CBRE Group, Inc. (CBRE) Earnings Call Transcript & Summary

Good morning, everyone. I'm Chandni Luthra from Goldman Sachs, and I have the pleasure both of introducing the President and CEO of CBRE, Bob Sulentic, and of moderating this fireside chat today, this in-person fireside chat, by the way. Bob, thank you for joining us. We are very happy to have you in person at this conference.

Happy to be here, Chandni. Thank you.

I have some prepared remarks with me. But for our audience, if you have any questions, please feel free to raise your hand for those joining us virtually via the webcast, I have this iPad here, please send in your questions, and I'll ask them on your behalf. So to begin, Bob, would you take a few minutes to set the stage for us, perhaps introduce CBRE, not that it needs an introduction. But please talk about key strategic areas of focus, what makes you unique amongst other commercial real estate service funds and then we can kind of dive in.

Okay, Chandni. First of all, CBRE is the world's largest commercial real estate services and investment firm. We have about 100,000 people spread across 100 countries. We do almost everything you can do in commercial real estate. So we do management of all types of buildings. We manage about 7 billion square feet of space around the world. Every type of space, you can imagine, office space, lab space, industrial space, et cetera. We do all types of brokerage. So we lease buildings on behalf of landlords and tenants. We sell buildings on behalf of owners and investors. We broker equity and debt to finance buildings. We're the largest commercial developer in the U.S. We have one of the largest real estate investment management businesses in the world with about $130 billion of assets under management. So we're a large company, and we like to talk about our business as being diversified across 4 dimensions. So number one, product type. And by product type, we mean the type of building. So warehouses, office buildings, retail buildings, life sciences buildings. Secondly, the type of services. So management services, brokerage services, development services, investment services, project management. We're a big project manager. We just bought a big interest in a very important project management company that's involved in green energy and infrastructure. Number three, we're diversified across client types. So almost any type of company you can imagine whether it's a technology company, a financial services company like Goldman Sachs, a retail company. Anything that you could almost think of, we serve 90%, for instance, of the Fortune 100 companies and most of them around the world. And then finally, by geography. We operate in all regions of the world in 100 countries, as I said. So that defines our business. And it's particularly notable that, that diversification across those 4 dimensions really has made us quite a resilient company over the last several years and including through this COVID era.

So let's dive into the subject of return to office, which has kind of been this big theme for 2 years now almost. So CBRE has said in the past that office will never quite be what it was prior to the pandemic in that you see post-pandemic return at about 85%. How should we think about any updates to that view? I mean, we were all looking forward to January 2022 to this big catalyst. And now it just -- there's so much uncertainty in the [ year ]. So how do you think about impact on that dynamic from all the lockdown related news from across the pond? And then what we are seeing with the new variant?

Well, there's a lot of ways that you could describe what's going on with the return to the office circumstance. And there are some things we're pretty confident in. But we're also pretty confident that overall, there's a lot of uncertainty, and they will continue to be until the whole situation surrounding COVID [indiscernible]. But here's what we're pretty confident in. Companies are going to want more flexibility. They're going to want flexibility because they're uncertain about what the future is. They're going to want flexibility in terms of the way they use their space, the way they commit to their space, et cetera. Good buildings with good systems, high-quality buildings are going to be more in demand. Space is highly likely to be more oriented around common space rather than private offices and people are going to be more spread out than they were before. Flex space, which is independent of a company's own proprietary office space. So we made an investment in the company Industrious that type of Flex space. We're highly confident is going to be more in demand in the future -- partly for the -- the desire for flexibility that I already commented on. But as this thing [ unfolds ], there is a lot of uncertainty. We know there's going to be a lot of work for companies like ours around project management, repurposing space, upgrading buildings, tenants, occupiers are rethinking the office building. This -- by the way, this is certainly -- there's new elements because of COVID, but I think your opening comments when you started to ask this question, said that there's a new view of office space because of COVID. There's been a new view of office space perpetually for the last 20 years. If you look at what's happened, the amount of office space that companies have taken per person is downsized and downsized and downsized and space has been reimagined and it's created -- all of that activity has created opportunity for companies like ourselves. We think that's going to continue to be the case, but there is considerable uncertainty with elements that are likely.

