CBRE Group Inc

Greetings and welcome to the third quarter 2020 CBRE Group Incorporated earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 call is being recorded. It is now my pleasure to introduce your host, Kristen Fairman, Vice President, Investor Relations and Corporate Finance. Please go ahead.

Good morning, everyone, and welcome to CBRE's third quarter 2020 earnings conference call. Earlier today, we issued a press release announcing our financial results, and it is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks, as well as an Excel file that contains additional supplemental materials. Our agenda for this morning's call will be as follows. First, I'll provide an overview of our financial results for the quarter. Next, Bob Selendik, our president and CEO, and Leah Stearns, our CFO, will discuss our third quarter results in more detail. After their comments, we'll open up the call for your questions. Before I begin, I'll remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CDRE's future growth prospects, operations, market share, capital deployment, acquisition integration, financial performance, including profitability and margins, the effect of cost savings initiatives in our 2020 outlook, including the impact of COVID-19, 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. You should be aware that these statements should be considered and could cause actual results to differ materially from those expressed in these forward-looking statements. 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. You have provided reconciliations of adjusted EPS, adjusted EBITDA, fee revenue, and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of our presentation slide deck. Now please turn to slide four of our presentation, which highlights our financial results for the third quarter of 2020. Total revenue and fee revenue fell about 5% and 13% respectively, driven by a decline in our advisory services segment. Lower revenue was partially offset by disciplined cost management and temporary cost reduction, as well as the initial benefits of transformation initiatives targeted to improve the ongoing cost structure of the business. This limited the adjusted EBITDA decline to 3%. Overall, adjusted EPS for the quarter with 73 cents will gap EPS, which includes around 13 cents of transformation initiative costs, total 55 cents. Now for insights on the quarter and our longer-term outlook, please turn to slide six as I turn the call over to Bob.

Thanks, Kristen, and good morning, everyone. The results we reported this morning highlight the progress CBRE has made. in building a more resilient business since the last downturn occurred more than a decade ago. We are a remarkably different company from the one that endured the global financial crisis. I'll briefly cite some specific ways the company has evolved and improved. Facilities management, which provides steady recurring revenue, has grown exponentially with the portfolio up by 3.7 billion square feet in 10 years and now totaling 4.2 billion square feet. And we've added a data center management capability that is growing robustly. Our industrial and multifamily offerings have also grown dramatically and are proving to be very resilient in the current environment. These offerings together cut across leasing, sales and mortgage origination, and servicing. They also comprise the majority of our real estate development portfolio, U.S. project management has grown fivefold in 10 years, and COVID is further catalyzing demand for this group's specialized services. Finally, our investment management business's core asset portfolio, which has grown more than 300% over 10 years and now comprises near to 85% of total AUM, has held up quite well this year. The resilient aspects of our business are helping us weather the sharp COVID driven fall in property leasing and sales. Another key contributor was quickly aligning our expenses with reduced market demand. A significant portion of our compensation structure falls automatically in the current environment and our global leadership team has rapidly implemented other cost management actions. Many of these actions were contemplated before COVID following a strategic review designed to enhance scalability and efficiency. This work has been quite effective, cutting where appropriate without compromising our future. I want to briefly comment on the macro environment before handing the call to Leah. At the present time, COVID is putting downward pressure on parts of our business and creating larger opportunities in other parts, several of which I highlighted earlier. Inevitably, the magnitude of COVID's impact will diminish considerably once the public health crisis passes. We can expect our sales and leasing businesses, where decision making is now largely frozen, to be prime beneficiaries. However, a significant amount of the COVID-driven change will be permanent. For instance, our work with occupier clients confirms that companies will continue moving toward a hybrid model that combines working from the office and from home. Occupiers will take space for fewer employees, but that space will be less densely populated, more intensely managed, and more flexible. there will be a premium on high-quality, well-managed buildings with great infrastructure. We are continuing to take advantage of the strong secular growth trends that were driven by the last cycle, including occupier outsourcing, industrial and logistics space, institutional quality multifamily assets, and workplace experience services. We expect new secular opportunities to be created in the wake of COVID and are positioning our strategy and leadership focus and allocating our capital to make the most of them as the new cycle unfolds. With that, I'll turn the call over to Leah, who will take you through the quarter in detail.

