Home Commercial Amidst $150MM in Additional Cost-Cutting, CBRE Spends $630MM in Stock Buybacks in...

Amidst $150MM in Additional Cost-Cutting, CBRE Spends $630MM in Stock Buybacks in 2023 to Appease Investors & Management

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By The Registry Staff

In the ever-evolving world of commercial real estate, adaptability and strategic foresight are paramount. The past quarter has tested the resilience of even the largest industry players, as evidenced by CBRE Group’s recent announcement of substantial cost-cutting measures. The world’s leading commercial real estate services firm is addressing a challenging environment that has seen unexpected headwinds in its core brokerage business.

CBRE’s decision to implement cost reductions follows a disappointing third-quarter performance, which prompted the company to revise its earnings expectations for the second consecutive quarter. The primary culprit behind these less-than-ideal results has been a slowdown in leasing and sales, exacerbated by a challenging capital markets environment.

On a recent quarterly earnings call, CBRE’s Chief Financial Officer, Emma Giamartino, highlighted the company’s response to the adverse market conditions. “We discussed earlier this year that we were prepared to cut costs further if the market environment deteriorated,” Giamartino stated, “That time has come, and we will be reducing costs across our lines of business.”

The financial target for these cost reductions is set at $150 million, focusing primarily on its transaction lines of business. This comes on the heels of the firm’s announcement in Q3 2022 that it was targeting a total of $400 million in cost reductions, with approximately $300 million of those reductions already realized through layoffs.

The economic challenges facing CBRE stem from several factors. The most prominent among them is the uncertain trajectory of interest rates. As expectations for sustained higher interest rates persist, the knock-on effect has been delayed sales and leasing decisions, impacting CBRE’s core business operations.

CEO Bob Sulentic elaborated on these concerns, stating, “Uncertainty around interest rates is one really prominent fact, and the expectation that they’re now going to come down later than we previously thought. Number two, there’s still a view that values are going to come down some, that privately held assets haven’t come into line yet.”

The impact of these challenges is felt on a global scale. CBRE reported a 16 percent decline in leasing activity year-over-year worldwide, with the Americas experiencing a more pronounced 21 percent decline. Sales revenues also mirrored this trend, falling by 38 percent globally and by 41 percent in the Americas year-over-year. These results illustrate that leasing has been slower than initially anticipated.

Mergers and acquisitions activity has also slowed as CBRE adjusts its risk appetite amid higher capital costs, coupled with the failure of seller expectations to align with market conditions. “We need seller prices to come down for us to be able to execute some of these deals,” emphasized Giamartino.

Despite the challenging landscape, CBRE has not abandoned its strategic vision. The company has invested $150 million this year in multifamily and industrial acquisitions, emphasizing its commitment to growth.

Furthermore, CBRE has continued its share buyback program, completing $500 million of stock buybacks during the third quarter alone, reaching a total of $630 million for the year. Companies choose to buy back shares for a number of reasons, including as a way to increase shareholder value, return capital to shareholders, defend against hostile takeovers or issue stock options to employees as part of their compensation packages, amongst others. While share buybacks can create value for shareholders when done thoughtfully, they can also be criticized when companies use them to artificially inflate stock prices or neglect long-term investments in favor of short-term financial engineering.

Despite the persistent industry turbulence, CBRE’s leadership remains optimistic about the future, anticipating meaningful growth in the coming year. However, they acknowledge that the road ahead may be arduous, with earnings per share expected to decrease by approximately the mid-30 percent range, reflecting CBRE’s exposure to interest rate-sensitive business areas.

The company anticipates that transaction activity may not fully rebound until the second half of 2024, underscoring the need for adaptability and careful strategic planning in this ever-changing commercial real estate landscape.