CBRE Group Inc - Class A (CBRE) — Q3 2022 Earnings Call Transcript

Good morning, everyone, and welcome to CBRE's third quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, CBRE.com. There you will also find a presentation deck that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that our presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including our 2022 outlook, operations, market share, capital deployment strategy, investments, and share repurchases, financial performance, foreign exchange impacts, cost management, the business environment, and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q respectively. We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. I am joined on today's call by Bob Sulentic, our President and CEO, and Emma Giamartino, our Chief Financial and Investment Officer. Now please turn to Slide 5 as I turn the call over to Bob.

Thank you, Brad, and good morning, everyone. Lower core EPS in the third quarter reflected a sharp deterioration in the macro environment, particularly with regard to capital availability for transactions. Nevertheless, core EPS was well above any third quarter in our history, except for last year's especially strong result. Even in light of a $0.07 drag in this year's quarter from foreign currency effects, this underscores the resiliency we built into the business. In contrast with last year's strong third quarter, the capital markets environment weakened materially as the quarter progressed. Property sales performed in line with expectations in July and August; however, most debt and equity capital sources moved to the sidelines after Labor Day, causing both sales and loan originations to fall sharply. In addition, as expected and previously communicated, we completed far fewer development asset sales this year than in last year's strong third quarter, mostly driven by the front-end loading of asset sales this year. We also delayed selling some assets during the third quarter. As we noted last quarter, when market dislocations cause transaction activity to decline, those transactions are typically paused and returned to the market when the uncertainty passes. We took advantage of the temporary market dislocation to continue repurchasing shares at an elevated clip. In contrast with sales and financing, leasing performed very well. Revenue was up across all property types, led by office. In addition, as we discussed previously, many parts of our business are either cyclically resilient or benefit from secular tailwinds. These businesses, including occupier outsourcing, valuations, property management, loan servicing, investment management, and project management posted solid results for the quarter. We plan to further capitalize on our balance sheet to invest in secularly favored parts of our business that add differentiated capabilities. Over the last 2 years, project management, flex office space, renewable energy, and industrial and multifamily assets have been at the forefront of those efforts. Going forward, in addition to those areas, we are particularly focused on both enterprise and local facilities management, investment management, and the more cyclically resilient advisory business lines, while also continuing our share repurchase program. As we prepare for a tougher operating environment, Emma will discuss how we have already been identifying cost savings while aiming to continue investments that will sustain long-term growth. Many economists, including our own, have cautioned that the market outlook is especially difficult to forecast right now because of an unusual confluence of high inflation, coupled with strong consumer spending, resilient employment growth amid a tightening credit cycle, and residual pandemic and Ukraine war-related challenges. With this caveat in mind, we have updated our full year core EPS growth expectations to be up mid-single digits compared with 2021. Absent the challenging foreign currency comparisons, we expect our 2022 core EPS growth would achieve low double-digit growth over 2021. While economic downturns are never welcome, they present opportunities to consolidate our position as global occupiers and investors gravitate to the industry leader. We fully intend to make the most of these opportunities. With that, I'll hand the call to Emma for a deeper commentary on the quarter and our outlook.

