CBRE, JLL, Colliers International Say Underlying CRE Fundamentals Remain Strong, Despite Late-2015 Investor Caution, Buyer Hesitation
The largest publicly traded commercial real estate services companies expect the strong market conditions that have buoyed property values and attracted record levels of investment to carry over into this year.
CBRE Group, JLL, and Colliers International all reported improved margins and strong revenue growth in their transaction, investment management and corporate outsourcing businesses in 2015, despite evidence that macroeconomic concerns may have slowed investment sales activity in the fourth quarter.
CBRE reported revenue growth of 20% to $10.9 billion while fee revenue increased 14% to $7.7 billion in 2015, with the strongest growth coming from its Americas region. Contract revenue totaled $6 billion while fee revenue rose 14%, excluding the contributions from the Global Workplace Solutions business CBRE acquired from Johnson Controls last year.
Leasing revenue rose 11%, surpassing $2.5 billion, while CBRE's capital markets, property sales and mortgage services segments spiked 20% to $2.1 billion. CBRE said it expects continued strong performance and low double-digit revenue growth this year in the occupier services segment, with leasing revenue increasing at a high-single digit rate.
Global investors are expected to continue to pursue real estate in 2016, with capital markets revenue expected to grow in the mid-to-high single digits, said CBRE CEO Bob Sulentic.
"While we are mindful of concerns about China’s slowing growth and the effect of lower oil prices, fundamentals in our sector remain on solid footing," Sulentic noted. "We are positioned for another strong year in 2016, but are maintaining flexibility in case the economy weakens. It’s an active marketplace for what we do. We are a month into the year and it’s the slowest month of the year, so you can’t draw any conclusions."
CBRE CEO Jim Groch said increasing contract revenue from asset management and facility management make up a much larger percentage of CBRE's business than 10 years ago, which he said will offset some of the company's exposure to CRE cycle changes.
"There are parts of our business that will be impacted if we go into a recession, but overall I think we’ll see tremendous opportunities to take advantage of as well," said Groch. "The strength of the fundamentals in the sector and what we’ve seen in the market and performance in fourth quarter leaves us feeling fairly optimistic about the strength of the sector."
Chicago-based JLL also reported an exceptionally strong 2015, with record total revenue of $5.9 billion, up 9.8% due to double-digit fee revenue growth across all service lines, said CEO Colin Dyer.
Highlighting JLL's growth was a 16% gain in annual revenue by LaSalle Investment Management, and a 17% increase in the company's core fee revenue to $5.2 billion as JLL continued to grow through acquisition last year, closing or announcing 24 transactions.
Fourth-quarter investment sales volumes were down 8% from the record final quarter of 2014, including a 9% decline in the U.S. market as investors became slightly more hesitant about completing deals in the final three months of last year, Dyer said. That said, demand for leased space among businesses remains robust and broad-based given the massive amount of equity and debt capital available to invest and keen appetite for virtually all commercial property types.
"Whether the fourth quarter activity is an early warning of moderation, we don’t know yet. We’ll judge that as we go through this year," Dyer said. "But the underlying activity levels are strong. We see interest in real estate from all sources. We talk to institutional investors, specific pension funds, for example, who are still raising their percentage allocation to real estate."
JLL observed "something of a cooling in demand at the high-end, in particular of our investment sales markets -- a bit more selective purchasing, buyers not chasing risk as much as they might have done earlier in the cycle," Dyer said. He also noted evidence of a widening gap between buyer and seller price expectations, with sellers continuing to push prices upwards even as buyers became more hesitant to pay existing asking prices.
"We saw transactions indeed tending to slow and that’s one of the reasons why [fourth quarter] was a little weaker, because we believe that a lot of transactions went to through year end, and will continue to complete in the first quarter," Dyer said.
Colliers International also reflected a more moderate tone about 2016 prospects for commercial real estate. The company reported strong top-line results for the fourth quarter as revenues increased 11% to $556 million -- though well below the 25% growth observed in the third quarter. Investment sales were up 8% but decelerated from the previous quarter.
"Our pipelines and access to capital is good, and interest rates are low, but the stock markets are scary," said Colliers Chairman and CEO Jay Hennick. "Oil impacts things, and so general sentiment is not so good, and that is slowing things down for us, primarily in the area of investment sales. Less so in leasing. 2016 may not be as frothy in terms of growth as last year, but markets are still pretty good."
While very high prices have been paid for trophy properties in key global markets in recent years, some cooling in the highest end of the market was expected, Hennick said.
"Whenever you have some headline risk like we’re seeing now, there may be a pause," Hennick said. "But once we get through that, we believe the fundamentals are largely intact to support pricing, and I don’t see a significant falloff at all."