Thanks, Bob. Turning to slide eight, our advisory services segment fee revenue and adjusted EBITDA fell over 23% and nearly 32% respectively, reflecting weakness in high margin sales and leasing activities that Bob alluded to. While our advisory adjusted EBITDA margin fell about 180 basis points year over year, it improved sequentially approximately 560 basis points to about 15.5%. This sequential improvement was due to the combined impact of short-term cost reductions, including continued furloughs, lower bonus accruals, and tight management of travel and entertainment expenses, as well as the initial impacts of transformation and workforce optimization efforts. Additionally, about 190 basis points of the sequential improvement was due to the cadence of COVID-related items. Global leasing revenue declined about 31% as the pandemic continued to negatively impact our major global markets. In the U.S., continental Europe, and the U.K., which together comprised about 81% of global leasing in the period, revenue decreased 36%, 22%, and 6%, respectively. The U.K. benefited from some large industrial transactions during the quarter, which helped offset weak demand for office space. Globally, industrial leasing fueled by the continued shift to e-commerce increased 10% in Q3 and 8% year-to-date. Advisory sales improved sequentially, falling 34% year-over-year in Q3 versus 48% in Q2. All three regions saw sequential improvement paced by continental Europe, where advisory sales revenue fell just 7% in Q3, compared with 26% in Q2. In the U.S., we added 280 basis points to our market share, according to RCA, as investors seek out the best device and execution in a challenging market. Given the high level of institutional dry powder and continued low interest rates, investor demand for quality real estate assets with strong rent rolls and credit-worthy tenants remain solid despite the pandemic. Commercial mortgage revenue fell 21% in the quarter. The lending environment improved marginally from the second quarter, but lenders remained quite conservative in their underwriting standards, which weighed on volumes. Notably, multifamily volumes rebounded sequentially during the quarter, and by September, exceeded the prior year level. Refinancing activity comprised 60% of our year-to-date originations, up from the typical 40% to 50% range. Our other advisory services business lines were less impacted by COVID during the quarter. Valuation revenue fell about 10% in line with the last quarter, while advisory property and project management and loan servicing each saw fee revenue growth of over 2%. Lower growth in loan servicing was the result of lower loan prepayment fees. Excluding prepayment fees, our servicing revenue would have grown at a low double-digit clip, consistent with previous quarters. The loan servicing portfolio grew 13% over the prior year period and 3% sequentially to nearly $253 billion. Forbearance requests also continue to be immaterial for this business. Turning to slide nine, our global workplace solutions business increased fee revenue nearly 6% as 9% growth in facilities management and 13% growth in project management offset a steep decline in GWS transaction revenue. but a margin expanded nearly 480 basis points to nearly 17%, despite the loss of high margin transaction revenue. And this was our second consecutive quarter of record profitability. This strong improvement in profitability was partially driven by temporary measures, primarily associated with lower discretionary spending and bonus accruals, long-term cost efficiency initiatives, and about $12 million in expenses in the prior year period that did not recur. Structural changes to the cost structure contributed about one-third of the margin improvement. We also expect to drive gradual, long-term improvements in profitability as our client relationships expand and mature. Long-tenured, satisfied clients typically expand their scope of service and engage us to support their project and transaction management needs. While our margins are improving and our new business pipeline is strong, we continue to feel the effects of pandemic-related delays in securing and onboarding new GWS clients. Several large contract decisions flipped from Q3 to Q4, while others are temporarily on hold. As a result, we continue to expect top-line growth to be more muted than we would typically expect in a more normal recessionary environment. Turning to slide 10, let's now look at our real estate investment segment, where we achieved $65 million of adjusted EBITDA, a $51 million increase from the prior year period. Development was a standout performer with adjusted EBITDA rising to approximately $50 million, reflecting a large number of asset sales and a small contribution from the UK multifamily development business we acquired last October. We are benefiting from positioning our portfolio to meet elevated demand for multifamily, industrial, and healthcare assets. In fact, these three property types, plus office buildings that are at least 90% leased, comprise over 80% of our in-process activity. Because of this and our sizable pipeline, we expect our development business will remain resilient moving forward. Our investment management business also had an impressive quarter. Adjusted EBITDA rose over 12%, and importantly, adjusted EBITDA from recurring sources increased nearly 70%. This reflected continued strong growth in assets under management, which reached a new record at $114.5 billion, and more than offset a lower contribution from carried interest revenue and co-investment returns. Lastly, HANA's adjusted EBITDA loss of nearly $10 million was slightly higher than in the last quarter. HANA's results continue to be impacted by lower-than-anticipated occupancy as a result of the pandemic, as well as costs associated with expanding our enterprise-focused flexible space solution. Turning to slide 