoohi added that the pandemic forced a significant re-think of how commercial real estate is consumed, and this has caused a changing of the guard at the biggest brokerages. “It’s about more than the transactions, it’s about how to add more value to the clients,” he told me. “The traditional mindset was just put butts in seats, but now it’s about how the space functions. How are the occupiers going to use the space? The conversation is more complex now.”
For example, a law firm will need space that will look much different than a client in other industries. This changing of the guard is affecting CBRE and the other top brokerages, and Pajoohi said they’re learning there’s less need for the human touch and more reliance on data and technology. “However, clients with bigger space requirements still need relationship-based brokers,” Pajoohi continued.
Another reason CBRE has performed so well for so long is because of the highly talented brokers and employees it’s been able to keep. One of those employees is Darcy Stacom, who serves as chairman and head of New York City capital markets for CBRE, and has done billions in high-profile deals. Pajoohi told me Stacom is “in a league of her own.” Stacom has earned the nickname ‘Queen of the Skyscrapers’ because she’s led the marketing and sale of more trophy properties than almost any other real estate professional in the United States.
Stacom regularly ranks in the top 1 percent of CBRE’s global producers, and she has done so for several decades. As a woman in a male-dominated field, Stacom has also shattered the glass ceiling for women professionals in commercial real estate. She has come under criticism for her fiery temper and alleged overbearing management style. Eleven former Stacom staffers accused her of abusive behavior in September 2021, alleging she berated and threw things at them. “I appreciate that at high-intensity times, I may not have handled every situation the way I would want and offended some people,” Stacom wrote in an email to staffers after the incidents leaked to the press. “For that, I apologize. I also recognize that, like any leader, I am continually learning and seeking to improve how I manage people.”
Despite the allegations of hostile behavior, Stacom’s performance hasn’t been affected much, and she remains an icon in NYC commercial real estate. Every brokerage and services firm has talent, despite some recent struggles to find talented workers. But those rare talents are what can put a company like CBRE over the top, especially someone like Stacom, who has consistently performed at an elite level for decades.
Game planning for a recession
Along with acquiring talent, CBRE continues to focus on strategic acquisitions of regional and specialty firms to bolster its global reach and expand its service offerings. For example, CBRE purchased 60 percent of the ownership interest in Turner & Townsend Holdings Limited, a UK-based project and cost management leader, in the fourth quarter of 2021. CBRE Group’s in-fill acquisitions aggregated nearly $26 million and $42.2 million in cash and deferred consideration in the first and second quarters of 2022, respectively.
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Despite CBRE’s size and scale, it isn’t immune to the issues impacting other commercial real estate firms. The enduring nuisance of COVID-19 and emerging new variants have continued to limit some face-to-face meetings, putting some property sales and leasing transactions on hold. The risks associated with interest rate hikes pose operating challenges for CBRE in the near term. The brokerage also has an extensive international presence, so unfavorable foreign currency changes, geopolitical tension, and weakness in some global economies impact the firm. CBRE Group decided to exit its Advisory Services business in Russia in the first quarter of 2022 because of the war in Ukraine. The Ukraine conflict has also exposed CBRE’s operations in Europe to greater risks.
CBRE Group Inc.’s stock (NYSE: CBRE) has also beat somewhat within the past year. CBRE closed at $78.14 per share on September 14th, down more than 18 percent over the past year. CBRE stock was held by 42 hedge fund portfolios at the end of the first quarter of 2022, down from the 55 portfolios that held the stock in the previous quarter. Nevertheless, investment management companies like Vulcan Value Partners have added CBRE stock recently, according to its second quarter of 2022 investor letter. Vulcan Value Partners reasons that CBRE Group has strong fundamentals, and the declining share prices “provided an opportunity to purchase the company at a discount to its intrinsic value.”
The commercial real estate industry, including CBRE, may be uniquely positioned to weather an upcoming economic downturn, too. Former Treasury Secretary Larry Summers said commercial real estate should continue to be a compelling investment compared to stocks and bonds, according to an online discussion hosted by Marcus & Millichap CEO Hessam Nadji. “A bond is 3.3 percent, and that’s all it’s going to be at the end of ten years,” Summers said. “The value of property is vastly more likely to appreciate over ten years. It will go up, not down.” Summers does think a recession will happen, but the real estate sector is much better equipped to deal with it compared to 2008 when the housing market collapsed. He predicted that the role of commercial real estate in investment portfolios should be larger in the years ahead, and that would be good news, indeed, for all major real estate firms, including CBRE.
CBRE has built a resilient business with a strong balance sheet, but challenges lay ahead in the real estate market that even the biggest firms can’t avoid. Larry Summers may be optimistic about the future of commercial real estate, but others are more cautious about the weakening economy and its impact on the sector. Forty-eight percent of real estate CFOs across North America, Europe, and Asia say their revenues will likely decrease this year, according to a new survey by Deloitte. The top risk identified in the survey is higher inflation, which will likely lead to more Federal interest rate hikes and a higher cost of financing.
During its second-quarter earnings call, CBRE executives outlined how they plan to deal with these challenges. Some of the firm’s business lines, such as property and facilities management, directly benefit from economic uncertainty because companies turn to outsourcing to reduce costs. The other parts of CBRE’s business that are more transactional in nature, like capital markets and leasing, are more sensitive to market uncertainty in the short term. For example, the pandemic created tremendous market uncertainty during 2020, leading to the transactional parts of CBRE’s business to see a total net revenue decline by 26 percent in the first quarter of 2021 compared to the previous year. But all the transactions didn’t disappear; they paused.
“When market uncertainty lifted, these transactions came back, resulting in a powerful recovery,” said Emma Giamartino, CBRE’s CFO and Investment Officer, during the earnings call. “The net revenue growth of these businesses outpaced the S&P 500 over the period starting pre-COVID through the recovery of the following year,” Giamartino added that CBRE is already taking steps to focus on what they can control, cutting costs by limiting new hires, eliminating nonclient-related travel and entertainment, and reducing other discretionary expenditures. “And we are prepared to go further if we decide more reductions are needed,” she said.
Some industry insiders have the take that CBRE may not be the best but simply the biggest of the world’s commercial real estate brokerages and service firms. CBRE’s massive size comes with advantages, and they’ve shown in recent years they know how to maintain their dominance in the industry. The company has a deep knowledge of economic cycles and downturns, having been around for more than a century, and it will have to tap into that knowledge more in the coming months and lean on its resilient business model. Even if economic experts like Larry Summers are right and commercial real estate will be well-positioned in a downturn, the industry’s major companies like CBRE will be tested and have to prove their mettle.
