Cushman & Wakefield Limited (CWK) Earnings Call Transcript & Summary

Welcome to the Cushman & Wakefield's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Megan McGrath, Head of Investor Relations for Cushman & Wakefield. Ms. McGrath, you may begin the conference.

Thank you, and welcome to Cushman & Wakefield's Fourth Quarter 2022 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results for the period. This release, along with today's presentation, can be found on our Investor Relations website at ir.cushmanwakefield.com. Please turn to the page in our presentation labeled Cautionary Note on Forward-Looking Statements. Today's presentation contains forward-looking statements, based on our current forecasts and estimates of future events. These statements should be considered estimates only, and actual results may differ materially. During today's call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Reconciliations of GAAP to non-GAAP financial measures, definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and the appendix of today's presentation. Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2021 and in local currency, unless otherwise stated. For those of you following along with our presentation, we will begin on Page 4. And with that, I'd like to turn the call over to our CEO, John Forrester.

Thanks, Megan, and thank you to everyone joining our call. With me today is Neil Johnston, our CFO, and I have also invited Kevin Thorpe, our Chief Economist, to participate in the Q&A portion of the call to provide insight into our macroeconomic and market outlook. I'm proud of the results we have reported today, and I want to thank our team of exceptional professionals around the world. 2022 was a year like no other, and our team's ability to provide value to our clients in such volatile times is a testament to their hard work and the strategic groundwork that we as a company have been laying to enhance the strength and resiliency of our platform. 2022 was, of course, a year of 2 contrasting halves, with record results in the first half, offset somewhat by a second half that presented considerable macroeconomic headwinds. Despite the uncertain environment, Cushman & Wakefield reported strong results for the full year. Fee revenue of $7.2 billion and adjusted EBITDA of $899 million, growing 8% and 4%, respectively, were record company highs. Our 2022 results reflect the consistent execution of our multiyear strategy of building a fully-diversified global platform with a strong mix of highly recurring revenues. During the year, we continued to invest in long-term strategic growth areas, completing and integrating 6 acquisitions and further enhancing our position in growing asset classes such as life sciences and logistics. A few notable highlights of the year include an exceptional growth year for our occupier outsourcing business as we won and onboarded several of the largest available mandates. Our new business pipelines continue to grow strongly, with a mix of competitive second- and third-generation contracts and first-generation outsourcing, as corporates look to reduce costs. We had a successful year with our Greystone joint venture, and we remain excited about this partnership and continue to build out our full-service multifamily platform to drive market share gains in what is now the largest asset class for institutional investors in the United States. Additionally, we achieved double-digit growth in industrial leasing, while life sciences leasing grew by more than 60% versus the prior year, both reflecting our prior investments in these key growth areas. And lastly, despite the challenging environment in capital markets in the second half of the year, our overall market share for investment sales volumes in the U.S. increased 11 basis points in 2022, according to Real Capital Analytics. We finished third overall in total investment sales volumes while moving up to second and fourth in the industrial and multifamily asset classes, respectively. Our ability to gain market share even during challenging times demonstrates the quality of our teams and the impact of our strategic investments in the highest growth sectors in commercial real estate. These notable highlights were accomplished while further strengthening our balance sheet, putting us in an excellent position to take advantage of future growth opportunities. Our industry remains relatively fragmented in many markets, and times of volatility provide the opportunity to add depth to our global capabilities at attractive returns. Now I want to turn to 2023 and how the year might progress. We enter the year having experienced a significant downward shift in transactional momentum experienced in our fourth quarter results. Capital sat on the sidelines during the fourth quarter and is likely to remain there in early 2023. In Leasing, the shifting