11. Given COVID-19's uncertain trajectory and adverse economic impact, we will again refrain from providing explicit EPS guidance, but will provide an update on our expectations for the full year and fourth quarter. In advisory, we are taking a conservative view of transaction activity in Q4. Transaction revenue has performed better than expected during this crisis, which is partially driven by the transaction size and geographic diversification embedded in our business. In the U.S., deals less than $250,000, which comprise over half of total transaction revenue, declined about 26% year-to-date, versus 40% decrease from transactions over $2 million. We anticipate a similar benefit of this diversification in our Q4 results, but also expect the transaction business to recover more gradually. we expect sales and leasing revenue together to be down approximately 30% to 40% in Q4, in line with the trends we saw in the second and third quarters, with the Americas slightly lagging other parts of the world. For the rest of the advisory business combined, we foresee a mid-single-digit revenue decline in the fourth quarter. This reflects the expectation that Q4 will be our highest revenue-generating quarter, as it usually is, Given this uptick in revenue and our continued focus on cost management, we expect advisory adjusted EBITDA fee margin to continue expanding by around 2% compared with Q3. Moving to GWS, we now believe growth in fee revenue will rise in the mid-single-digit range for the year, with growth in contractual facilities management and project management revenue offsetting continued weakness in GWS transactions. This marginally lower-than-normal growth expectation reflects our view that the pandemic-related delays I mentioned earlier will improve more slowly than we previously expected. At the same time, we expect double-digit, full-year adjusted EBITDA growth, reflecting the benefit of stronger-than-expected Q3 performance and the continuation of our cost management efforts into Q4. We expect margin expansion will be slower sequentially as the benefit of temporary cost actions dissipate. Looking at REI, our global investment management and development business lines are well positioned for the current environment, and we foresee more resilient performance than during the last downturn. In investment management, we anticipate adjusted EBITDA will grow in the high teens range from the 91 million achieved last year. We now expect growth in recurring EBITDA stemming from our growing AUM to be complemented by higher expectations for incentive fees and carried interest than we previously anticipated. We now project U.S. development adjusted EBITDA to exceed the more than 100 million generated in 2019. Demand for quality assets has been stronger than we previously anticipated, and we now expect to complete more asset sales before year end. We again expect sequential growth in adjusted EBITDA from UK multifamily development in Q4. The pace of improvement since the peak of the pandemic has exceeded our expectations, and we now expect a small but positive EBITDA contribution from UK multifamily development for the full year. This is an improvement from the break-even performance we expected previously. And finally, our expectations for HANA remain consistent with our previous outlook, with an adjusted EBITDA loss of around 35 to 40 million for 2020, which is marginally higher than the loss incurred in 2019. Turning to slide 12, we've continued to fortify our financial position throughout the COVID-19 crisis. On a run rate basis, we have lowered our expense structure by nearly 200 million. We expect to realize about 120 million of this in 2020 and approximately 80 million in 2021. We primarily achieved these reductions by making structural changes in the design of our workforce, while also focusing on right-sizing our cost base and teams to meet future demand. In addition, our liquidity has increased by almost $1 billion from a year-ago period to $4.2 billion, and we ended Q3 with just 0.2 turns of leverage, down over 0.4 turns from a year ago. This improvement reflects the long-term strategic work we initiated well before the pandemic to drive improvements in profitability and cash flow conversion. Given that we've been able to strengthen our financial position meaningfully at the depth of the COVID-19 crisis, we're highly confident we have ample capacity to withstand future challenges while simultaneously deploying discretionary capital. As Bob highlighted at the outset of the call, we strongly believe there will be parts of our business that will benefit from COVID-driven secular trends. as well as portions that are likely to be adversely impacted. We plan to focus our discretionary capital deployment on areas where we believe the crisis is likely to accelerate demand. At the moment, we are deploying capital for internal investments and actively evaluating a steadily increasing M&A pipeline as we begin to see strategic opportunities. This means we will prioritize internal investments and M&A rather than share of purchases. We want to ensure we are using our liquidity and financial capacity to enhance the revenue and profitability growth trajectory of our business, as well as the resiliency of our business over the long run. We're also recognizing that the cost actions we've taken this year have impacted our people. As we've said before, once the time is appropriate, if we are unable to identify suitable and properly valued acquisition opportunities, we will then consider share repurchases. While the environment remains highly uncertain, we're more confident than ever that our business and our capital structure are positioned to not only weather the challenges presented by COVID, but to build on our industry leadership position and maximize long-term earnings and cash flow growth. With that, please turn to slide 13 and I'll turn the call back to Bob.

