CBRE, Newmark Face Steep Q2 Earnings Decline

Good morning,

CBRE, Newmark face steep Q2 earnings decline, legislative developments make multifamily conversion easier in California, CMBS data reveals challenging lending landscape ahead, and insurers impose rate hikes, coverage limits to restore profits. Let’s delve into todays topics.

📈 Market Update

⬇️ CBRE, Newmark Face Steep Earnings Decline

CBRE and Newmark have reported their second-quarter earnings, and the results aren’t pretty. CBRE reported a 57% drop in Q2 earnings as capital markets revenue fell 44% YoY. The company cut its full-year earnings per share estimates by 20-25% due to continued pressure on capital markets. CBRE is anticipating a mild recession in the back half of 2023. Newmark’s Q2 earnings declined 86% on a 63% drop in investment sales revenue.

CBRE pursuing M&A, growth in solutions: CBRE is maintaining an investment-grade balance sheet and a pipeline of billion-dollar M&A deals to expand capabilities globally. CBRE completed four acquisitions in Q2 totaling $143M, including Valuation & Information Group, a valuation firm focusing on senior housing and healthcare real estate. The company has $18B of US multifamily on the market, more than double the volume it sold in the first half of the year. Trammell Crow, CBRE’s development arm, also expects to pick up steam as capital becomes more available. Trammell Crow has $17B in its development pipeline with another $13B of projects in its control and has yet to develop.

Newmark remains bullish: Despite their struggles, Newmark has taken a more bullish stance compared to CBRE. The company expects capital markets to rebound in the second half of the year as interest rates stabilize, and remains confident in its full-year revenue and EBITDA projections. Newmark recently purchased UK real estate adviser Gerald Eve for $115M. The company originated a $947M loan for Park La Brea in Los Angeles, the largest single-property multifamily financing in the US since 2019. Newmark was also the lead adviser to Blackstone on the $2.2B sale of its self-storage portfolio to Public Storage.

🏘️ Legislative Developments Makes Multifamily Conversion Easier

Recently passed legislation in California, including AB 2011, AB 1532, and AB 529, aims to streamline approval processes and remove barriers for converting vacant retail and office properties into affordable housing. If successful, this could prompt other states to pass similar laws.

Challenges remain: Even with legislative help, conversions still face challenges like infrastructure upgrades, high renovation costs, and creating livable layouts. Customized feasibility studies and market analyses provide critical data to validate project economics. Construction risk management helps ensure on-time and on-budget execution. Robust due diligence makes retail/office to affordable housing conversion more viable.

⚠️ CMBS Data Reveals Challenging Lending Landscape Ahead

New analysis from Green Street paints a concerning picture of the CRE lending landscape over the next few years, according to data on upcoming CMBS loan maturities. CMBS loans provide a useful proxy for broader credit conditions across CRE. The data shows that owners are facing a toxic combination of declining property values, rising interest rates, and tighter underwriting standards.

Average commercial property values have already dropped 15% from recent peaks. And with interest rates on 10-year mortgages up 300 basis points over the last 18 months, Green Street estimates values could fall another 10% to be properly aligned with bond yields.

Trouble ahead: This spells trouble for the 45% of analyzed CMBS loans maturing from 2023-2025, heavily concentrated in the struggling office and retail sectors. To refinance and meet new tighter loan-to-value ratios, office and retail borrowers may need to inject up to 25-30% more equity respectively.

Floating rate resets will further strain property cash flows, with rate caps now 6 times more expensive than in mid-2022. With equity requirements high and hedging costs soaring, many owners will be forced to either sell assets or inject substantial new capital to refinance upcoming maturities. The CMBS data suggests the next few years will see significant turnover in commercial real estate ownership, as properties change hands due to an inability to refinance under current lending conditions.

🏘️ Insurers Impose Rate Hikes, Coverage Limits to Restore Profits

Facing significant losses from escalating claims, home insurers are taking a hard line improve their financial results. Across the country, state regulators have approved double-digit rate increases, with hikes of 20% to 30% in states like Texas, Arizona and North Carolina.

Insurers are going beyond premium hikes to restrict coverage. Many are increasing deductibles, capping roof replacement payouts at cash value, and tightening eligibility based on roof age. These actions shift more risk back to homeowners. Some companies are exiting markets prone to natural disasters, like Florida and California, where massive claim payouts have piled up.

Catastrophe losses reach new highs: The rate increases address insurer losses from natural catastrophes, which have exceeded $90 billion for three years running. Severe weather events are becoming more frequent, and population growth in disaster-prone regions amplifies damage. Reinsurance premiums are also spiking, up 30-50% this year, pressuring insurers to raise rates.

With losses mounting and reinsurance costs escalating, homeowners should prepare for more rate hikes and tighter coverage terms as insurers take strong measures to improve financial performance. Absent relief from natural disasters, today’s insurance market will likely remain challenging.

📊 Chart of The Day

✍️ Further Reading

• It Likely Doesn’t Get Any Better for 2023: US Weekly Hotel Occupancy Peaks at 73% (CoStar)

• Here’s How the Empire State Building’s Owner Lures Tenants to Prewar Office Properties (CoStar)

• US Property Prices Fall Further, Weighed Down by Apartments, Offices (CoStar)

• Tides Largest Backer Warns Investors, Faults Syndicator for Diverting Funds (RealDeal)

• Here is Where Multifamily is Facing the Biggest Tax Increases (GlobeSt)

• Vornado Sells Manhattan Retail Assets for $124M (CPE)

• Slowing Inflation Provides Hope of a Soft Landing, but Plenty of Challenges Remain (Morningstar)