macroeconomic resulted in lower overall activity across most asset classes. However, long-term commercial real estate fundamentals remain strongly intact. There is significant dry powder available for deployment, but market participants crave greater clarity on interest rate trajectory in order to facilitate price discovery. We believe that economic green shoots, such as continued moderation in inflationary data and a clearer path for those critical interest rate policies, could appear relatively soon. Whilst the leasing market is likely to remain under pressure in the short term, we anticipate demand for higher-quality assets and locations to remain strong. In addition, we expect that over the next few years, an elevated level of expiring leases, roughly 300 million square feet per annum, on par with levels observed in 2021 and 2022, will keep the office leasing market relatively active. We also continue to feel confident in the scale of opportunity and the capabilities we have built in other fast-growing asset classes. We expect continued positive absorption trends in industrial leasing in 2023, with employment in the industrial labor market over 1.3 million jobs higher than pre-pandemic levels. And with e-commerce, third-party logistics and global reshoring trends continuing to grow. Our near-term transactional market caution does not apply to our large recurring revenue service lines. In the fourth quarter of 2022, our PM and FM businesses grew strongly, up 8% versus prior year, with solid growth across all segments of that business. In particular, our project management business had a strong year as we helped our clients reconfigure and redesign space, most notably in life sciences. We expect the positive momentum in our recurring revenue business lines to continue in 2023, demonstrating the power of our long-term diversification strategy. Looking across our large global platform, I can give some additional color on where we believe market tailwinds will occur in 2023. We have a leading presence in Greater China. With COVID-related restrictions now eased after a substantial term of muted activity, we are expecting a solid recovery this year. In addition, we expect the fast-growing Indian economy continue to expand as the property market matures. In Europe, challenges such as the Russia-Ukraine conflict resulted in difficult operating environment in 2022, especially towards the end of the year. Looking forward, we are seeing somewhat better inflation data points in Europe, and we believe that ESG drivers and a flight to quality could provide some resilience in the leasing markets as the year progresses. We have a world-class team in Europe that was able to successfully navigate 2022's challenges, and we are confident in their ability to continue to execute. We have high conviction on our long-term strategy and in the results of our investment in targeted growth areas, designed to drive long-term shareholder value. Our clients come to us for our exceptional expertise, our unrivaled focus on meeting their needs and our commitment to creating value in every engagement, and they will continue to rely on us to navigate this complex landscape that we all face. In our day-to-day operations, everything we do is built around our 4 strategic pillars: client centricity, relentless operating excellence, being a leading people and talent platform, and increasingly leveraging our data with analytics that provide unique insight and value. We are focused on exciting growth sectors with a complete suite of services and solutions to both owner and occupier clients around the world. We're building market-leading platforms in these secular growth areas as we continue to transform our business by operating efficiently and at scale, all while maintaining a focus on our client-first culture and commitment to diversity, equity and inclusion. We have a well-balanced business model, and the foundational work we have put in place over the past several years positioned us for success in 2022. Given the current economic backdrop, we are being prudent in our investment and capital allocation decisions, prioritizing long-term growth areas, managing our cost base in order to drive further operating efficiencies, which Neil will touch on in more detail in a moment, and positioning the business to emerge out of the current environment, firing on all cylinders. We have an experienced management team that has led through previous economic cycles, and that knowledge base is invaluable. We also have exceptional leaders and employees around the world, [ proven ] in the execution of our business priorities. We have the platform, the people and the expertise to continue taking market share and delivering value to our clients and shareholders. And with that, I'd like to turn the call over to Neil to discuss in more detail our financial performance. Neil?