Thank you, Bob. As Bob noted, global economic sentiment has deteriorated since our last quarterly update. More specifically, and as you've all been following closely, since we last reported, the 10-year Treasury rate has spiked 140 basis points, the S&P 500 has declined by 7%, and public rate prices have fallen by 16%. The futures market is now indicating that the Federal Reserve will raise rates more steeply and ease them less quickly, resulting in a harsher and longer downturn than when we last reported. It is worth reiterating that this has all happened in just the last 90 days. This more negative backdrop began to impact our business late in the third quarter, and there will be more impacts in the fourth quarter. CBRE's core EPS fell 19% from the prior year to $1.13. And as Bob noted, the drivers were weakening capital market conditions, the timing of development asset sales, and a foreign currency headwind. Our results were, however, supported by the continued growth in the lines of business that, as Bob noted earlier, we see as cyclically resilient or secularly favored. Net revenue from these businesses collectively increased 12% in local currency, excluding the contribution from Turner & Townsend, and 24% in local currency, including Turner & Townsend, $284 million of net revenue in Q3. Finally, our GAAP EPS grew by 7% in the quarter due to a $183 million mark-to-market gain on our investment in Altus Power, which continues to benefit from demand for renewable energy solutions and its synergy with our CBRE businesses. I'll discuss results for each business segment, starting with advisory on Slide 6. Total advisory revenue rose 1% in the quarter or 5% in local currency, though performance diverged across business lines. Capital markets weakness emerged immediately following Labor Day, which historically has been a time of heightened sales activity. The decline was most pronounced in our Americas region, where property sales revenue fell 16% during the quarter. While Americas Capital Markets revenue, which includes sales and debt origination, was relatively flat for July and August, September revenue fell by 43%. Outside the Americas, property sales rose 3% or 17% in local currency for the quarter. The decline in US property sales reflects sharply reduced credit availability. Typically, credit spreads have tightened as rates rise. However, higher rates have been accompanied over the past few months by credit spread expansion. Many capital sources have tightened underwriting standards considerably and set pricing at levels that are uneconomical for borrowers. Against this backdrop, our mortgage origination revenue declined by 28% versus last year's Q3, while the value of loans originated fell 34%. Revenue declined less than loan volumes because more financing in the quarter came from government-sponsored enterprises, which we had expected to occur during periods of market weakness. The decline in credit availability was broad-based, with only regional banks lending more than in last year's Q3. Difficult comparisons further impacted year-over-year growth. Our combined property sales and debt origination businesses grew by 79% in last year's third quarter, driven by a resurgence of activity following the brief 2020 recession. We were encouraged to see our leasing revenue increased 14% or 17% in local currency, driven by large office and industrial transactions in major markets. Globally, leasing revenue increased across all major property types, with office growing mid-teens off a low base and industrial up high single digits. Property management, valuation, and loan servicing all proved to be resilient as expected, collectively realizing net revenue growth of 2% or 8% in local currency. Advisory Services segment operating profit declined by 19% or 15% in local currency. Overall, advisory margins on net revenue declined by 4.2 percentage points, including the decline in loan origination-related OMSRs. Slide 7 illustrates the drivers of advisory's lower margin versus prior year. Just over half the decline in Advisory segment operating profit margin is attributable to higher cost of services with advisory gross margins declining 2.2 percentage points year-over-year, or 1.9%, excluding OMSRs. Approximately 80 basis points of the gross margin decline is due to higher broker commissions. Strong growth in the front half of the year resulted in an outsized number of brokers achieving higher splits earlier than we've seen historically. This will also impact the fourth quarter, albeit to a lesser degree, before the annual resets next year. For context, approximately one-third of our U.S. brokers had historically reached higher tranches by the third quarter. For 2022, the percentage of U.S. brokers reaching higher tranches is almost 50%. It is important to note that our average commission expense naturally increases during strong years and declines during soft years. For example, in 2020, only one-fourth of producers had reached a higher tranche by the third quarter. The remainder of the gross margin decline is due to investments to support growth, broker recruitment costs, and revenue mix as revenue erosion has been steepest in debt originations, our highest margin line of business. Additionally, advisory operating expenses increased by $47 million or 10%, with the majority of the increase due to hiring that occurred in late 2021 or early 2022 as we prepared for a more robust growth environment and higher employee compensation reflecting a tight labor market. While we have and will continue to invest in target areas of growth in our business, we've also undertaken an equally targeted cost-cutting program which I'll discuss shortly. While we began reducing operating expenditures during the third quarter, which showed the lowest year-over-year growth in OpEx since Q1 2021, only a fraction of our cost-cutting program was implemented during Q3 and thus did not fully reflect the impact of those reductions. We expect our cost programs to result in a single-digit year-over-year decline in Advisory segment OpEx in the fourth quarter. On Slide 8, our GWS segment posted strong net revenue growth of 8%, or 13% in local currency, excluding the contribution from Turner & Townsend, and 32% in local currency, including the contribution from Turner & Townsend. Both Facilities Management and Project Management net revenue grew organically by double digits in local currency. We also remain pleased with Turner & Townsend, which is performing in line with expectations. Facilities management growth was supported by significant expansion work on our existing client base, particularly with technology clients. And project management growth was driven by Phase II designs and fit-outs, often tied to our clients' changing use of office space. Our GWS new business