So help us understand this future of workspace that you just described a little bit. I mean, are we looking at a hub-and-spoke model? Are we thinking about moving from high cost to low-cost centers? How should we think about the margin impact of all this and talk to us about your own Industrious initiative and sort of your own investment in this area?

People will be less densely packed into space. We're pretty confident of that. There will be more collaboration space. I think the notion of the hybrid use of space, people working, part-time from home and part-time from the office is going to be very real. But when they're in the office, they're going to be there to collaborate. Occupiers again take space under the assumption not that there's going to be a level amount of occupancy across the course of a week or a month or a year, but that there will be peak times when they want to bring all their people together. So space will be sized for that. We're already seeing it right here in this city that there is a big move toward the best buildings with the best systems for obvious reasons, HVAC systems to keep the air clean, elevator systems in common areas that allow circulation effectively through the space. We know that's going to happen. Through our close relationship with an investment in investors, we know that they're seeing record amounts of companies coming to them and taking space with them. So we're -- and we believe that's going to continue. Those are the things we're seeing that we're confident are going to play out over time. And -- but we're confident we're going to see things a year from now that are different than we're seeing today. And that's consistent with the theme that's been going on since the onset of COVID and before COVID.

And as we think about office demand in the U.S., traditionally as we've come to know it, and we think about recovery. Could you help us understand why has there been a divergence in the U.S. in terms of pace of recovery versus other regions? I mean, do you think this view of Flex is going to be across the globe? Or is it more pertinent to certain geographies across the world.

Well, Flex is for sure a global phenomenon. It's not concentrated here in the U.S. And in fact, the U.K. and Europe are ahead of the U.S. in that regard. But the reason that there's been a divergence in the return to the office, there was a divergence in terms of the exit from the office, too. There are places in Asia where like in Taiwan, the office never closed down. And -- but the reason is that is twofold. Number one, where the disease occurred and when it occurred and how severe it was in different parts of the world caused certain parts to go into an office recession first and then come back first, and that, of course, would be Asia. And then the way people live and the density of populations in different parts of the world. If you look at Asia where there's -- the situation at home, the size of apartments, the fact that you have multiple generations living in a unit together make it hard for professionals to work from home. So they're more inclined to go into the office. We've got a half -- we've got almost half of our 100,000 employees working from the office. So we know this from our own people. But we also know this from our clients. So you have those 2 circumstances, when the disease arrived, how severe it was, when it receded and the nature of the way people live in Europe and Asia tends to be more dense than it is here in the U.S. So the inclination to come back to the office is more -- more force behind it.

Switching gears to capital markets a little bit. What do you think has driven this extremely robust activity that we have seen this year? How much of this was, say, a catch-up from last year? Or as we think about 2022, given how much activity we've had, is there a pull-forward situation? I guess what we're just trying to understand is how to think about 2022 and what real estate asset classes are better positioned versus others next year?

Well, there was a little bit of a catch-up. We don't think there's much of a pull forward going on. We think next year is going to be better than this year in the capital markets as we define it, building sales and financing. There is a huge amount of institutional capital that wants to get into commercial real estate. It's for one thing, all just talk about inflation, real estate has forever been an inflation hedge and long-term holders of real estate benefit in an inflationary environment. So there'll be some of that. But there's an acknowledgment that the world is growing, and that people are going to be using some types of buildings. They're going to either be using warehouses or office buildings or retail centers or all of the above, and it will move from place to place, for sure. The move toward a multifamily institutional quality properties is a global phenomenon. And we consider multifamily be commercial real estate because it's financed by institutional investors. So multifamilies and big demand, industrial or logistics space is an unprecedented demand. We don't see anything that would cause that to change with the supply chain challenges that cause need for warehouses with the growth in e-commerce. We're seeing signs around the world. By the way, signs here in New York that retail is coming back relative to where it's been, we expect that. We expect the hotel business will come back. That will create opportunities. So we think that this very big year we've seen in capital markets in 2021 is a result of that, and we think next year, our research shows that next year will be bigger. Most of the investors we work with around the world intend to keep and put -- keep the capital they have in real estate in it and then put more in.

