CBRE Group - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 was solid on profitability and broad-based growth: Core EPS rose to $0.86 (+10% YoY) and Core EBITDA to $540M (+27% YoY), with net revenue up 15% to $5.11B and total revenue up 12% to $8.91B. Versus consensus, Core EPS of $0.86 beat $0.76*, while revenue of $8.91B was slightly below $8.96B* (EPS beat; revenue slight miss)*. “Most of our businesses were performing better than expected… pipelines were strong,” CEO Sulentic noted.
• Resilient businesses continued to anchor results (net revenue +14% to $3.70B), while Transactional businesses grew faster (+16% revenue to ~$1.4B); BOE margin expanded 100 bps (local currency) aided by 2024 cost actions.
• Guidance maintained: management kept FY 2025 Core EPS guidance at $5.80–$6.10 despite tariff-driven uncertainty; absent large-scale M&A or recession, they still expect to end 2025 under 1x net leverage.
• Potential stock reaction catalysts: strong office leasing momentum (U.S. office leasing +38%) and accelerating capital markets/mortgage origination (+52%), offset by tariff uncertainty and REI development losses in Q1; FX headwinds in Q1 (2–3%) could flip to tailwinds in Q2 per CFO.

Note: Values marked with * are retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Leasing strength above expectations: Global leasing revenue +18% (+19% LC), led by U.S. (+24%) with office +38%—“United States set the pace…”.
• Mortgage origination acceleration: revenue +52% (+53% LC) as banks and insurers drove refinancing and acquisition financing; April rate-locks increased when the 10-year dipped below 4%.
• BOE margin expansion and cost discipline: net revenue +20% (+22% LC), SOP on net revenue margin up ~100 bps in LC due to 2024 cost efforts; property management net revenue +36% aided by Industrious acquisition.
• Management quote: “CBRE had a strong start to 2025… better than expected… pipelines were strong” – CEO Sulentic.
• Recession resilience improved: resilient SOP now ~60% of total; declines in a GFC-like recession would be “materially lower… less than half” of prior 85% peak-to-trough, per CFO.

What Went Wrong

• Tariff-driven uncertainty: “outlook has become less clear” with some corporates slowing big programs; pipelines “strong, just somewhat less”.
• REI development loss: global development operating loss of $25M vs $4M last year; segment SOP down to $25M (-26.5% YoY).
• Free cash outflow in Q1: FCF of -$610M (seasonal working capital/compensation), though TTM FCF ~$1.48B and 93% conversion.
• FX headwinds: consolidated results included ~2–3% currency headwind in Q1.
• Core corporate operating loss increased by ~$12M.

Transcript

Speaker 7

Greetings and welcome to the CBRE First Quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Chandni Luthra, Global Head of FP&A and Investor Relations. Thank you. You may begin.

Speaker 9

Good morning, everyone, and welcome to CBRE's First Quarter 2025 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental material. Today's presentation contains forward-looking statements, including without limitation statements concerning the macro environment, our business outlook, our business plans and capital allocation strategy, and our earnings and cash flow outlook. Forward-looking statements are predictions, projections, or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to the morning's earnings release and our SEC filing.

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'm joined on today's call by Bob Sulentic, our Chair and CEO, and Emma Giamartino, our Chief Financial Officer. Throughout our remarks, when we cite financial performance relative to expectations, we are referring to actual results against the outlook we provided on our fourth quarter 2024 earnings call in February, unless otherwise noted. Also, as a reminder, our resilient businesses include facilities management, project management, property management, loan servicing, valuations, other portfolio services, and recurring investment management fee. Our transactional businesses comprise property sales, leasing, mortgage origination, carried interest, an incentive fee in the investment management business, and development fee. With that, I'll turn the call over to Bob.

Speaker 8

Thank you, Chandni, and good morning, everyone. CBRE had a strong start to 2025 across our lines of business and around the world. Notably, as the first quarter ended, most of our businesses were performing better than expected, and our new business pipelines were strong. This was equally true for both our resilient and transactional businesses. Since then, driven by uncertainty created by the tariff situation, our outlook has become less clear. Even in light of this, our current activity levels and new business pipelines continue to be strong, just somewhat less than they were. Looking at our Q1 results, we were particularly pleased with the performance of our project management and building operations and experience segments in their first quarter of existence.