pipeline is on pace to end the year above the prior year's fourth quarter, with the opportunities coming from new and existing clients across a range of industries. GWS' segment operating profit margin on net revenue was 11%, excluding the impact of Turner & Townsend, down from an unusually strong third quarter of last year. The 11% margin represents a sequential improvement and was in line with our expectations as margins continue to normalize from COVID-related highs. Turning to our REI segment on Slide 9. Segment operating profit of $59 million represents an $88 million decline from the prior year. You'll remember last quarter, we told you that 75% of the REI segment's total operating profit will be realized in the first half of the year due to the cadence of our development asset sales. The segment operating profit decline is predominantly due to this anticipated deal timing. Within REI, Investment Management realized operating profit of $44 million, down 12% from last year. In local currency, the decline was 4%. Beyond FX, prior quarter results were bolstered by an $11 million positive mark-to-market on our $335 million co-investment portfolio versus negligible mark-to-market in the current quarter. The overall decline has continued growth of asset management fees, which increased by 19% in local currency, even though adverse currency movement reduced AUM to $143.9 billion. Our development business realized $17 million of operating profit against $100 million in the prior year, reflecting fewer asset sales during the third quarter. While we expected most of this decline when we provided our last quarterly update, we elected to pause on selling certain assets as we wait for capital market sentiment to improve. And as we noted last quarter, our development business utilizes highly flexible financing, which enables us to monetize assets when market conditions are accommodating and to pause when appropriate. Please turn to Slide 10. While we can't dictate the macroeconomic environment, we can control our costs and how we allocate our capital. We are targeting over $400 million of cost reductions due to management actions. This is in addition to the naturally flexible cost reductions when business declines, such as discretionary bonuses, incentive compensation, profit sharing, and commissions. As discussed last quarter, CBRE can ramp up cost reduction activities as market conditions necessitate. Our current cost reduction program is driven by our base economic assumptions, which, as we've discussed, envision a more challenging economy than we communicated last quarter. Approximately $300 million of targeted cost reductions will be permanent in nature, with the vast majority coming from headcount reductions. Beyond headcount reductions, we also anticipate permanent reductions to our cost basis for third-party and occupancy spending. The balance of the savings, approximately $100 million, is more temporary in nature, but we will continue that until market conditions have improved. These cost savings will come from reduced travel and entertainment, promotion and marketing spending, and reductions to discretionary compensation plans. And to be clear, the planned reductions to discretionary compensation are above and beyond the natural flexibility of these plans that are already tied to financial performance. Against our $400 million cost target, we have identified $175 million to be completed by the end of the year, with a significant majority of the remainder to be completed by the end of Q1 2023. Only a small percentage of the cost reductions taken to date are reflected in Q3 results due to a slight lag between taking action on headcount reductions and having those cost savings reflected in financial results. Given the nature of our cost structure, almost all of the planned reduction will be reflected in our operating expenditures, although we do anticipate achieving targeted reductions to some of the more fixed costs within our cost of services. While we are adjusting our costs, you can expect us to invest more aggressively utilizing our balance sheet during market weakness. In the third quarter, CBRE repurchased 5.1 million shares for $408 million, bringing our share repurchases through Q3 to nearly $1.4 billion. We expect share repurchases to increase sequentially in the fourth quarter, ranging between $500 million and $700 million. We also continue to remain an increasingly robust pipeline of M&A opportunities. Current market conditions are increasing the likelihood that we'll be able to act on them. For now though, buybacks remain the best use of capital, but that may change as we get into next year. Please turn to Slide 11. As we've discussed today, the broader economic outlook has worsened since our last update, necessitating that we revised our expectations for full year performance. As Bob indicated, we now expect full year core EPS growth to be up by mid-single digits compared with 2021. Our guidance most notably assumes that the capital markets remain under pressure. We expect leasing to remain more resilient than property sales, albeit with more muted growth than we saw in the third quarter. Due to the headwinds in our transactional businesses, we expect full year Advisory segment operating profit to decline by mid- to high single digits, with FX driving 3 to 4 percentage points of the decline. We expect our GWS segment will achieve low to mid-20% segment operating profit growth for the full year, fueled by continued strength in the fourth quarter. Absent foreign currency headwinds, we project segment operating profit growth for the full year in GWS would be 7 percentage points higher. Within our REI segment, we believe we have realized approximately 90% of our full year segment operating profit, largely due to the expectation of a few development asset sales in the fourth quarter. As noted previously, our outlook has been negatively impacted by the continued strength in the U.S. dollar. At midyear, we forecasted a $100 million full year negative impact to core EBITDA from FX. We've now raised the expected FX drag to $125 million for the full year, with $50 million hitting in Q4. Absent FX, we anticipate that core EPS growth would have been in the low double digits for the full year. We remind investors that it is difficult to forecast macro conditions and certain components of our business, notably capital markets, the timing of development sales, and to a lesser extent, leasing are subject to fluctuations in overall economic sentiment. In closing, while near-term headwinds are intensifying, we remain as energized as ever about our long-term prospects and are committed to using our scale, balance sheet, and cash flow to accelerate long-term growth and value creation. With that, operator, we'll open the line for questions.

