Dive Brief:
- Cushman & Wakefield saw a 20% quarter-over-quarter decline in leasing revenue in the second quarter of 2023, driven primarily by lower office activity.
- The commercial real estate firm said leasing declines contributed to its net loss of $71.3 million during the six months ending June 30.
- Chief Financial Officer Neil Johnston expects the company to achieve $130 million in cost savings, mainly from infrastructure, overhead and general administrative expenses, which include software costs, severance and lease terminations.
Dive Insight:
Reduced office demand has slowed down leasing momentum. By the end of last year, about 42 transactions for offices 100,000 square feet and larger were signed, plummeting to their lowest level in eight quarters, according to JLL’s Q4’22 U.S. Office Outlook research report.
During Cushman & Wakefield’s first-quarter earnings call in May, former CEO John Forrester pointed to a growing caution about leasing decisions, with occupiers scouting for cost-cutting opportunities due to elevated odds of a recession and a continued preference for hybrid work strategies. “[W]e expect these headwinds to continue in the near-term,” he said.
During the second quarter, the rate of decline slowed 40%, but the U.S. lost an additional 12.5 million square feet of office occupancy, according to JLL’s Q2’2023 U.S Office Outlook report. What this means is that U.S. office vacancy rates could peak in the near term amid shrinking delivery volumes and accelerated demolitions and conversions of older buildings, the report said.
As of June, more than half of the commercial tenants surveyed by CBRE reported that they plan to cut office space at the end of their current lease.
Michelle MacKay, who joined Cushman & Wakefield as its new CEO in July, however, pointed to these factors as opportunities that could strengthen the company’s focus on Class A and Class B properties.
“What’s interesting … is that most of the conversation in commercial real estate today is around the office sector. So, the clients are engaging with us as advisors, and not just deal doers. And that’s the evolutionary path that we want to be on,” she said during the company’s second-quarter earnings call, noting that Cushman & Wakefield has not traditionally worked with properties in the bottom 30% of any asset class.
MacKay cited expectations of solid growth through 2024, as a result of continued investments in the company’s services business and a review of its operations. “We’ve got great bones here,” she said, stating that the holistic business review would involve introducing a more data-driven methodology to the firm’s processes of evaluating free cash flow, capital intensity and the core competencies of each business unit.
The company achieved $21 million in cost savings during the first quarter of 2023, as part of its previous $90 million yearly cost-cutting target set in May. Cushman & Wakefield’s second-quarter fully adjusted EBITDA guidance range of 9% to 10%, unchanged from the first quarter, is driven in part by low- to mid-single digital revenue growth in the firm’s property management and facilities management segment.
Cushman & Wakefield’s CFO Johnston said a significant amount of “ad-hoc work,” such as snow removal and code training, could be needed to push the company toward the higher end of its guidance range. “We don’t plan for that. But certainly, that is something that would drive us to the high end,” he told analysts and investors during the company’s second-quarter call.
The firm recorded a 2% revenue increase in its property and facilities management business quarter-on-quarter, driven in part by a 4% increase in its Americas segment since the second quarter of 2022. This compared to a 23% and 47% year-on-year increase in leasing and capital markets segment revenue, respectively.