So with that context, how do you think about valuations and cap rates? I mean we've seen sort of compression across a lot of asset classes and yet some asset classes have not really participated. How should we think about the real estate market from evaluation standpoint next year, especially if we see Fed increasing rates in summer?

We-- well, it's interesting. Some of the asset classes that have been of concern over the last couple of years, hotels, retail centers, potentially office buildings, we think there's going to -- they're going to -- we're going to start to see them come back. And that's going to be -- that come back is going to be independent of interest rates. Industrial, as much as the values have gone up and the cap rates have gone down there. I mean there's no vacancy and there's not enough supply. So those dynamics would suggest that you're not going to see prices move in the other direction and you may continue to see prices move up. We're active in the life sciences space, and there is a huge demand for life sciences space. And there's -- right now, the amount of space that's available on the market is not adequate to serve the demand in several of the key markets around the U.S. So -- and then, of course, there's this thing about what about interest rates and cap rates. Well, if the first thing that you would observe if interest rates go up as it's a reflection of a strong economy and commercial real estate that performs well when the economy is good. That's just been the case forever. And as I already mentioned, many, many investors view it as a hedge against inflation. And so the huge base of long-term oriented institutional investors would likely view real estate as a good place to be.

And as we think about the level of compression that we've already seen with industrials vis-a-vis obviously [indiscernible] e-commerce and then multifamily, single-family, how do you think about 2022? Can there be further compression from these areas? You talked about no capacity out there. So then how do we sort of square this together?

We were wondering if there could be further compression this year in cap rates for industrial and there were. But look, industrial is expensive, and there's nothing about the dynamics in the marketplace that we see, the amount of space that's available, the amount of space that's coming online, the demand for space, the rents and the pressure on rents. There's nothing we see in any of that, that makes us think the value of industrial is going to do anything other than be stable or go up for the foreseeable future. And if you read most of the research around it, there's -- that's the general view on industrial. Multifamily, I think there's just a long-term secular thing going on around the world where -- and we voted with our pocketbook and bought a multifamily developer, institution multifamily developer in the U.K. a couple of years ago. I think there's a long-term trend and people, just like office occupants like the flexibility of Flex space, it appears that the population at large likes the ability to have the flexibility to rent rather than own. So there's even single-family homes that are moving in the direction of [ running ] as you know. And there's a big industry there, a lot of folks are successfully competing in. So we don't see reason to believe that values will go down in either multifamily or industrial/logistics and there could be further cap rate compression.

Moving to the subject of industry consolidation, I mean CRE service providers have sort of used this as -- it's been part of your DNA, the industry's DNA and the industry has come a long way over the last 2 decades or so. So as we think about the next few years, where is the opportunity? What are the lines, business lines, geography, whether there is more room for industry consolidation? And then what do you think is perhaps missing in your own portfolio? Or could you use kind of a further consolidation in your own portfolio to just strengthen your armor going into the next decade?