Both segments generated strong financial results and evidenced the type of operational and strategic gains we were hoping for and expected when we reconfigured the business this way. The gains included shared client access, insights into opportunities for product development, and stronger positioning to pursue certain types of M&A. Another notable example that has quickly emerged is the ability to migrate strong leaders into more compelling positions. This is great for our emerging talent and great for CBRE. CBRE's strategy is underpinned by broad and deep capabilities across the dimensions of commercial real estate: asset type, client type, service type, and geography. We couple this with a strong balance sheet, strong cash flow, and the experience and willingness to invest aggressively. This positioning allows us to drive resources into both steadily growing resilient businesses and high-margin transactional businesses.

The current market uncertainty aside, we are encouraged by the prospects that our strategic positioning and resource set have created for sustained resilient growth. With that, I'll turn the call over to Emma, who will discuss the quarter and our outlook.

Speaker 0

Thank you, Bob. First quarter core EBITDA increased 27% and core EPS by 10% compared with last year's first quarter. Recall that last year's Q1 included a large one-time tax benefit. Without that benefit, core EPS grew 39% year-on-year. These strong consolidated results include an approximately 2%-3% currency headwind in the quarter. To better reflect operating performance, I will reference growth rates and margins in local currency throughout the remainder of my remarks, unless otherwise noted. As Bob noted, we saw strength across our platform as our resilient businesses generated net revenue growth of 17% for the quarter, nearly matching the 18% increase in our transactional businesses. On a trailing 12-month basis, resilient businesses accounted for over 60% of our total SOP. Turning to our segments, advisory services had a particularly strong start to the year.

Net revenue growth of 16% exceeded expectations, led by strong leasing and capital markets activity. Global leasing revenue growth accelerated to 19% in Q1, from 15% in Q4 of 2024. The U.S. was particularly strong as overall leasing revenue increased 24%, driven by a 38% increase in office leasing revenue, which reached its highest level for any first quarter. We saw continued strong activity across gateway markets, with each of the six markets delivering greater than 30% growth and over 55% growth in aggregate. At the same time, many non-gateway markets, including Atlanta, Dallas, Houston, and Miami, delivered double-digit growth. U.S. retail leasing was also very strong, up 34%. Industrial leasing saw 12% growth as third-party logistics companies drove higher demand. Outside the U.S., leasing trends were notably strong in Southeast Asia, especially office leasing in India, as well as in certain countries in Europe.

Capital markets activity was also strong. Global property sales revenue increased 13%, once again led by a 26% gain in the U.S., which saw a significant uptick in multifamily and industrial asset sales. Outside the U.S., we saw notable strength in continental Europe. Our mortgage origination business had another strong quarter with 53% growth in origination fees. U.S. loan origination volume rose 69%, led by strong activity from banks and insurance companies on the back of continued outside growth in refinancing, as well as strong demand for acquisition financing. Overall, advisory SOP rose 31%, delivering strong operating leverage as SOP on net revenue margin increased by more than 200 basis points. In the BOE segment, net revenue grew 22%, with strength across facilities management, property management, and contributions from Industrious, which we acquired at the beginning of this year.

In facilities management, the enterprise business saw strong demand from clients in sectors such as technology, life sciences, and healthcare. We also had a particularly strong quarter with hyperscale data center clients. In our local business, revenue grew by double digits, with continued outside growth in the U.S. as we expand our market share, as well as continued strength in the U.K. Strong property management net revenue growth slightly exceeded expectations. This segment is benefiting from enhanced operating leverage, primarily resulting from last year's cost efficiency initiative. This contributed to 38% SOP growth and 100 basis points of net margin expansion. Turning to the project management segment, we have completed the first quarter after combining CBRE's legacy project management business under Turner & Townsend's leadership. Revenue grew 9%, in line with our expectations, with continued mid-double-digit growth from legacy Turner & Townsend and mid-single-digit growth from CBRE legacy project management.