Thank you, John, and good afternoon, everyone. For the full year, we generated fee revenue of $7.2 billion, an increase of 8% over the prior year, and adjusted EBITDA of $899 million, an increase of 4% over the prior year. Contributions from PM/FM and leasing growth as well as our Greystone joint venture were largely offset by lower capital market activity COVID-related restrictions in China, FX headwinds and higher commission expense. Adjusted EBITDA margins were 12.4%, a decline of 46 basis points versus 2021, which was generally in line with our expectations and guidance. Adjusted earnings per share for the year was $2, a decrease of 2% versus prior year. Looking at our fee revenue by service line. For the full year, PM/FM revenues grew 12%, primarily driven by Project and Facilities Management activity. We were especially pleased with the performance of our PM/FM business and the strong growth in our recurring revenues. Leasing fee revenue grew 15% in 2022, driven by a steady recovery in the office sector throughout most of the year and continued solid performance in the industrial sector. Capital Markets decreased 10% versus a record setting 2021. Turning to the fourth quarter. Fee revenue of $1.9 billion declined 14% versus prior year. The decline in fee revenue reflects lower brokerage activity, which was most profound in Capital Markets as investors remained on the sidelines. Fourth quarter adjusted EBITDA of $220 million declined 35% versus a record prior-year comparison. The decline in adjusted EBITDA was principally driven by the lower brokerage activity and COVID-related restrictions in China, which continued to adversely impact our results in APAC. Adjusted earnings per share for the quarter was $0.46, a decrease of 51% versus prior year. Moving to our fee revenue by service line. For the fourth quarter, performance across our entire PM/FM service offering was strong, particularly in our Project and Facilities Management businesses, with PM/FM in total up 8%. Capital Markets fee revenue declined 52% in the fourth quarter, with all segments declining versus a record-setting fourth quarter of 2021. Leasing revenue decreased 10% versus the prior year. Despite continued labor market strength, many office occupiers tempered decision-making during the fourth quarter while waiting for increased macroeconomic clarity. In the industrial and logistics sector, while absorption was down sequentially, the fourth quarter still marked the ninth straight quarter in which absorption surpassed the 100 million square foot mark. Valuation and Other declined 10% in the fourth quarter as a result of lower activity in our Valuation business. Turning to our segment results for the quarter. Americas fee revenue declined 18% year-over-year, with strong 6% growth in PM/FM more than offset by a 9% decline in Leasing and a 54% in Capital Markets. Adjusted EBITDA of $163 million decreased $88 million versus prior year, principally driven by the lower brokerage activity and partially offset by the positive contribution from our Greystone joint venture. In EMEA, fee revenue declined 11%, with PM/FM up 6%, Leasing down 11% and Capital Markets declining 41% versus a challenging prior-year comparison. Adjusted EBITDA of $29 million declined $26 million versus prior year, primarily driven by lower brokerage activity. In Asia Pacific, fee revenue growth of 2% was driven by the performance of our PM/FM service line, which grew 19% for the quarter. Partially offsetting this growth were declines in Leasing and Capital Markets, which declined 16% and 38% versus prior year, respectively. The declines were most pronounced in China as a result of COVID-related restrictions. Adjusted EBITDA of $27 million was down $14 million versus the prior year, driven by the declines in China. Moving to our balance sheet. Our financial position remains strong. We ended 2022 with $1.7 billion of liquidity, consisting of cash on hand of $645 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver, and net leverage was 2.9x at the end of the fourth quarter. Subsequent to the fourth quarter, we amended a portion of our senior secured term loan, extending the maturity date of $1 billion of the $2.6 billion outstanding to January 31, 2030. Our goals with this refinancing were to extend the maturity of our debt profile while also increasing the flexibility of our balance sheet by spacing out our maturities. We achieved both of these goals with outstanding execution on the deal. Our new maturity profile, coupled with our ample liquidity, puts us in an excellent position to pursue our long-term strategic priorities. Now moving to 2023. Given the current macroeconomic uncertainty, combined with the typical second half seasonality in our business, it is unrealistic for us to provide specific guidance at this time for the full year. However, I would like to provide some high-level insight as to how we're thinking about the business this year and what we are planning for as a result. Our recurring revenue PM/FM business is well positioned in the current environment to provide stability, and we expect it to generate low to mid-single-digit revenue growth in 2023. In brokerage, we anticipate the environment to remain challenging in the first half of 2023, with brokerage declines similar to Q4 of 2022. We do anticipate sequential improvement in the year-over-year brokerage trends throughout the course of the year, with the timing and strength of these improvements depending on many factors, including the path of price discovery in Capital Markets and more clarity on occupier decision-making. In addition, we expect that Leasing declines will be less pronounced than Capital Market declines. We will provide an update on our expectations as clarity in the market improves. Looking specifically at costs. As a reminder, on average, about 45% of our costs are variable, 40% are semi-variable and roughly 15% of fixed. Cost profiles vary by service line, but generally, we would expect decremental margins of roughly 40% to 50% in brokerage and incremental margins of 10% to 20% in PM/FM. As a result, the anticipated declines in brokerage during 2023 will result in overall margin pressure, which will reverse as brokerage recovers. As stated on our third quarter earnings call, in the back half of 2022, our teams identified specific actions to drive further operating efficiencies. We have already begun executing on these initiatives and anticipate achieving $90 million of cost savings in 2023. We expect these cost savings to more than offset any inflation in our semi-variable and fixed cost base. However, they will not completely offset the temporary margin contraction from the anticipated brokerage revenue decline as we believe it's important to maintain a strong position to grow share in the recovery. Given these expectations for the year, particularly as it relates to brokerage revenue, we expect that the phasing of our EBITDA contribution will be more back-end weighted to second half of the year, similar to what we experienced in 2021. In summary, I'd like to leave you with the following. Although we are currently experiencing short-term macroeconomic headwinds, long-term commercial real estate fundamentals remain strong. We have developed a rigorous approach to scenario planning and cost management over the years, and that focus and discipline continues in 2023. And finally, through active balance sheet management, targeted cost actions and strategic investments, we are in a position of strength, both for the anticipated recovery in brokerage and the continued growth in our recurring revenue businesses. With that, I'll turn the call back to the operator for the Q&A portion of today's call.