So I understand that it's too early for 2023 outlook at this point. But if you could please perhaps give us some parameters to frame 2023. Like what would you need to see engines in capital markets to get restarted? Is there a way to frame capital market activity in terms of first half versus second half? Like when do you think the outlook really starts to get better?

Chandni, it's something that we're very focused on. And we're working through our budgets right now to really determine what we're expecting in 2023. But from a macro level, if you look back to what we said 90 days ago, we viewed that we would be in a mild recession and that rates would peak in Q1 of 2023, and they would start to alleviate through 2023. Our position now is that things have materially changed. We've seen that impacting our capital markets business directly. We are getting hit harder and faster than we were expecting 90 days ago, and we're expecting the recession to impact our business for longer than we did 90 days ago. And so looking to next year, we do expect the capital markets to come back likely in the second half of the year, but that return is going to be more muted than what we initially expected when we talked to you in Q2.

That's actually helpful color. Switching gears to margins a little bit. So 13% margins in the quarter, down 450 bps. It's better than 3Q '19, but then, of course, the worst is still ahead of us. So help us frame margins in the context of 2019. Given that the macro is about to get much tougher and what you framed in your answer just recently, how should we think about margins in the context of 2019? Is there a scenario do you think we go all the way? Or do you think there is some recourse in the cost-cutting plans that you laid out?

Yes. Sandy, I want to focus specifically on advisory, as that's the most relevant aspect of your question. I hope it's clear what occurred in Q3, but I'll summarize it. In Q3, as shown in Slide 7, it's vital to review our advisory margin, excluding OMSRs. The decline in our peer margin contributed 30 basis points due to the fluctuations in OMSRs; when they grow, they add margin, and when they decline, the entire margin is lost. Additionally, because of our remarkable first half of the year and the exceptional growth we achieved, our producers reached higher tranches much sooner than they ever have before, which accounted for an 80 basis point margin decline. These tranches reset at the end of the year, so we do not anticipate this being a challenge in 2023. Furthermore, we invested in producer recruiting to support our future growth; in the first half, we again delivered exceptional growth while investing in our costs to sustain that growth moving forward. On the operating expense front, we also made new hires, having under-invested in 2021 due to revenue growing faster than our investments. Moreover, like every other company, we experienced wage inflation. Looking ahead to Q4, we expect operating expense growth to continue decreasing. In the first half of the year, our operating expenses in advisory increased by over 19%, but in Q3, they reduced to a growth rate of 10% year-over-year. In Q4, we anticipate our operating expenses will decrease year-over-year within advisory. There are two key components affecting these costs: one is our ability to manage discretionary expenses like travel and entertainment, and the continued limitation of new hires, which takes longer to translate into cost savings. You'll also see some impact from our $400 million cost savings program, although the results will come with a delay, primarily in 2023, as we work on reducing headcount. Overall, we expect our advisory margin to finish the year over 19%. Excluding OMSRs, our margin should exceed 18%. This is significant as it represents a record margin, excluding 2021, when our margins were artificially high due to costs not keeping pace with our revenue growth.

