The world's largest commercial real estate services firm raised its profit outlook for the rest of the year after posting revenue that was higher than anticipated, driven partly by data center development and office leasing.
CBRE is on track to reach record earnings only two years after a real estate downturn had it in cost-cutting mode. The firm's revenue increased 14% to $10.3 billion in the third quarter.
"We exceeded the expectations we had going into the quarter," CBRE Chair and CEO Bob Sulentic told investors and analysts during the firm's third-quarter earnings call Thursday.
The Dallas-based firm was the first major real estate services firm to post its third-quarter earnings, with JLL, Cushman & Wakefield and Colliers set to report in coming weeks. CBRE's earnings could set the tone for what other firms report.
"We often talk about our breadth and depth across assets, client type and geography," Sulentic added. "That breadth and depth gives us scale that supports our strategy in many ways, including recruiting, developing integrated solutions for clients, making capital investments and creating an information advantage."
That scale helps CBRE grow in areas such as in its data center business, where it produced nearly $700 million in revenue in the third quarter — a jump of 40% compared with the same quarter the prior year, Sulentic said. From a geographic lens, he said Japan and India are two countries where CBRE saw combined revenue grow by more than 30%, to nearly $400 million in U.S. currency in the third quarter.
"Given the results here to date and the momentum of our business, we are raising our full year outlook," he added.
CBRE raised its core per-share earnings outlook to a range of $6.25 to $6.35 from the prior projection of $6.10 to $6.20, reflecting 24% growth at the midpoint of the span for the year. It would also place core per-share earnings at 10% above the firm's prior peak.
CBRE's advisory business, led by leasing and sales, outperformed in the third quarter with 16% growth in revenue, Chief Financial Officer Emma Giamartino said.
Banking on data centers
For global leasing, revenue increased 17% in U.S. dollars, with the highest third-quarter revenue ever reported by CBRE. In the U.S., industrial leasing rose 27% driven by data centers, and office leasing also rose, Giamartino said. Global property sales jumped 28% in the third quarter, with strength seen in U.S. office, industrial and data centers.
"Our strategic land acquisitions in recent years, coupled with our land development and entitlement capabilities, position us to capitalize on demand for large data center and development sites," Giamartino said during the earnings call. "We expect to monetize several of these sites later this year for next year.
She added that "we continue to believe our development portfolio has more than $900 million of embedded profits that will be monetized over the next five years."
Even as CBRE looks to monetize its data center sites, executives told analysts that getting the needed power remains a challenge for large data center users to work out with on-site utility companies.
Leasing is an important part of CBRE's business, Sulentic said, in answering questions from analysts. He said the firm was "surprised" by the "resurgence on a relative basis of the gateway markets," New York City and San Francisco, in particular.
"If you look over the course of the last 12 months and you look at our pipelines, our expectation is you're going to see growth in office building leasing," Sulentic said. "People still talk about return to the office. We don't really talk about it that way. I would say it's more of a return" to average.
Leasing recovery
"COVID is so far in the rear view," he added. "People are thinking about [their real estate] more than ever before. Real estate facilities have become much more critical to companies than they used to be. Occupiers are talking about the importance of their real estate to their cultures, the way their people work and their productivity."
Sulentic, who began his real estate career leasing warehouses, said industrial properties have changed significantly over time, from once being a shell of a structure to now being filled with "thousands of robots" and "miles of conveyor systems."
Meanwhile, office leasing recovery has been driven by top-tier office space and that demand has inspired landlords in lower-quality buildings to upgrade their space, Sulentic said, adding that he's seeing this happen in real time in the New York market in Manhattan. Demand for high-quality office space has also pushed companies to look at secondary markets, he said.
That has also led to new development opportunities for CBRE at the firm's development site in Uptown Dallas. The real estate downturn had CBRE postpone plans to transform a site at 2401 McKinney Ave. into its global headquarters as part of a larger development, as CoStar News reported.
Now, it appears what Sulentic calls "one of the very best office sites in Uptown Dallas" has attracted the interest of a "a couple of large users" with plans for what could become upward of a 600,000-square-foot tower.
"We've been sitting on that site," he said. "We own it on our balance sheet and we're not in a hurry to do anything with it. There're pretty good odds we'll go ahead and kick that site off to bring 500,000 to 600,000 square feet of new prime Class A space into the market.
"And we're not the only ones doing that," he added. "Three years ago, it wouldn't be part of the conversation, but it is now. In New York, some of the prominent developers have announced new things or will be."