[Operator Instructions] Our first question comes from Anthony Paolone with JPMorgan.

I guess, first question, I just want to understand the comments in the slide deck around brokerage declines in the first half. And so if I think about the fourth quarter, like Capital Markets was down, I think, 53%. So should we take that as your view of what the first half of '23 will also be down in terms of order of magnitude? And I guess, same for lease...

Yes, sure. Tony, at this point, very difficult to project what's going to happen, even through the second quarter. But the point is we have planned and done scenario planning and looked at the year. We believe that, that sort of range for Capital Markets and that sort of range for Leasing is what we're planning for the first half. We are expecting sequential improvements each quarter, and so we expect that to improve, especially in the back half of the year.

Okay. And then for PM/FM, you did 8% growth, I think, in the fourth quarter, and you said low mid-single digits. Is that -- I know you have a large janitorial business, and so I was wondering if you could just break out sort of the growth embedded within that number. Is that -- is janitorial kind of in that same ballpark, or is that bringing it down a bit? Just wondering, how the core trends in that are working?

Tony, this is John. Yes, I'd look at the PM/FM as a whole. There's no real specific difference in the short-term dynamics between each of the sector service lines that make up that bucket of revenue. What we've seen is a very strong 2022. As I said in the prepared remarks, we had a really outstanding year in some of the very large contracts that we brought on. So therefore, I guide that you think about that business more of over a period of 2 to 3 years, driving that type of average growth, as opposed to, say, last year being a blowout year, followed by a more muted one. That's not how we see that business because contracts come on, they get integrated and then we go through the sales cycle again. But ultimately, I can point to a pipeline, particularly in our outsourcing business, which is growing very, very substantially year-over-year, and it makes us feel very good about the continued strong growth.

Okay. Can I ask one last one, since I think we have Kevin on? Just any view on where office market vacancy rates should ultimately settle out, once leases are cycled through and sort of the new world for space use is kind of dialed into people's footprints?

Yes. Sure. I appreciate the question. Just, I guess, a couple of points, and then I'll lay out the forecast. So I think just in thinking about the office sector, the outlook, I think it's really important to recognize that office demand last year was beginning to stabilize. We just sort of focused on the U.S. U.S. net absorption started to [ float ] with positive territory in the first half of last year, and in fact, 1/3 of the markets that we track were starting to absorb space again. Even with remote work, we were seeing all these green shoots, stronger demand for space. Return to office was trending higher, not what it was pre-pandemic, but trending higher, lease duration starting to normalize back to pre-pandemic levels. So from my perspective, these green shoots were kind of confirming our thesis that you'd actually sort of job -- the relationship between job growth and demand for space would reestablish itself. It started to do that, but now when we look into this year, right, the baseline, we're anticipating a mild recession risk or high, potentially mild recession. And typically, during periods like this, businesses do look for ways to cut cost and get more efficient with headcount and space. That's just sort of the recession playbook. Will that actually happen in this cycle? Certainly seeing it in spots, the tech sector, for example. But will that be a trend across the board? I think that's really hard to say. I think it's really worth noting that businesses have already gotten a lot more efficient with their space since the pandemic started. And if the mild recession is truly mild, that may not translate into significant job losses. And I think we also mentioned in the prepared remarks that demand for space is somewhat inelastic, right? So businesses need space to operate their business, and there's always a regular churn in leasing. And what we're tracking is a significant number of leases expiring over the next couple of years. So baseline outlook for office vacancy is 18.2% in the U.S. We have that trending to 20% through the recession, and then stabilizing and trending lower from that point forward.