As we have outlined previously, we expect the integrated project management business to more closely resemble Turner & Townsend's growth and margin profile over time. In the legacy Turner & Townsend business, we had strong wins in infrastructure in the U.K. and Middle East, as well as large new program mandates in real estate, and the pipeline looks solid. Project management SOP margin on net revenue continued to improve year-on-year, driving SOP growth of 14%. It is noteworthy that this margin does not yet reflect the cost and operating synergies of bringing these two businesses together. In our REI segment, investment management operating profit was up 43% year-on-year, exceeding expectations, primarily driven by higher net promotes and recurring asset management fees. AUM ended Q1 at $149 billion, up about $3 billion since the end of Q4, driven by net inflows, higher asset values, and favorable currency movement.

Our development operating profit was in line with expectations. We continue to grow our U.S. in-process portfolio, starting 12 projects in the first quarter, compared with 26 in all of 2024, and capitalizing an additional five deals. Now I'll discuss free cash flow, leverage, and capital allocation. Trailing 12 months, free cash flow was nearly $1.5 billion, reflecting 93% free cash flow conversion, above the high end of our targeted 75%-85% range. We repurchased nearly $600 million worth of shares since the end of the fourth quarter, underscoring our commitment to return capital to our shareholders and the unrealized value we see in CBRE shares. In total, we deployed approximately $1 billion of capital year-to-date across M&A, share repurchases, and co-investments, and ended the quarter with net leverage of less than one and a half turns. Our capital deployment strategy remains consistent with our historical practice.

We prioritize M&A and principal investments into our REI business and will balance our spend with share repurchases as long as our share price remains attractive. Absent large-scale M&A or the onset of a recession, we continue to expect to end the year with under one turn of net leverage, and we are willing to lever up to two turns for the right acquisitions. Heading into Q2, our strong Q1 performance, strong pipelines, and strong current activity would have prompted us to raise our full-year guidance to the high end of the range we sent in February. However, given the significant market uncertainty related to tariffs, absent increased interest rate volatility or a recession, we are maintaining our 2025 core EPS guidance range of $5.80-$6.10.

Given our success in increasing the resilient parts of our business and our strong balance sheet, we are better positioned than ever before to not only weather a recession, but to take advantage of the opportunities created in a downturn. With that, Operator, we'll open the line for questions.

Speaker 7

Thank you. If you'd like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Anthony Pellon with JPMorgan. Please proceed with your question.

Speaker 6

Thanks and good morning. I think, Bob, you mentioned the pipeline is still strong, just somewhat less than maybe what it was. Can you maybe give us a little bit more color or detail on kind of what's been changing over the last few weeks, whether it's a more wait and see, whether deals have been canceled, maybe whether there are certain regions that stand out as changing the most, or business lines? Just any context around some of the more recent changes would be great.

Speaker 8

You bet, Tony. I want to stress, you said it, I want to stress it. Things did not go from good to bad. Things went from really good to not as good. We ended the quarter with strong pipelines, and as we have gone through the better part of April, we have seen really good activity. We have seen some implications of what is going on with the tariffs. For instance, let us start with capital raising in our investment management business. We raised almost $5 billion in the first quarter. We were surprised that we raised that much. We ended the quarter with a lot of enthusiasm, and some of the capital sources from around the world that invest into our funds and the accounts we manage have slowed down a little.

Our expectations have gone, by the end of the first quarter, had gone beyond where we were going into the year. I'd say we've kind of pulled back, roughly consistent with where we were going into the year now. If you look at project management, a lot of activity in project management, a lot of activity, and Emma called it out in her comments, and things like infrastructure, some big programs and projects around the world. Some corporates now who are uncertain about what's going to happen with them due to the tariffs, whether we might go into recession, have started to slow down on some of their bigger programs. We went from a really enthusiastic picture to one where there's some choppiness out there. On leasing, one of the ironies with what's going on right now, industrial outperformed. That wasn't ironic.

