CBRE, the world's largest commercial real estate services firm, lifted its annual profit outlook for a second straight quarter as revenue surged in its data center business.
The Dallas-based brokerage and advisory company, the first major firm of its kind to report second-quarter earnings, said its revenue rose 16% to $11.2 billion from the same time the prior year. With earnings topping estimates as a result data centers, leasing and property sales, CBRE raised its core per-share outlook for the year to a range of $7.80 to $7.90, up from $7.60 to $7.80.
CBRE Chair and CEO Bob Sulentic said in an earnings call with investors the firm's strength was balanced across the company, with segments including advisory, building operations and experience, project management and real estate investments increasing operating profit by more than 25%.
“Resources and investments are being productively directed into areas that drive current growth and position us for long-term growth,” Sulentic said.
The firm announced its earnings hours before rival Newmark was due to report, with Colliers and JLL expected to follow on Thursday. Cushman & Wakefield is scheduled to post their quarterly results next week.
Revenue tied to data center services rose nearly 30% to surpass $700 million, helping to drive CBRE's better-than-expected earnings for the quarter, Sulentic said. That revenue comes from data center build-out and maintenance, he said, but not data center land development. CBRE said in a presentation to investors it expects "increased data center land monetization" in the third quarter.
CBRE executives said investors, particularly those in the Middle East, remain cautious, given the volatile global backdrop with the U.S. war with Iran going on. Sulentic, in addressing an analyst question on the potential for interest rates to rise amid the war, said the firm's business is more resilient now more than ever — so, if interest rates rise, they are prepared.
"We don't know how that'll unfold going forward, but we think we'll continue to see pretty strong sales for the rest of the year, and we think we'll see pretty strong debt origination for the rest of the year," he said.
CBRE faces obstacles related to the data center boom. Sulentic acknowledged that one of the challenges to data center growth is NIMBYism, or the “Not In My Back Yard” sentiment tied to water and power constraints.
There are "challenges all over the supply chain,” Sulentic said. “It’s hard to hire people to put all the equipment that goes into data centers. When anything becomes that big and rapidly changing and uses up resources the way data centers use up resources, there are going to be challenges."
Boost from acquisitions and leasing
Separately, CBRE continues to seek ways to grow through mergers and acquisitions. Sulentic said the firm has “some ideas around Turner & Townsend,” a program manager majority owned by CBRE that does a “tremendous amount of corporate” real estate work.
“With Turner & Townsend as part of our business, we’re doing big, complicated projects for corporates that we weren’t able to do before,” he added. CBRE declined to disclose project examples due to confidentiality agreements with clients. Sulentic added CBRE sees opportunities with Turner & Townsend doing more big infrastructure and energy projects in the United States.
CBRE drove its highest U.S. office leasing revenue for any second quarter, Chief Financial Officer Emma Giamartino told investors, driven by large deals in gateway markets.
In the United States, overall leasing grew 24%, led by office leasing at 29% and industrial leasing at 17%, she said.
"We've seen notable strengths across the legal and financial services sectors, as tenants are upgrading and expanding their space," Giamartino said.
Meanwhile, U.S. industrial leasing growth was led by third-party logistics providers and advanced manufacturing. Los Angeles, San Francisco, Washington, D.C., and Chicago were CBRE's top markets for industrial leases.
Leasing overseas grew notably in France, Germany and Spain, with leasing revenue in its European business rising 27%, while its Asia division saw a 19% bump in the quarter.
Globally, property sales revenue increased 20%, with the United States leading the charge across most property types, up 24%. The firm's European and Asian business divisions saw more modest growth.
Data center boom
CBRE’s building operations and experience division revenue grew 15%, led by a 68% jump in critical infrastructure services revenue, aided in part by Pearce Services, a provider of advanced technical support related to digital and power systems. CBRE bought Pearce Services in November for $1.2 billion.
“Our data center solutions business grew nearly 30%, benefiting from both significant hyperscaler demand and the depth and breadth of our capabilities,” Giamartino said.
CBRE has about 30 data center land sites of varying size in its land bank in the United States, executives said, adding it’s difficult to project when the firm can monetize them. Sulentic told investors that CBRE’s status as the world’s biggest commercial real estate services firm helps them gain new business among its hyperscale clients -- companies that use the most computing power and data storage.
“We do a lot of work for the world’s biggest companies and what we’re seeing day to day is there’s a skewing of that opportunity toward anything related to data centers and infrastructure,” Sulentic said, adding this can be hyperscalers or military-related companies.
He added that “those types of companies are offering up bigger opportunities than we’ve ever seen from them before. I don’t think I ever remember being involved in any area of our business where the revenue synergies were as great as they are in the data center business.”
However, even with data center challenges, there's "enormous demand and, even in light of those challenges, there’ll be considerable growth in the number of data centers and the size of data centers out there. We’re convinced of that. They’ll move to areas that allow them to get that done, and supply chains will adjust."
Over half of CBRE's data center revenue came from downstream work, roles needed after the centers are built such as managing and refitting the facilities, Sulentic said.
“We expect a very substantial sustained opportunity in the creation of data centers and even bigger long-term opportunity in the downstream work we do in data centers,” he added.
This story has been updated.