Thanks, Leah. Before we take your questions, I want to briefly acknowledge our CBRE employees. Their hard work and strong focus on our clients are truly distinguishing our company at a time of significant challenges stemming from the public health crisis. These challenges have also brought us closer together as a company. The $6.1 million we raised from our people and the company for the CBRE Employee Resilience Fund has enabled us to provide more than 9,000 grants to our colleagues who are facing financial hardship. We are pleased to help make their lives a little easier during this stressful time. Now operator, we'll take questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star followed by the one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. Once again, that is star 1. And we'll take our first question from Steve Sakwa with Evercore ISI.

Thanks. Good afternoon. I just wanted to circle up on a couple of things. Leah, the $55 million in expenses that you talked about, these transformation initiatives, I just wanted to get a little bit more understanding how much of that was to benefit the current quarter and how much of that is really kind of longer-term kind of benefits to the company. And how do we sort of measure or see those benefits going forward?

Here, Steve. The $55 million was one-time costs that we recognized in the quarter attributable to the separation and other expenses related to the transformation. Those will, in combination with workforce actions that we took in the second quarter, will amount to about $200 million of run rate savings. A little more than half of that will benefit from this year, and the rest will commence in 2021.

Okay, great, thanks. And then I know you can't be too specific about the M&A activities, but, you know, I guess I'm just trying to get a little bit better feel for the areas, you know, maybe if you think about your three divisions, you know, where you're more likely to deploy capital or maybe where you're more likely to see opportunities arise or maybe where you're seeing more opportunities today.

Yes, Steve, this is Bob. We've gone through our business pretty carefully in the past year, subject to a very thorough strategy update that we did. And we've identified areas of our business that we think either we're well positioned to grow disproportionately in or there will be secular tailwinds. and we're targeting those areas of our business for M&A activity. Now, we'll do M&A activity in other areas if we think we can get a particularly good deal or if we think we have holes in our geographic coverage, things of that nature, an ability to add to our capability for our clients. But we're really focused on some areas of the business that we think are going to have nice secular tailwinds, and they're very much in line with what we do as part of our core offering, and we're pretty excited about what's out there for us right now. But I will say we're going to be patient. We're not going to run out just because we have the dry powder we have or because we're in a low point in the market cycle and buy up a bunch of stuff unless we think we can integrate it well, it's got a good cultural fit, and we can make a reasonable deal.