The market was good, and industrial outperformed, and office outperformed by quite a bit. We think industrial is going to come back kind of to where we thought it was going to be going into the year. We do not really think that is going to be the case with office. What we have going on with office right now is two dynamics. One is a scarcity circumstance. It is not just Park Avenue. It is all over the gateway markets and other big cities and second and third-tier markets. Companies realize that office space is important to them. They realize that there is somewhat of a return to the mean, and that they are forcing that in some cases, and it is happening on its own in some cases.

As a result, because there has not been much new office space created over the last few years for obvious reasons, the office space that is out there is in big demand. The choppiness that we are now seeing in people's confidence about the economy is really not impacting their enthusiasm for leasing office space that much at this point. That is the one area where we probably do not see a lot of change. There are some big office leases that have big tenant rep that people are pulling back a little bit from, but we are not seeing a lot of change there. We are continuing to see some good opportunities to capitalize development deals because what is going on now is keeping other capital sources out of the market.

We have talked kind of at length over the last couple of years about how when things are like they are now, you can gain real advantage there. That is kind of the picture we are seeing out there. Emma, I do not know if there is anything you would add to that.

Speaker 0

I think you captured all of it.

Speaker 6

Okay, great. Thanks for all of that. I just have a follow-up on project management now that it's broken out and combined. I guess as we look out, this has been an area where you've been pretty confident about the growth. I guess you finish projects, and then you have to replace them. I guess what can we look at as we start to look out the next few years that the replacements are going to be big enough to net to sort of the growth level that you've kind of talked about, like kind of in the double digits and stuff here, especially given, like you said, some of these things may pull back a bit. Is it just the pipeline that you say you have, or how do we kind of look at that?

Speaker 8

It's really important to kind of dissect what's going on with our project management business. The market's going to be potentially a little slower in some areas for the reasons we've already articulated on our comparative marks and in the response I gave you to your first question, Tony. You have to look at specifically what's going on inside CBRE and inside the combined CBRE, Turner & Townsend business. We are in the door and doing work for a lot of big corporates that had opportunities that we weren't positioned to execute on because they were big complex projects. We have Trammell Crow Company that sources land sites and can do land development for big projects that we weren't positioned to execute on ourselves. Turner & Townsend had opportunities that they didn't have the talent to execute on.

In the United States, Turner & Townsend did not have a sizable platform. They did not have the ability to take on certain things. There is the trajectory of the market and the volume activity broadly defined in the market. There is also the positioning of our combined business that provides just a much better overlay to whatever the market circumstances are than we had previously. Again, we now have a, I think one of the things that is going to surprise people that watch our company over the next couple of years is just how much different that project management business is than it used to be. It has 15,000 project management, program management, and cost consultancy professionals. It has a huge opportunity that it was lightly penetrating here in the United States.

There is going to be a market circumstance that we are all going to learn about that is going to be impacted to some degree by tariffs and a recession or not. Then there is going to be the business we have built and the trajectory of that combined business relative to what it would have been had we not combined those businesses. That is where a lot of our enthusiasm for the growth of that business comes from.

Speaker 6

Okay. Thank you for everything.

Speaker 7

Thank you. Our next question comes from Julian Bloom with Goldman Sachs. Please proceed with your question.

Speaker 2

Yes. Thank you for taking my question. I think you mentioned in the release that you're maintaining guidance absent increased interest rate volatility or a recession. I guess, can you give us a sense of what a recession would look like for your earnings? Just given how much higher the mix of resilient businesses are now versus in prior recessions, how much better would your earnings sort of hold up this time around?

Speaker 0

Yeah. Thanks, Julian. First, I just want to comment on our guidance. We maintain our guidance. We do think there's a wider range of outcomes than we thought back in February when we first provided our guidance for the year. It's difficult to provide specifics, but we can frame how we're thinking about where we'll end up on the year. These components are really important to acknowledge. First, absent tariff uncertainty, as Bob alluded to in his remarks, going into the second quarter, given the strong performance in Q1, given the momentum we're seeing in Q2, we would have likely increased our guidance from the range that we set at the beginning of the year. We would end up in the high end of our range if we simply flowed through our Q1 outperformance.

