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Major CRE Firms Say 3Q Deal Slowdown Reflects Client Caution

CBRE, JLL Chief Executives Touch On Fiscal Cliff, Hurricane Sandy As Market Uncertainty Reaches Zenith
October 31, 2012
The largest publicly traded CRE firms reported leasing and sales activity slowed noticeably in the U.S. during the third quarter as businesses wait on the sidelines for clarity from next week’s election and ensuing efforts to resolve nation’s fiscal debt and tax issues before making major property decisions.

Also in third-quarter earnings calls this week, CEOs of the two largest publicly traded CRE companies said the ongoing debt crisis in Europe and a slowdown in Asian economic growth, combined with the slow pace of the U.S. economic recovery, aren’t inspiring much confidence among real estate investors and tenants.

"The market environment turned more cautious in the third quarter," noted Brett White, CEO of Los Angeles-based CBRE Group Inc. (NYSE:CGB). "Many investors and occupiers deferred making decisions and commitments."

The cautious fourth-quarter commentary was to be expected, given the unknown but likely minor impacts on transactions from Hurricane Sandy, how real estate participants will react to election results and fiscal cliff and tax uncertainty, and the importance of high-margin transactions in the seasonally strongest fourth quarter, said Brandon Dobell, A William Blair & Co. who tracks CRE servicers firms, in a note to investors.

Such caution translated into lower deal volumes across most of CBRE’s business lines and geographies, particularly commission-driven sale and lease transactions. Still, CBRE was able to produce a slight improvement in its revenue and preserve margins in the quarter, White said.

CBRE's revenue rose 1% from a year earlier to $1.56 billion in the third quarter and net earnings of $39.7 million, or 12 cents a share, down from $63.8 million, or 20 cents, a year earlier.

"The current recovery, unlike previous ones, remains frustratingly slow and inconsistent. Nevertheless, we continue to believe that the recovery is ongoing and as we’ve been saying for some time, remain subject to quick swings in market sentiment," said White, adding he expects a "solid finish to the year" in the fourth quarter with the usual strong year-end pipeline of deals closing.

Jones Lang LaSalle Inc. (NYSE: JLL) also reported stronger revenues and net earnings from a year ago as it continued to grow market share around the globe.

JLL reported that third quarter revenue rose 5% to $949.49 million from $903.21 million a year ago, while third-quarter profits came in at $49.5 million, or $1.10 per share, compared to $33.9 million or $0.76 per share for the same quarter a year ago. Excluding charges, adjusted net income for the third quarter was $55 million, or $1.23 per share, compared to $49.5 million or $1.12 per share for the quarter a year ago.

"We believe we see that business is coming our way because of general uncertainty and hesitancy, and that traditionally favors the strong brands in any markets, and ours is no exception," said JLL CEO Colin Dyer, participating in the company's conference call Tuesday morning via mobile phone due to dislocation by the hurricane.

While the company’s leasing and capital markets business is strong compared with a year ago, occupiers, buyers and sellers are hesitating to close deals, while "keeping their eyes on the global news feeds around the big global uncertainties, from the U.S. elections to Chinese growth rates, to corruption in India, to the Europe euro situation," Dyer said.

Dyer said it's still much too early to tell the extent to which clients have been impacted or damaged by Hurricane Sandy, which mangled the Eastern Seaboard this week, causing damages topping $20 billion as of Wednesday.

"Clearly, business in the New York and New Jersey area will be severely dislocated for the coming few days. But our teams have been active over the last 24 hours in coming to client's assistance, and will continue to do that," Dyer said. CBRE's White echoed those sentiments during his company's conference call Tuesday afternoon.

FirstService Corp., the Canadian parent company of Colliers International, last week reported third-quarter revenue of $589.8 million, a 1% increase from the prior year, with adjusted EBITDA at $48.8 million, compared to $47.6 million. An outsize portion of the growth came from year-over-year revenue growth at Colliers, noted Jay S. Hennick, founder and CEO of FirstService.

"As long as market conditions remain stable, we expect to finish the year with overall results comparable to last year," Hennick said.

Both CBRE and JLL executives said transaction velocity typically picks up in the last two months of the year, as it did with a burst of deal closings last December.

"The pipelines are good. We'll just watch very carefully to see how our clients' confidence enables them to move their deals across the line," Dyer said. "We're positive about our own prospects and the way we're doing business, but we're keeping our hands very firmly on the cost control and cash control levers as well."

Early projections for 2013 show JLL's investment sales volumes at least matching this year's, with potential upside in the Americas where volumes could be as much as 25% higher than this year.

JLL expects capital values to increase by an average of 3% next year and predicts global leasing volumes will be 5% to 10% higher in 2013 -- and up 10% to 15% in the U.S., while rent growth next year is expected to match this year's fairly flat rates.

"For next year, we anticipate markets that are not going to get worse, but at the same time, not improving as quickly as businesses might hope," he said. "There are encouraging signs. The U.K. emerging from recession and China perhaps, turning around its declining growth rates."

"But there are also global-scale issues that concern business confidence, the post-election fiscal cliff in the U.S. and the ongoing issues with sovereign debt in Europe being the two principal examples."

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