Our next question comes from Chandni Luthra with Goldman Sachs.

This is Chandni Luthra from Goldman. I'd like to talk about the $90 million cost savings that you talked about briefly. What are the areas that you're targeting? What are the temporary actions in there? And what are those segments that's going to be most impacted with these actions?

Sure, Chandni. The majority of those costs are permanent costs, and they're focused around efficiency. So rather than just going in and either just doing temporary cuts or randomly taking up cost, we've been very, very focused to make sure that the business stays strong and we continue to drive our efficiency. Remember, we -- this efficiency journey has been a 3-year journey, and so this is just a continuation of that. And it really spans all costs of all geographies.

One thing I'd add, Chandni, is that intuitively, of course, you would be focused on taking cost out of that part of your business, which is going through a low volume period. Well, interestingly, of course, the brokerage business is actually a very light cost business. . And if you were going to drive very substantial cost savings to try to cover all the decrement of revenue falls in transactions, you'd actually have to cut hard into the infrastructure that's driving the growth on the services side. That will be the case for all organizations like us with a diversified model. So the key for us is to ensure that we focus on stripping out, say, inflation that's coming through from our own service suppliers and in the work that we do, and allow ourselves to maintain a world-class workforce so that we come out, as I said in the prepared remarks, firing on all cylinders because we do believe the fundamentals are absolutely in place for a strong recovery at some point.

Got it. And as a follow-up, I'd like to talk about leverage a little bit. How do you think about your leverage target in 2023? Where do you think leverage is going to track? Is there going to be some cadence that we should think about? And then as a follow-up, within that, you obviously recently amended a portion of your term loan. Could you discuss how we should think about your interest expense in 2023?

Sure. So Chandni, let me unpack that a little bit. If we look just at leverage, our long-term target remains intact. Our leverage over the long run is to be in that 2x to 3x range. We ended the year at 2.9x, so well within that range. Going in '23 with an expected decline in EBITDA, you will see that leverage temporarily moved up, but I think what's much more important is liquidity. We have over $1.7 billion of liquidity, so we feel like we're in a very strong position from both a leverage and liquidity standpoint. In terms of the -- extending the Term Loan B, we just saw a unique opportunity in the market as we came into the year. We've got a -- we had a $2.6 billion Term Loan B that's expiring in '25, and so we have time. But coming into the year, we saw spreads move in, and we saw a lot of demand for our paper. And so we had a very successful transaction, where we just pushed out $1 billion to 2030. The goal there was really just to space out our maturities and give us a very flexible balance sheet, really, to strengthen our balance sheet overall. In terms of interest rate cost, the increase from that was very small, 50 basis points, so less than $5 million. So that's very cost effective in terms of the transaction itself. However, we will see interest go up slightly in 2023 just because of [ SOFR ] increasing. But I would remind you that about 80% of our debt on a net basis is fixed. So that does provide -- that does reduce the impact of floating rate debt moving.

Our next question comes from Stephen Sheldon with William Blair.

This is Pat McIlwee on for Stephen. So as a follow-up to Anthony's question and John's response to it, it sounds like everything is going well in the PM/FM business. . And I understand it's a pretty unique operating environment, but given the guidance, is there some conservatism baked in there? Or what factors were you considering when building that after what was a pretty strong quarter and year for that business here?

It's actually something that we think about a lot. We are, by nature, in a conservative guidance, particularly in an environment like this. And a lot of our -- the growth that comes through in the PM/FM business is based on wins and contract changes in a given year. So sitting here in January, yes, we've got a very strong pipeline. We feel good about our ability to retain and win business. But ultimately, the success rate within that retention and renewal will make the difference of 100 to 200 basis points here or there. So we -- the guidance we've given, we feel very positive that we will achieve more than that will be because we do continue to take market share, but it's based on the availability of contracts at a given time and when they are onboarded. Just to give you an idea, in particularly the global outsourcing markets, the pursuit of a contract in a bidout or renewal can be as long as 18 months. So really, we are bidding on contracts today that won't show up as revenue until potentially at the back end of 2024. Others are on a much shorter timeline and could how up as soon as Q2, so that's just really where we give caution to that guidance number at the beginning of the financial year.