The midpoint of our range would mean something like leasing and capital markets slows down in the back half of the year. On a downside, it would mean that those transactional revenues slow down even more. We're likely not in a recession. In terms of your question around a recession, it's difficult to frame that because the severity and degree of a recession can vary significantly. What we do know is because we are significantly more resilient than we were even a few years ago, definitely more resilient than we were coming out of the GFC. As a reminder, we're 60% resilient SOP today. Back in 2011, we were roughly 11%, 20% SOP was resilient. We've meaningfully increased the resilience of our business. That resilience profit is growing at a double-digit rate.

If you were to put our business through the same type of a recession that we saw in the GFC, our declines would be materially lower. GFC, our declines were 85% peak to trough. Now, it would be less than half that.

Speaker 2

Thank you. That's very helpful. I guess turning to sort of capital markets activity, it sounds like things continue to progress well thus far in April, just maybe not quite as strong as they were. What are you seeing maybe in terms of your pipelines of future capital markets activity or broker opinions of value? What is that telling you about where we could trend in the second quarter?

Speaker 0

I'll speak to what we saw through Q1 and then what we're seeing in the beginning of Q2. Through Q1, we had strong capital markets activity, particularly in February. In March, it slowed down somewhat, but not to a meaningful degree. When you got into April, there was somewhat of a pause because of the significant amount of uncertainty. We're not yet seeing any of that impact our transaction activity. In the first few weeks of April, our investment sales activity is very strong. It's actually accelerated on the loan origination side. We saw a significant increase in rate locks when the 10-year fell below four for a short period of time. Activity is continuing, and our pipelines remain very strong.

Our belief is as long as rates on the capital market side, the 10-year I'm speaking to, does not go above 5%, activity is going to continue.

Speaker 2

Thank you very much. That's very helpful.

Speaker 7

Thank you. Our next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.

Speaker 3

Hey, just two quick ones. One is just on the project management business, going back to that. I think the comments said the margins do not reflect the cost of operating synergies and so on and so forth. Just curious if you can give us some high-level thoughts and just the margin profile of that business. In this environment, are there any other sort of tools that you could use to protect margins?

Speaker 0

We believe the long-term margin for our entire project management segment should trend towards what the legacy Turner & Townsend project margins have been, which have trended towards the mid to high teens range. Our legacy project management business has had a margin that's slightly below that. What you're seeing in our results is the blend of that margin. It's a little below 15%. We think simply through cost and synergies, redundancies, which you really haven't gone after, back office integration will be able to improve that margin over the next couple of years.

Speaker 2

Great. My second question is just capital allocation, obviously, the buyback in the quarter. Just curious how conversations are going on the acquisition front in a market like this. Do they sort of die off? Do you become more opportunistic? Any color there would be helpful. Thanks.

Speaker 8

Yeah, Ronald, as it relates, I think you're talking to M&A, right?

Speaker 2

Exactly.

Speaker 8

Yeah. A couple of things. First of all, we have refined and refined our M&A strategy over the past few years. We did a lot of strategy work we talked about last year. We have a very clear view as to where we want to do M&A in the business now. What we're finding is that as the markets remain choppy, the kind of companies that we're interested in, in part, we're interested in because they really like the idea of being part of our platform. It's our observation in the various conversations we're taking part of now that choppiness builds momentum for us in the M&A work we're doing. We would expect that to be the case. We would expect the approach we take to M&A to play out nicely in a difficult market.

I mean, I've been around now for multiple downturns, and we always talk about, "Oh, gee, when things get tough, we'll take advantage of it." And we do to varying degrees. I don't think we've ever been as well positioned to take advantage of a downturn as we are now because of our balance sheet in part, but also because of the success we've had with the kinds of companies that we're interested in acquiring and are interested in being acquired by us.

Speaker 3

Helpful. Thank you.

Speaker 7

Thank you. Our next question comes from the line of Steven Sheldon with William Blair. Please proceed with your question.