Okay, thanks. That's it for me.

We'll go next to Anthony Palamoni with JP Morgan.

Thank you. First question is, I guess we'll stick with the M&A side of things. Are you considering deals that just add to businesses that you're already in as you think about this? Are there new places you think you can go into? Because I know in the last Several years you've done, you did New Orleans, I got you into data centers, you did infrastructure on the investment management side. And so just curious if what you're focused on is additive or just new to the platform. Yeah, Tony, we will look for things that are closely adjacent to what we do and we think consistent with our skill set and relevant to our client base. we would not likely go too far afield from that because we think there's enough opportunities that would meet that requirement or be more core to what we do. And that's basically how we think about that. Okay. And do you see the opportunity set having some sizing you've mentioned? It sounds like putting buyback on the back burner. So it sounds like Are these a potential size that you would not be able to do both?

Our current pipeline is actually larger than we could reasonably entertain in any one quarter. So we are being very cognizant of the opportunity set that we have. We want to make sure that we have sufficient dry powder to act quickly if we find the right opportunity. And so from our perspective, we think it's a prudent measure given, one, we have a very active M&A pipeline, and two, we are taking actions that directly impact our people for us to balance our approach on the buyback and put that off For a quarter or two.

Okay. And then on the cost side, thanks for all the detail there. Just wondering if there's a way to think about it of the $200 million, for instance, if we thought of 2019 as a baseline, what piece of that should we think about as being, I guess, more prominent that would change the margins on a more long-term basis?

That is all incremental reduction from 2019 levels. So it is all run rate.

And you think that's all permanent, not just part of the current environment and doing things more temporarily?

Correct. There have been other actions that we've taken, for example, furloughs or deferring. Our compensation structure naturally reduces because of commissions and bonuses based on certain targets that were set at the outset of the year that won't be achieved So those are not included in the $200 million. The $200 million is actual structural cost reduction, either through reducing, really through reducing overhead and basically headcount.

Okay. And then last one for me, you had mentioned in GWS a couple of items just slipping. I think last quarter you had mentioned, I think, mid-to-high single-digit top line and high single-digit EBITDA. Did that change? I didn't catch if you had updated that part of it.

So we now expect the GWS revenue to be in the single digits. However, we do expect profitability or EBITDA growth to be double digits. So we have updated that.

Okay, great. Thank you.

We'll go next to Jade Romani with KBW.

Thanks very much for taking the questions.

Just to start off with, I think last quarter, JLO CEOs said that the average office lease duration in their pipeline was down by about 16%. What kind of trends are you seeing in terms of how occupiers are looking at their office exposure? And are you seeing a reduction in average lease maturity?

Yeah, James, well, the overwhelming thing that's impacting average lease maturity is that a lot of the big long-term leases just have been put on hold. Decisions aren't being made. We have that circumstance with our own portfolio of office space for our CBRE people. As everybody tries to figure out what space use is going to look like post-COVID, those big decisions aren't getting made. By the way, that's something that will definitively come back. Will it all come back? Probably not, but much of it will come back, and that's on hold. So the average lease is shorter as a result of that. What you're seeing now is renewals, extensions, small deals getting done, but all of that impacts the averages, and we expect that to continue as long as COVID is having the impact it's having now. Thanks very much for taking that question. Just separately, I've gotten a lot of calls from investors today on the restructuring charges, and I was wondering if you could provide any insight as to what types of actions those relate to. You know, was that on the advisory services business? Was that as it relates to TIC's infrastructure and administrative back office functions? You know, where did the actions occur and Should we really be expecting, in terms of a fixed runway benefit, $200 million in annual savings?

The distribution, about 60% of it was in our advisory segments. About 30% was in GWS and about 10% was in REI. That's a combination of the workforce actions we took in the second quarter as well as the transformation initiatives that we launched in the third quarter. The third quarter actions were principally around the stands and layers exercise that we did, just looking at the overall shape and structure of our organization and making sure that we were appropriately structured to be as efficient as possible coming out of this. So most of it is related to severance and other separation costs related to that action. We do have some determinations and other things that have gone through as we've sought to consolidate our workforce. but the vast majority of it is represented in terms of severance costs.