Okay. And at a higher level, as the trends in returning to office seem to kind of plateau a bit and the future work looks a bit more hybrid in nature, can you just talk about how that impacts your longer-term outlook for both leasing and the PM/FM business? And also, is there anything you can share on your exposure to office properties in one or both of those business lines?

Happy to. I'll talk about the office sectors with regards to how they show up within the organization and I'll pass over to Kevin, who -- as they have more ready data on the market as a whole. What we've seen, and I think this is typical of our peers, is the proportion of revenues derived from office activity right across the platform from transactions also within our PM/FM business, pre-pandemic compared to now, have been falling primarily as the size of the other asset classics has been growing. So actually, our revenues are very strong, still, in office. But as a proportion, they've gone from a small majority, over 50%, to just below 50% over the last 12 months or so. And we expect that to continue to fall as portion, even though we may well see growth in our office-derived revenues over time. We've been successful in taking market share. We see opportunities to build and grow teams still in offices in markets, where we are underrepresented. We have very high-quality teams, who are maturing and growing our ability to penetrate and win. So I would just guide that the office will remain fundamentally a very large part of our portfolio, but ultimately become less the anchor over time, particularly as multifamily and industrial continue on their secular long-term growth. Kevin, have you got any observations about actually the return to the office and the utilization?

Yes. So if you kind of go back to January of last year, this is during the Omicron surge, roughly 18% of workers were at the office at any given day. I think I mentioned earlier, that's now hovering closer to 50%. And if you do just back-of-the-envelope math on that, that indicates that there's roughly 9 million more people back at the office in the U.S. on any given day versus the same time a year ago. The pre-pandemic norm was closer to 70%. I'm not sure we'll ever get back to that point again. But with a recession potentially imminent, with the pandemic seemingly staying, we are seeing more companies assert their desire to have people back in the office more regularly. I do think that's important to the office recovery. And I do expect the office attendance, the in-person attendance, to continue to drift higher. And I would just add, even if we just say 50% is the new norm, [ suppose ] we assume that, businesses still need to accommodate for when there's going to be more than 50% in the office on any given day. And I think, in particular, the peak space needs for the days when you have the maximum number of employees in the office for teamwork and communication and so forth, that's ultimately going to drive demands for office space. And so we do have occupier state, the amount of occupied space continuing to grow through the end of the decade, right? It's this point -- which means just the office leasing pie also grows. It's just going to be more concentrated in the higher-quality segment of the market. But hopefully, that answers your question.

Our next question comes from Michael Griffin with Citi.

Maybe switching to more of those non-traditional real estate asset class you got exposed to, I think, of lab office, I think of the growth in logistics. I know you've talked favorably about data centers in the past. I mean, how much across your existing business segments do you expect this to grow as sort of a percentage of the pie? And then any commentary about positive secular trends you're expecting in the near term would be helpful.

Okay. I'm probably going to toggle this with Kevin again, he will have the data to hand more specifically. I'd make a couple of comments. I think -- and I'll bring in potentially the level of activity we're seeing from sectors in office. I think there's a lot been written and said in the last few weeks about the utilization of office, particularly by the tech sector, and the layoffs that we're seeing there and what's the impact of that on the office market. What I would say there is throughout, I'm afraid, what has been a very long career, a lot of working in offices. I've seen -- there's always been a particularly driven sector engine that has driven the market. It was just before the Millennium 2000 financial services, particularly investment banking was driving a very large proportion of high-quality office uptake globally. Professional services through and just after the GST became the big driving engine of office growth. And then we've seen technology, of course, over the last 10 years being that driver. There's always been a growth engine, and what we're seeing now actually is the diversification of use being the growth engine. So ultimately, a lot of the absorption that we're seeing in the alternative classes like data centers, last-mile logistics, life sciences are -- is accommodation, which will ultimately have been offices in prior cycles. And they are strong, faster growth markets. If you can take our old revenues from life sciences this year with a 60% increase in revenue year-over-year, you got an idea of the rate of growth in the markets. They're going to be taking the place as the engine of growth of, say, technology. So overall, we still feel relatively positive about the office sector as a whole because there, as ever, has always been some drivers of demand growing and some becoming more muted within that. But I'll pass over to Kevin now, who's probably got some far more accurate data.