Yes. So when you look at the whole sector, there's reason to believe that consolidation will continue because the most successful companies in the sector have grown through M&A and have positioned themselves better to serve clients who increasingly are global and want services across product lines, service lines, geography over time. Those companies are the winners, we're the biggest of them. And because of that, the companies see the benefit in it. Their clients see the benefit in it and there's capital there to support consolidation. And so when that circumstance exists, there's likely to be consolidation. And smaller companies increasingly believe they need the platform associated -- that comes with an association with the bigger companies to be successful. Although there still will be [ boutiques ] of different kinds. For us, if you go back to those 4 dimensions of diversification I mentioned, which again our product type, service type, client type and geography, we've grown to the point where we're substantial across all those dimensions in a very significant way. When you're substantial across those dimensions, we're not just there. We're significant. So we're the market leader in most of what we do by scale and our client satisfaction scores across most of that. They're very good. And so when you're positioned like that, you can look to deploy capital to do M&A in places that you didn't think of -- others don't think of doing it, and you didn't think doing it before. And so I'm going to point to -- we've already talked about industrials, that we had decided that we'd like to Flex space sector a lot a few years ago, and we decided to start a business called Hana. And then COVID came, and we decided we're going to need to move faster. And so we made -- we bought 40% of Industrious. If you would have gone back 5 years or even 4 years, I don't think we would have even been thinking in that way. For years, we've identified project management as a place that we wanted to get bigger. And I'm going to say 5 years. If you went back 7 or 8 or 9 years when you and I were having this conversation, we wouldn't have been talking about buying project management companies that would have been brokerage property management valuations companies, maybe -- or almost certainly outsourcing, but not big project management investments. So we got to where we got to with the focus. We had started to get into infrastructure. We had started to get into green energy. We had started to do bigger and more complex projects for our corporate clients around the world, and we identified Turner & Townsend as the premier company globally in that space, including cost consultancy, they have substantial infrastructure business, substantial green energy, biggest -- big complex projects. And so we targeted them and we made a $1.3 billion investment in them. We now own 60% of that company. And we're already in the process of working with them to introduce them to this big base of corporates we have around the world that they can do things for that we couldn't do for. And in kind of reverse, they're introducing us to places in Europe and Asia that they were more substantial than we were. That's the kind of thing that we probably were not talking about or well positioned to do 5 or 6 years ago that now we are, and we think there'll be other parts of the business that we compete in more prominently than we did historically that we'll have the opportunity to do M&A in over the next few years.

So CBRE has grown its revenue mix from property, from facility management, investment management, loan servicing. What is the right mix of recurring versus nonrecurring businesses for you? And how do you think about the trade-off between margins versus consistent revenue growth.

Well, we don't have a specific place that we want to be on mix versus contractual -- in terms of contractual versus recurring but noncontractual revenues or potentially recurring but noncontractual revenues. We're about 50-50 now, and we have invested heavily to grow our contractual revenues. We like that. We'd rather have $1 of revenue recur and then not recur. But what we've decided is more important than that is that we grow our business in areas that are secularly favored for an extended period of time, okay? And so if you're in a business that's secularly favored for an extended period of years, whether it's recurring or not recurring, it's going to recur -- I mean, excuse me, whether it's contractual or not contractual, it's highly likely to recur. And so we've really focused on that. And we've already talked about multifamily. We have a huge multifamily business. Most of that is not contractual. Some of it has a contractual flavor to it, the loan servicing we do would, for instance, or the investment management work we do with multifamily. But we do all kinds of development, capital markets, both on the equity and debt side that's not contractual, but it recurs and grows because of the secularly favored nature of that business. We have a very substantial life sciences business. We have a life sciences sector in our corporate outsourcing business or our GWS business. We have a life sciences development business. We have a big life sciences brokerage business. Some of it's contractual, some of it's not, but it's going to be around in a big way for years to come, and we're going to invest more and more in that business, and we're well positioned to do it because of the footprint we have in life sciences already.

With a couple of minutes left, anybody in the audience has a question. We have mics at the back.

Bob, thanks a lot for doing this. Great see you again in person. I wanted to ask, you have a -- this is kind of dovetailing on the last question that was just asked. You guys have a little bit -- at least you've made explicit your view on how office grows publicly versus the other asset classes from a revenue perspective for you. You've indicated that publicly. And it sounds like you're -- can you just delve in a little bit deeper in terms of -- is that just a public view that, hey, our office exposure is going to grow a little bit slower, but we're still committed to both? Or are there things behind the scenes investments that you're making, emphasizing certain business lines? Do you just like more tangibly about how you're trying to reorient the business around that view? Because it seems like you're more explicit about it than maybe some of your peers, if that makes sense?