Speaker 2

Hey, good morning. Thanks for taking my questions. Maybe starting with Bob, really appreciate the detailed commentary on Tony's prior question. We wanted to drill down a little more on the industrial leasing outlook. Great to hear about the outperformance there in the first quarter. I would just think it would be tough for clients to make leasing decisions right now with industrial footprints, given all the moving pieces until there's more tariff clarity. Curious if you have any additional color on what you're seeing there, especially later in the quarter and so far in April.

Speaker 8

It is tough to give more clarity than we've given. Here's what we think. We think that the kind of, as we called it, outperformance in industrial leasing that we saw through the first 90 days of the year is going to come back a little. It is going to come back to where we thought things were going to be. I will say that the uncertainty, we've talked about it at length here, what we think is going to happen and how we think it's going to play out. One of the ways we've concluded that you can look at it is a lot of the momentum was with 3PLs. The reason 3PLs is because the primary users of the space have decided the uncertainty is going to cause them to back off on commitments a little. They instead lease from the 3PLs.

It gives them more flexibility. In turn, the 3PLs have to do leases. The big leases, the 700,000 sq ft and above, have slowed down. Below that, there's been good momentum. We think we're going to continue to see that, but we're not going to see that to the degree that we saw it in the first quarter. To be a little redundant here, we're kind of assuming that industrial leasing is going to be back to where we thought it was going to be when we entered the year, which is kind of flattish to 2024.

Speaker 2

Okay. Got it. That's very helpful. Maybe just some quick follow-up for Emma. If we do see macro trends deteriorate, become a bigger headwind, how would you think about managing the cost structure? You obviously had some efficiency initiatives in recent years. I think CBRE always seems to be operating pretty leanly. Are there levers you could pull to support profit trends, I guess, if top-line trends do deteriorate?

Speaker 0

Yeah, absolutely. It is something that we're always planning for and thinking about. I think we've materially improved our ability to quickly react and take action when we need to around our cost structure. We've always talked about our cost structure being inherently variable. Our commission costs move with revenue or decline with revenue. Our bonuses and profit shares in mostly our transactional businesses flex with revenue. The other levers we have are our typical discretionary expenses. We can pull back when we need to. Hiring, we can pull back if we need to very quickly. We have a lever with recruiting if that is something we think makes sense. The main point is that we have the ability to act, and we've shown that in the past two recessions or downturns for real estate.

Speaker 2

Got it. That's helpful. Maybe just what in class, hiring, I guess. Has CBRE changed hiring plans for the year?

Speaker 0

We have not.

Speaker 2

Perfect. Thank you.

Speaker 7

Thank you. Our next question comes from the line of Manus Ebeki with Evercore ISI. Please proceed with your question.

Speaker 5

Good morning and thanks for taking the question. This is Manus. I'm for Steve Sarkwa. Just wanted to quickly ask about one item, and that is currency headwinds. I know you quoted around 2-3% of headwinds in the first quarter. The dollar has. Quarter or what your general outlook is and how that is fitting into kind of the guidance range?

Speaker 0

It is obviously very difficult to predict what will happen. If you just take today's forward curve, those headwinds are pretty much entirely removed. They would be reversed. They become tailwinds in the second quarter. I do want to emphasize that we all know that this is moving very quickly and it is pretty volatile. It is difficult to predict what will actually happen over the next three quarters.

Speaker 5

Okay. I mean, for sure, that makes a lot of sense. Maybe one follow-up question on capital usage. You obviously used around, I think, around $600 million worth of share buybacks so far. We wanted just to see if that has maybe changed, how you think about share repurchases going into the second quarter as obviously the macro environment has changed a little bit.

Speaker 0

Our capital deployment strategy has been unchanged for a few years now. We always prioritize M&A and REI co-investment. We're actively looking at a number of deals in our pipeline across both of those pieces. If those convert, that's what we'll prioritize with our capital. If we're seeing that there's a slowdown in M&A or REI, which we're not seeing right now, then we balance that out with share repurchases as long as we believe our price is attractive.

Speaker 5

Perfect. Thank you. That's it for me.