Emma, maybe just sticking on this margin discussion in advisory. So if I'm understanding this right, on the Page 7, that 190 basis point drag in the third quarter from OpEx, that actually flips and becomes a little bit of a benefit in 4Q. And so if I'm kind of understanding and putting some narrative around this, is it just that come 4Q, you lose some of the drags on the cost side and the margin side, but you're more impacted by maybe the drawdown on the revenue side?

Yes. In Q4, we anticipate a year-over-year decline of approximately 20% in net revenue from advisory. However, we also expect margin expansion due to cost adjustments. You're correct in your understanding.

I understand. I would like to get a clearer picture of mortgage originations and loan servicing this quarter. I expected mortgage originations to be somewhat protected since people would likely need to refinance, whereas in investment sales, sellers don't have to sell their assets. It seems that wasn't the case, though. Do you have any thoughts on why this happened or if we might see a return to that trend?

Yes, Tony, that is simply due to two factors: both rates and spreads increased. Typically, when rates rise as they did, spreads tend to decrease a bit, but in this case, both rose. People avoided refinancing because it became too costly. It’s that straightforward. We experienced this situation to a degree that was unexpected. Looking ahead to the fourth quarter, we believe financing will perform better than new sales. Individuals are unlikely to engage in asset trading until interest rates drop and they feel they can achieve the desired pricing. In our opinion, this will occur after the Federal Reserve begins lowering interest rates, which, as Emma mentioned in her prepared remarks, we anticipate may happen later next year. This was particularly evident in Q3, especially in September.

Okay. Got it. And then just last one for me on the leasing side. You pointed out offices have been pretty strong. It's also a fairly cyclical property type. Like how much more runway do you think is left there to get back to normal when you kind of net that against maybe perhaps activity slowing because of the more macroeconomic factors?

Tony, when you say how much runway is it until that gets back to normal? Give a little more on that. I want to make sure I understand what you're asking there.

Yes, sure. I was under the impression like office maybe looked particularly good because you were still having some of the post-COVID recovery in just decision-making, but maybe that's off.

What we are experiencing is a significant number of renewals in the market, a trend we discussed last quarter. We anticipate this will continue both this year and into the next. However, we also expect to face some downward pressure as we enter a recession. During a recession, leasing typically slows down as companies seek ways to cut costs. This leads to a situation where businesses may opt for short-term extensions. Consequently, we predict leasing activity will remain relatively flat in the fourth quarter, yet we still foresee some advantages from the accumulated renewals that will need to be addressed, with effects extending into next year.

Okay. So it sounds like maybe it's a net kind of flattish number between sort of the renewals getting cleared and the headwind from the macro?

That's what we think. And maybe a little down, but that's how we think it's going to play out.

Yes. And Tony, for Q4 specifically, we're expecting leasing to be flat.

Emma, on your last point regarding Q4 leasing being flat in the office sector, could you clarify if that's year-over-year?

To be clear, that's flat globally across all product types, and that's year-over-year.

Okay. I was wondering if you could just provide any comments on the industrial sales market. I know that's an area that you guys have been fairly active in. It's obviously been one of the more favored asset types within REIT land, but we have seen a pullback in that leasing market as well. So I'm just curious if you have any comments on kind of industrial cap rates and the appetite today?

Industrial cap rates, like all cap rates, have increased. However, industrial fundamentals remain very strong, although there has been a slight decline in some areas. We are experiencing a bit of downward pressure on rental rates and some increase in vacancy, but the fundamentals continue to be robust. The major markets have performed well with very low vacancy and strong demand, which has fostered a situation where there are both buyers and sellers of assets. Nonetheless, sellers are hesitant to sell in the current market due to rising cap rates and high financing costs. As a developer within our portfolio, we have opted to postpone sales of some of our industrial assets. We believe that once the situation stabilizes, which we anticipate happening in the second half of next year, those assets will be sold. The market for both sellers and buyers is strong, and we expect that activity will begin to pick up in the latter part of next year.

Great. Just I guess one more question. If you could provide any comments around sort of the industrious and office kind of leasing business that you guys have. And I'm just curious what uptake you've seen in that business and just kind of the short-term office leasing business?

