After months of speculation, CBRE finally came clean earlier Monday on its decision to scrap plans for its new headquarters, the latest in a series of cost-cutting moves by major companies hoping to break out of a slump.
Profits and revenues at the country’s largest brokerage firms took a big hit in the second half of last year, and CBRE was no exception. The firm’s advisory business, which includes leasing, capital markets brokerage and debt advisory, saw a 21% drop in net income in the 4th quarter, according to its latest earnings report.
Losses incurred in 2022 and the rising cost of new construction prompted CBRE to reverse course on previously stated plans to invest millions in a 27-story global headquarters at the corner of McKinney and Maple Avenue, just down the street from its current offices in Uptown Dallas. Instead, the company will move its C-suite into a 67K SF space at Klyde Warren Park.
“What they’re doing is being a little cautious,” said Eric Beichler, managing principal and shareholder at Mohr Partners in Dallas. “When you look at some of the layoffs by peers, the timing to build the new building is not ideal.”
Across the United States, commercial development plans have been put on hold or abandoned as managers anticipate ongoing inflation and pressure from rising interest rates. As a publicly traded company, CBRE is forced to make cost-cutting decisions that will benefit both the firm and shareholders, Beichler said.
Trimming real estate is a common lever to pull when looking to save money, as evidenced by the spate of publicly traded companies taking similar steps in recent months, said King White, CEO of Dallas-based Site Selection Group.
The company also expects to save $300 million by laying off workers, a move that was “largely done” at the beginning of this year, a company spokesman said. Bisnow in a previous interview.
“They’re probably under pressure, just like any other big company, to control costs, and real estate is one way to do that,” White said. “It’s no different than what you’re seeing with Amazon delaying construction on their campus in Virginia.”
Amazon’s decision to halt expansion of its second headquarters in Arlington, Virginia, came on the heels of Microsoft’s plans to put its 90-acre campus in Atlanta on indefinite hiatus. Both companies canceled the ambitious development projects in the wake of declining profits and slowing growth.
The difference between what a project costs today compared to one or two years ago is often too big a gap to bridge, causing deals that require more equity than originally expected to fall through, Beichler said.
“The pressure is coming back to the equity side of the table,” he said. “Once you start underwriting and pro forma it, a lot of the developers and investors will rethink, ‘Is the time coming when I’m putting in a lot more equity than I would have six months ago for the same project?’ And the banks don’t want to make up that difference.”
A number of CBRE employees, including CEO Bob Sulentic, have given assurances that the company will move forward with its plans for a headquarters at McKinney and Maple at a later date.
CBRE’s new headquarters in Dallas would have taken the place of Truluck’s restaurant at 2401 McKinney Ave.
“We still think it’s one of the best office locations in America,” Sulentic told the Dallas Morning News. “And that site is going to be built. It’s a 700K SF office building, and it doesn’t make sense right now. But we still need to have a global headquarters.”
The company’s change in direction will not affect the 2021 incentive agreement reached with the state of Texas and the city of Dallas, CBRE said in a statement Monday. The document stipulates that the company must be headquartered in Uptown Dallas, but it does not include a specific address.
However, the deal calls for CBRE to create 250 new jobs at its new headquarters, which would add to the 700 existing jobs it is required to maintain at the property. This may be difficult to achieve given the much smaller footprint the company will now have.
“Whatever was agreed upon in these incentives typically has to be met for them to pay out,” said Maher Maso, principal at Ryan Cos. Dallas office and former mayor of Frisco. “Otherwise there are callbacks or they become invalid … The terms of the agreement are going to govern whether they receive them or not.”
White said his firm has restructured a number of incentive deals for its clients given the changing work environment, and both he and Maso suspect CBRE’s deal will also be renegotiated based on the economic benefit the company brings to the city of Dallas.
“Ultimately, you’re trying to create jobs,” Maso said. “Some cities are super strict, some understand that the marketplace is changing and we shouldn’t throw the baby out with the bathwater. It’s really up to the city.”
The purpose of incentive agreements is to deliver quality development that will create jobs and benefit taxpayers, said Maso. CBRE’s plans may have fallen through, but other major companies are moving full steam ahead with their commitments to Dallas’ urban core.
Goldman Sachs continues work on its new Downtown Dallas HQ, a project that received $18 million in incentives from the city of Dallas and is expected to draw 5,000 workers.
What CBRE’s decision portends for the incentive agreement, as well as the region’s office market as a whole, remains to be seen, but Beichler believes the news is more indicative of a difficult moment in time than a testament to the region’s growth potential.
“I don’t think they’re backing away at all on their commitment to Dallas or the region,” Beichler said. “I think they think the site where the new buildings are going to be a very strong place and an appropriate place for a global headquarters – I don’t think they feel differently about it – I think it’s a timing issue.”