Yes, sure. So a couple of data points that I think might be helpful. So first, just on high-quality office. So since the pandemic started in the U.S., over 100 million square feet of space has been absorbed in the highest quality segment, newly-built sustainability features, prime location, positive absorption in that space. And what's I think really interesting is there's -- in terms of the office stock in the United States, less than 10% of the inventory actually qualifies as the highest-quality product. So if you just think about that, what a massive opportunity to reposition office assets, right, sort of make -- move them up the relevancy curve. So that's office. Industrial logistics, I would say there's just -- there's no evidence so far that there's been any slowdown in demand trends, and I would say that globally. So in the U.S., as Neil mentioned in his remarks, very strong absorption in Q4, very low vacancy. In EMEA, same, very low vacancy rate, 3.5%. In Canada, actually, was a record quarter of absorption. Vacancy under 2% in Canada. I do think we have to be mindful of the recession and keep a close eye on the demand drivers, e-commerce, the state of the consumer and so forth, but the long term tailwinds are very strong for industrial logistics. Over time, e-commerce will continue to grow in the U.S. and globally, if more people shop online. Demand for last-mile space will remain fierce, given the sort of the push to get products to the people as quickly as possible, so the consumer spending pie will continue to grow. So there's a lot of reasons to be bullish longer term on industrial logistics, and certainly our investor clients are. Retail has been a surprise. There's still very strong pent-up demand for experience. Even as we go into maybe an economic downturn, there's very strong fundamentals in retail vacancy. It's the lowest it's been in 10, 15 years. There is rent growth in retail. Multifamily is another darling for investors sort of regardless of cyclicality. People need a place to live, and household formation is only going to continue to grow. Multifamily, by the way, is the #1 asset class now in the United States and growing very quickly globally. And the rest, data centers, clearly very cyclical strong, demand driver's up for that sector, when you think about data consumption and how that's growing. So yes, very confident in the long-term tailwinds and the fundamentals in [ profits ] overall.

And Kevin, on that, let's call it, the 10% highest quality of those trophy buildings, Class A kind of stock. You mentioned the vacancy expectations, I think, 18% for this year, maybe going to 20% next year and then declining for the overall market. Do you have a sense of what that is for that highest end of the market?

About half. So if you look at -- if you isolate the newly-built -- prime -- newly-built prime [ standard ] features, all the key features of what -- how we define prime office, vacancy in that product is somewhere between 10% and 12%, and it's lower than that in some of the key cities, lower than that in Manhattan, for example, and other markets.

Got you. And then just maybe one last one, sort of on your general macroeconomic outlook for '23. I think you might have mentioned in prepared remarks, anticipation around a recession at some point this year, that's probably no surprise. But just want to get your thoughts, maybe Kevin, this one is best here for you, sort of around where you see inflation maybe getting toward the back half of this year, expectations around rates peaking at some point. And any additional commentary there would be helpful.

Yes, sure. So I would just have to preface and I think as any forecaster showed right now, the situation is very fluid. Lots of unknowns. We're forecasting a very difficult time and heightened uncertainty. . Our baseline does call for a mild recession, and the indicators I'm studying still very much point to that. The yield curve remains firmly inverted. Confidence is down, stubbornly high inflation, which you mentioned and other indicators, they are just pointing to that. So in terms of CPI inflation, there's good news there, Both in the United States and Europe, inflation appears to have peaked. It was June of last year in the U.S. at around -- I think it was 9% on the nose. And that has now trended lower to -- 6.3% was the latest read on headline inflation year-over-year in January. So that is heading in the right direction, but we still have the wage pressures there. And so I do think it's going to be very difficult for inflation to get back to target until we do see the labor markets cool off, and that is going to take time. So we do have CPI inflation trending lower towards the end of this year, finishing in the U.S., and that's 3.5% to 4% range. And what that means for the 10-year treasury yield as we model this is we have it hovering in the U.S. in the 3.5% to 4.5% range for the next 12 months, and then we have it settling in at 3.5% beyond that. Our expectation is that growth will resume in 2024, that the recession will be over in Q4 of this year and would point to -- and pretty good confidence in that because of the strong underlying fundamentals going into this, some of the strongest fundamentals I've ever seen, as we enter into a potential recession. All the things are commonly cited, household balance sheets are in excellent shape, strong excess savings. So I do think once we get past the inflation problem, the Fed will then pivot to lowering rates, I think, in early 2024, and that's when we should see the economy start to rebound.