Speaker 7

Thank you. Our next question comes from the line of Peter Abramowitz with Jefferies. Please proceed with your question.

Speaker 8

Yes. Thank you for taking the question. First, just wanted to go back to one of Emma's comments. I think you mentioned that as long as the 10-year remains below 5%, it's kind of the key level that you can sort of maintain your pace in capital markets activity and deals will still happen. I guess I just want to make sure we're interpreting that correctly. Is that, I guess, you think even up to that 5% level, you can kind of hit what's in your guide in terms of this, I believe you called it a sort of slow and steady recovery in capital markets?

Speaker 0

There are a lot of elements that go into whether or not capital markets activity will continue. Specifically to loan originations, we see activity continue as long as interest rates are stable and below 5%. We have seen things materially slow down if we believe things would materially slow down if they go above 5%. What is important to remember on the loan origination side is that 55% or 60% of the activity that we are seeing is refinancing, and those deals need to continue to happen. We are confident that that activity will continue. Yes, it is rates staying below a certain level, but they also need to be stable. The volatility creates a it just causes investors to pause.

Speaker 5

Right. That's helpful. Okay. Just to clarify, one of your other comments, I think, was that activity slowed right at the beginning of this month, but has actually accelerated since. Was that in reference to the loan origination or advisory sales as well?

Speaker 0

Sales in March slowed somewhat, but it's one month. It's hard to see a trend, and it picked right back up in April.

Speaker 8

Okay. Got it. One more, maybe just kind of a thematic question for Bob, stepping back. Just thinking about kind of the political risk in the broader sense with this administration, I think one of the thoughts out there is that we could have these rolling 90-day extensions with the tariffs as the White House negotiates. This could go on for a very long time. Just kind of curious, how do you think longer term about how to discount that uncertainty in such a fluid situation as you think about the future of your business? Because it is certainly kind of a unique situation.

It is, Peter, very unique. I think it's fair to say that we don't have any insight into the uncertainty that others haven't already articulated. The big banks have reported, and they've given their view on that. They spend a whole lot more money to try to figure out that kind of stuff than we do. We've adjusted our view of things to take into account considerable uncertainty, which causes us to have a view of a higher risk of recession than we had before, which causes us to have a view of a higher risk of people being on the sidelines because they just don't want to act in uncertain times. That's all factored into what we've said about the performance we expect for the rest of the year. I don't think we have—it's not that we're unwilling to declare beyond that.

We just don't have insight beyond that. It all assumes a lot of uncertainty, a lot of choppiness, and a risk of recession that we didn't have before.

Speaker 5

All right. That's helpful. Thanks for the time.

Speaker 7

Thank you. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please proceed with your question.

Speaker 4

Hey, good morning. Your non-GAAP reconciliations alluded to a wind down of a business within real estate investments. What's that referring to?

Speaker 0

It's referring to a tailford.

Speaker 4

Got it. Thank you. When did the Industrious deal close and how should we think about the financial contribution from that business?

Speaker 0

It closed in mid-January. For the vast majority of Q1.

Speaker 4

Got it. Is there anything you can share in terms of the expected revenue contribution or margin profile?

Speaker 0

We have not provided those details. It is performing.

Speaker 4

Thank you.

Speaker 0

Yes, performing as expected.

Speaker 7

Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.

Speaker 1

Thank you very much. Can you give any color on what drove the margin gains in advisory and BOE? Net revenue was pretty close to our forecast, so operating leverage was much stronger. Just wanted to see if there's any further point you can make on that. It was much stronger even considering the revenue growth within capital markets and leasing.

Speaker 0

Advisory, it is incremental margins on that transaction revenue. We had, as we've spoken to, both leasing and investment sales and loan origination activity, which is all higher margin, came in above our expectations. Within BOE, the 100 basis points of margin expansion in the first quarter was in line with what we saw in the back half of last year. That was all the cost-saving initiatives that we started mid-2024, and you're seeing the run rate continue to flow in.