Well, office leasing and Industrious, they share some dynamics but they're different. Industrious provides a capability in the marketplace that's unique. You can get in and out quickly. You can get in and out without capital expenditure. You can adjust the amount of space you have very quickly. You can go into places that you don't intend to be long term. And with all the uncertainty around the use of office space and where it's going to go, Industrious' business has done quite well, and we believe it will continue to do quite well. And we're very excited about that investment and the performance of that investment. We've already commented today on office space. There is what you're seeing in leasing on office space is a pent-up amount of renewal activity and uncertainty about what's going to happen long term with offices. There's also a big bifurcation in how different parts of the office market are performing with the best buildings. The premier building is doing quite well with rents up and the less quality, less favored buildings suffering much more.

Yes. Sorry, Bob, my question wasn't clear. I wasn't trying to follow up on Tony's question. I was really asking specifically about the trends in Industrious and what market share you're seeing that WeWorks, Regis, and Industrious are taking in the office leasing business compared to traditional office leasing.

Yes. And that was my comment. That's where I started with Industrious. The trends that Industrious is seeing in the marketplace are very positive. We would characterize it as a record level of interest in that type of space. And it's been subjected to some different dynamics than regular office space. It creates flexibility. It creates the opportunity to get in and out of office space without capital expenditure. It creates the opportunity to get into a smaller amount of space and more convenient locations that you may not want to commit to long term. And as a result, it's doing extremely well.

What are you seeing in the GSE multifamily lending business? Historically, they've been countercyclical providers of capital. They don't price to a securitization exit, at least private label. And so their spreads may not be as wide. And they do have ample capacity on the FHFA governed lending caps. Are you seeing them step up in this point in time?

Jade, we are seeing the GSEs pick up in this past quarter. They contributed a larger portion of our volumes than they did in the prior quarter. So picked up from 20% of our volume to 25% in the quarter. So they are offsetting some of the declines from private lenders, but the entire market is down. And so even though they are picking up, it's not as material as you might expect.

In terms of REI's prospects, how sensitive is the outlook to current interest rates? If projects aren't stabilized and need to be financed at a mortgage rate that is unclear, will that hinder sales in that segment for a longer time than expected?

Think through the remainder of this year.

Say for next year. I mean the timing of the outlook isn't that important, but I'm more concerned about if mortgage rates were stickier at, say, something in the 6% range, would that really inhibit a lot of those projects that are waiting to be sold. Would that inhibit the ability to sell those?

We view development in terms of our in-process portfolio, which exceeds $19 billion. Typically, we see a conversion to statement of operations in the range of 1% to 2% over a 12-month period. As we enter a recession, we anticipate reaching the lower end of that range, around 1%, especially in a mild recession. This is influenced by two factors: one being cap rate expansion, which results in monetizing assets at a lower return, and the other our choice to delay asset sales until conditions improve. Our strong and flexible balance sheet gives us the option to hold off on sales in a challenging environment. Thus, we expect to be at the low end of 1%, and in a more difficult environment, it could fall slightly below that. However, it's important to note that this does not mean asset sales will cease; they should materialize in 2024 or later as the market rebounds.

Yes, I'm going to add to that. That's true of our portfolio, and that's true of everybody else's portfolio in general. Those asset sales will happen eventually. The assets are there. They're ready to be moved from one party to another. But the parties aren't going to do that until they feel like they're confident in the fairness of the pricing on the sell side and the buy side and the availability of financing that works.

Just more broadly speaking, on Investment Management. I mean, as long as I've covered this space, the theory has been institutionalization, increased allocations to real estate from LPs, sovereign wealth funds, etc. And for the first time, we're starting to hear chatter that's in the opposite direction that there's an over allocation because of the decline in equity markets and fixed income, and then LPs are getting nervous about allocating to CRE. Has anything really changed on that long-term secular trend in your view?

In the long term, nothing has changed in that regard. In the short term, you're referring to the denominator effect, which we haven't encountered in a while, though we have experienced it before. I believe we will return to the trends seen over the past decade. We are quite confident that this will be the case. We are actively engaging with capital sources around the world, and they share this perspective. However, we are dealing with a short-term situation driven by the debt markets and the denominator effect, and that is what we are currently observing and discussing.