Our next question comes from Doug Harter with Credit Suisse.

It's Will on for Doug tonight. We were just curious, just if you guys have had any early conversations, there are signs of early conversations with buyers or sellers in the market that give you any real sort of confidence of how the markets might perform in the coming year?

Well, is that question aimed at the Capital Markets side?

Yes.

Okay. I think what we've seen so far this year across all markets, well, all sectors and all geographies from Capital Markets is actually a remarkable level of positivity from investors. There is a very significant amount of dry powder. It's been mentioned many times on these calls and in our peers. But there seems to be a very clear view that as the fundamentals become transparent, that there will be high levels of activity in both sales and acquisitions. So the fundamental of global capital markets remaining a very large opportunity for us remains extremely strong. It's really just a matter of when. At which point, whether that is the back half of this year, potentially late -- even later, depending on the outcomes that Kevin mentioned. But ultimately, what we're seeing on sort of a client-by-client conversation basis, might have been around many of the largest investors in the world in the last couple of months, is that they remain ready to deploy and deploy in a very large scale.

Our next question comes from Ronald Kamdem with Morgan Stanley.

Just two quick ones. So just trying to connect some dots here. So looking at the guidance for PM and FM, the revenue is expected in the low to mid-single digits. But I think I also heard your earlier comments that the incremental margins for PM and FM would be decremental, and I think that's what I heard. So I guess my question is, if I'm just thinking about that PM/FM adjusted EBITDA number, is that -- are we supposed to see that as sort of a flattish or maybe even negative? Or without sort of giving guidance, obviously, just how should we think about how that flows through?

Yes. No, just to be very clear, we do not see decrementals in -- we were talking about incrementals on the services side. So the contribution margin as we grow our services business is in the 10% to 20% range. . We would just be providing that as a contrast to the decrementals we see as brokerage declines and just giving buttons on the expected mix change in revenue, especially as we go through the first half of the year. So to be very clear, we do expect growth in EBITDA in the services business.

Got it. So for the PM and FM, basically sort of similar growth on the EBITDA line as the revenue line. Is that sort of -- is that fair?

Yes. That's fair.

Excellent. And then my follow-up question is just -- I guess, my second question. Just tying this to sort of cash flow. Maybe can you remind us in terms of the conversion rate from adjusted EBITDA to sort of a free cash flow or operating cash flow number or whatever you prefer, what that would've been historically? And then how does that -- how does '23 impact, like how should we think about the capture rate changing in '23, going forward?

Sure. Yes. As we've said before, our long-term free cash flow conversion rate -- and when I say free cash flow conversion, I'm referring to conversion from adjusted EBITDA, so it's not from earnings from EBITDA. Our net conversion rate, our target is 30% to 40%. As we said, as we look at cash flow, given the changes that we see during the year, especially over the last 2 years where we saw very -- strength in the first half, weakness, weakness, strength, one really has to look over a cycle. So as we give that guidance 30% to 40% as a mid to long range guide, that is over the cycle, so it's over a multiple year period. If we look back historically over the last 2 years, so we look at '21 and '22, as you look at that free cash flow conversion, it was slightly below 30%, around 28%, but right in line with the guidance that we gave earlier last year. And as we look then to '23, we'd expect that conversion to be lower, given the fact that we expect to see weaker brokerage of high margin in the first half of the year, and then we will [ grow ] into those ranges over the cycle.

This concludes our question-and-answer session. I would like to turn the conference back over to John Forrester for any closing remarks.

Thanks to everybody for joining our call today to hear our 2022 full-year results. As we said, it was a strong year despite the challenges, and we believe 2023 is going to be another challenging year, but one which we are very well positioned for, and whether long-term fundamentals of our industry and our position within that industry remain strong. As a company, we're energized by the opportunity that volatility in complex markets provide in the macro environment. We always end up taking market share and coming out stronger in a period like this. So the benefit of the -- of scale and a diversified platform makes us feel very good about the opportunity to continue to grow the organization, lean into our strategy and drive outsized returns. So thank you all for joining, and speak to you next time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.