Speaker 4

Okay. Thanks very much. You've been leaning into key areas as the market went through a correction over the last couple of years, specifically in REI and data centers. I was wondering if you're seeing any slowdown in activities within data centers, whether it be new deals or leasing. On the REI side, are you changing how you think about making new investments considering growing uncertainty around construction costs?

Speaker 8

The way to think about us as it relates to data centers is we're a service provider, not an owner. We had a really good quarter with data centers. We have a data center services business that includes an M&A deal we did called Direct Line, which provides some additional technical services that go beyond what we had done historically. Very good quarter for that business. That acquisition is meaningfully outperforming underwriting. Turner & Townsend is a big project manager, the creation of new data centers. They have a lot of work going on. They have seen some pullback from some of the hyperscalers that we've all read about. They are pretty much at capacity in terms of their ability to do that kind of work. You are not seeing that impact us. Trammell Crow Company has kind of a unique role in the data center world.

They are in a position to acquire land and create the improvements you need on land, both the kind of soft improvements in terms of entitlements and then the hard improvements in terms of gaining access to electricity that makes that land a lot more valuable than it was when they acquired it. We think that that is going to play out for us this year the way we thought it was going to play out when we went into the year. Some of the headlines you're reading about a little bit of the slowdown by hyperscalers and some of the big-name hyperscalers and starting new projects is not likely to roll through our business this year relative to what we thought we were going to do with that business.

We have seen a good start to the year and expect it to be a strong finish to the year.

Speaker 4

Okay. Just a follow-up to that was on the construction costs. If just broadly, Trammell Crow's changing at all, how they're thinking about new investments considering uncertainty around construction costs.

Speaker 8

The first thing I want to comment on is risk in the in-process portfolio associated with construction costs that might be impacted by tariffs in Trammell Crow Company. When you look at that in-process portfolio, a significant portion of it is either complete or near complete and leasing up or just ready to be sold. That just definitionally wouldn't be impacted by the costs associated with tariffs. When you go to the stuff that's under construction, much of that is protected by GMP contracts. If there are cost increases, you'd be protected there. Beyond the GMP contracts, we have contingencies inside our budgets. When we report the amount of profit we have captured in our portfolio, we assume those contingencies will be used. If the contingencies get chewed up by some cost increase, then that's significantly covered beyond those GMP contracts by the contingencies we carry.

Even beyond that, I think there is a little misunderstanding of if you build a $100 project, what goes into it. Probably half of the project or more is land, engineering costs, site work costs, commissions on lease-up, etc., that will not be impacted at all. When you get to the other half, the construction costs, there is a huge component of construction costs that are driven by labor. There is a very significant portion of construction costs that are materials sourced here in the U.S., not from overseas. There is a smaller portion that would be sourced from places where the tariffs might impact it. When you roll all that through the number and overlay the GMP contracts, there is just not a lot of risk from tariffs in that portfolio of projects. When you look at future projects, a lot of dynamics will come into play.

If we see cost increases and if we see inflation roll through our economy as a result of those cost increases, and if you do not see a lot of new projects start, which we do not think you will, what you are likely to see is rental increases that will cover the cost of construction that goes up as a result of tariffs. We are very attentive to what might happen in this regard, but we are feeling pretty well mitigated at this point.

Speaker 7

Thank you. Our final question this morning comes from the line of Seth Bergey with CITI. Please proceed with your question.

Speaker 10

Hi guys. Thanks for taking my question. I just wanted to go back to some of your comments on leasing. Can you provide any kind of color as to if you're seeing any differences between smaller or larger tenants or U.S. tenants versus kind of global tenants? Thanks.

Speaker 0

I can give you high-level both office and industrial that's driving that growth globally. On office, pretty much all metrics are up. Square footage, term, rent is up slightly. On the industrial side, as you would expect, square footage is up slightly, term is up slightly, and rent's been flat.

Speaker 7

Thank you. Ladies and gentlemen, that concludes our time for questions. I'll turn the floor back to Mr. Sulentic for any final comments.

Speaker 8

Thanks everybody for joining us today, and we'll talk to you again when we report our second quarter earnings.

Speaker 7

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.