Well, we -- again, we look across those 4 dimensions of our business. I'll repeat it again, product type, service type, client type and geography type, and we have a big footprint across all 4 dimensions. So if we decide to invest into any particular product type or any particular service type or to serve a client type more intensely than we do now, we have resources in place, people in place, businesses in place that we can add resources to either capital or management attention to grow those areas of the business. And we do have a view in-house, a very well-developed view about the parts of our business that we should be deploying resources into to support and enhance our growth. And that changes over time. We've got plenty going on in the office [ space arena ], life sciences import office space. There's going to be a huge amount of project management work. There's nobody that's watching what's going on in office buildings that would not observe the need and opportunity for project management work as people reconfigure their office space, et cetera. Flex space, the Industrious investment, that's in the office space arena and we're big believers in that. We think that's one of the bigger opportunities out there. So we do have a view as to where across those 4 dimensions, our opportunity is there, and we're positioned with things we have in place now to add resources to drive growth in those areas.

You mentioned about the opportunity in Turner & Townsend, the synergies of being able to introduce each other to clients in the various markets. Could you just kind of step back and talk about the green energy vision, which I think was part of the reason for acquiring Turner & Townsend and you're talking to a lot of clients and where you see that space going over the next several years? How big is it and how you might best penetrate the opportunity.

Well, I've seen different -- I can't quote off the top of my head how big the green energy opportunity is, but it's like one of the stats, you could go to the moon and back 5,000 times. It's huge. And Turner & Townsend plays in it with big infrastructure projects, and they play in it with smaller green energy projects for corporate occupiers. And we think the growth potential there is being constrained by their capacity to serve it not by opportunities in the marketplace. Between us and Turner & Townsend, we -- I can tell you, sitting here today, we had the opportunity to grow our project management business and a lot of it is in that area, particularly for Turner & Townsend, that is in part limited by our ability to onboard and deploy project managers. There is a huge and rapidly growing opportunity in that area that they're well oriented too. But that's not the only thing we're doing in that space. We just -- it was just voted on yesterday that our SPAC -- the company that we targeted and our De-SPACing that will go public, Altus Power, is a green energy company all the way, a solar panel company for commercial buildings, and they're the leader in that sector. We think there's going to be great growth in that space. So it's a huge opportunity. Nobody quite knows how to quantify it because our company, like all other companies, has said we're going to get things done for ourselves and our clients, but we haven't yet figured out how -- getting it done is going to be so massive and so complex. We haven't all quite figured out how we're going to get it done, but we know there's going to be a lot of project management work associated with it. So we think that, that growth opportunity is -- I will tell you, our early read on it is it's going to grow better than we thought it was when we made the investment.

If I could get the last question, Bob. So obviously, you had record amount of cash flow generation over the past 12 months. You've announced the buyback. But as we think about the low levels of leverage that you are sitting on currently, how do you think about opportunities? And is there a case to be made to perhaps increase that leverage and get aggressive in all these sort of next leg of opportunity sets that you just talked about or others that we are not even envisioning right now?

Well, we think there's a lot of opportunities to invest. And just a reminder, here's the -- we invest in CapEx, which is technology and so forth. And that we're going to keep doing because we're a real estate company enabled by technology. We invest in our real estate investment business, which is development and investment management. And again, we're driving those investments into the areas of secular benefits. So life sciences, warehouses, multifamily et cetera. We've got big in process and pipelines of opportunity with all those product types. We invest in M&A, and that's what we've talked about that a lot today. And I made the comment about how we're spread across these 4 dimensions, and we see opportunities across those 4 dimensions. We've done -- we've committed -- we had a record trailing 12 months in terms of cash flow, $2 billion. We've invested -- or we've committed to $2 billion of investments in the trailing 12 months. So we're seeing a lot of opportunity. And then we're returning -- I think we've returned through buybacks something approaching $0.25 billion to our shareholders in the last year. So we're looking at all those areas. We're not going to over lever ourselves because we want to be in a position to do something big when something big comes along, and it will, given the way we're diversified across those 4 dimensions. And we're going to be really thoughtful about being in a position to take advantage of those kind of opportunities when they come.

That's all I had for me. Thank you so much for joining us, everyone. Now please help me thank Bob here for doing this in person.