First, I wanted to dig in more on the GWS new business pipeline. I think you said it increased significantly in the third quarter. Is there anything specific, I guess, driving that? And as macro uncertainty having any impact there in terms of the lane decision-making, or could it actually be creating more urgency to outsource to vendors like CBRE in this type of environment, but just love some more detail on what you're seeing there?

Stephen, there are a number of factors at play there. Whenever you go into periods of financial stress, companies everywhere look for opportunities to save costs. Our outsourcing offering helps them save costs. It's demonstrably able to do that. And so that's helping that capability sell in the marketplace right now. The other thing in times of economic uncertainty is sometimes decision-making is slower. And so while we have this large pipeline, you may see some slower decision-making. The third thing that's going on is we are continually adding to our capability in that area. Our procurement capability is getting better. The data that we can provide clients to help them make decisions is getting much better. We have a product called Vantage Analytics that they like a lot that helps them make decisions that causes them to be attracted to us. Our ability to connect our offering around the world and serve them in a way that's consistent is getting better. So that is all playing to our favor. And that's some of what you've seen come through this year and the buildup of the pipeline and the landing of new business, but the cost factor is always at the top of the list when we dig into that business and figure out what clients really want.

I appreciate that information. For my follow-up, I wanted to ask about the foreign exchange headwinds. I know you disclose your currency exposures in your SEC filings in relation to revenue, but I'm curious if your expense exposure is similarly related. Or are there any significant discrepancies you would like to highlight?

It's generally aligned. Our cost is being impacted in a very similar way to our revenue.

After the global financial crisis, it took, I think, probably 7 or 8 years for industry sales activity to rebound at peak levels. And then after the pandemic, it obviously just took one year. Given kind of what you're seeing in the macro right now, how are you thinking about the pace of recovery of the sales outlook and whether we're seeing deals just delayed or whether deals get canceled?

It's interesting to note how much time has passed since the financial crisis. The previous economic cycles were shorter, which influences people's perspectives. Many tend to overlook the severity of the financial crisis and how it was different from other downturns. Currently, we have a clear and identifiable pipeline of projects across various property types that owners want to sell, and there is ample capital available for buying. However, neither side believes this is the right moment to make a transaction. We anticipate that once interest rates begin to decline and the Fed shifts its approach because they recognize that continued rate increases are creating problems rather than solving them, we will see this pipeline begin to transact and recover. While we can't pinpoint an exact timeframe, we expect the recovery to happen much more quickly than it did after the financial crisis.

Great. That's helpful. And then as to your expense reductions, obviously, you guys took some expense actions during the pandemic. How much more room do you have to cut before you get into the muscle and maybe you start potentially losing market share?

Yes. Emma mentioned the $400 million figure. We believe this amount can be reduced without affecting our growth and our ability to serve clients in the future. A considerable effort went into identifying this $400 million from both grassroots efforts and top-down approaches. I want to reiterate what Emma said; a significant portion of our cost structure adjusts automatically when revenues decline, including commissions, profit sharing, development and investment management, incentive equity, and bonuses, all of which are completely separate from this $400 million. We think $300 million of this reduction will be permanent, while $100 million may return when conditions improve. We do not anticipate that this $400 million reduction will harm our business in any way.

A question investors often ask is where are commercial or let's just say, capital markets overall versus some prior periods, say, 2018, 2017? But I know that you all are constantly hiring producers. So could you give any sense for what the growth rate in number of producer headcount has been on the brokerage side relative to some past period so that we could adjust for that? And also, I think even if commercial real estate prices decline, the absolute nominal dollar of commercial real estate value is probably significantly higher than it was in 2017. So hard to compare next year versus 2017. But any color on that would probably be helpful.

Yes, Jade, we'll give a conceptual answer to that. We don't have specific numbers on brokers, but we have had a strong year for brokerage recruiting, and it was intentional because we believe that the opportunity to grow that business in the long term is there, and we believe it was the right time to get into the market and bring some new brokers on. So relative to history, it would stack up well relative to our good brokerage recruiting years in the past, but we don't have specific numbers for you on that.

Thanks, everyone, for being with us, and we look forward to talking to you again when we report our year-end results.