And to what extent does it reflect an expectation of a very moderate and drawn-out recovery in transaction volumes with respect to perhaps 2021 and 2022 in terms of the advisory segment?

Well, we certainly are very cognizant, and we said that, or I said that earlier, that we do expect it to be a more moderate recovery. Therefore, we are being very cautious around the expense structure for our advisory business. And so you should expect we'll continue to look at ways to make sure we're right-sized to ensure that our business and our workforce reflects the level of demand that's coming from our clients.

Okay, thanks very much.

And I guess if you could stratify the cost in terms of headcount reduction versus other structural changes you mentioned, lease terminations, how would that be split amongst those two categories?

The majority of it is severance cost.

Okay.

And then finally, just on the EMEA outperformance on capital markets, which you mentioned, what do you think was driving that? And could that be a leading indicator as to a pickup in demand on that side of the transaction pipeline?

We actually had some really strong performance across EMEA, particularly in continental Europe. So certainly we'll watch each one of those markets. Europe certainly came out of the COVID lockdowns before the Americas, but we're seeing some of that come back. So we're just overly cautious right now in terms of the level of activity that we're expecting in the fourth quarter headed into 2021.

Thanks for taking the questions.

We'll go next to Stephen Sheldon with William Blair.

Thanks. This is actually Josh Lansdowne for Stephen Sheldon. And thanks for taking questions here. I'm going to start with a recurring question, but always good to gauge. I'm wondering how far along you characterize we are in the price discovery process on the investment sales side. I'm wondering if there are any indications that bid-ask spreads have come in over the last couple of months, and if not, can you just outline why the persistent valuation gap?

I think it's going to be really important for us to see larger transactions on the leasing side occur before there's significant transactions that come back from an overall capital market activity perspective. So I think we are still a bit of a ways away from seeing significant capital markets activity resume. One of the benefits, though, is that we are seeing more liquidity in the market, and that will certainly help buoy our investment property sales business come back with more strength than we've seen in prior cycles where there's been more of a credit constraint in the market.

Sure. That makes sense. And then just picking up with one of the prior question lines here, um just generally speaking on the leasing front i mean you've noted longer term delays and making longer term leasing decisions so based on your conversations more recently has it influenced your thought process in any way about leasing activity picking up in a more meaningful way in 21 or does it seem that leasing activity is not going to resume at a higher level until there's some health resolution We, mid-summer, we saw the level of activity and discussions start to pick up some, Stephen, but the fact of the matter is we are deeply engaged with most of the big occupiers around the U.S. and around the world on how they're thinking about this. And they really are looking for clarity. related to COVID before they make their big decisions. And this is really an important point. There's two separate things going on here. One, we do think there will be some real change in the way office space is used going forward. We think there will be less people in the office. We think the offices that will be used less densely. We think they'll be more intensively managed. We think buildings with great infrastructure will be favored. There's a whole separate issue from that, though, and the separate issue is the leaching that's going to get done isn't going to get decided on in this environment, and that is going to come back. It's not all one thing. It's two separate things. Okay. Thank you. And then switching gears to GWS, you know, it's good to hear that interactions have continued here, although I have to say it's, I guess, a little surprising from my perspective to hear that occupiers are delaying their decision-making on this front. just given that there's usually first-year cost savings associated with outsourcing and then later in the added risk of managing operations due to COVID. So I was hoping you could expand a bit more on the reasoning behind the contract delays and what's your confidence at this point in GWS returning to double-digit growth next year? We have very big backlogs of opportunities, not only relative to earlier this year, but relative to prior years. But the simple thing is, There's so much physical presence that's needed to get these things done. People need to examine space. People need to think about moving people from one place to another. People need to think about getting project managers on site and getting work done. All of that is hard to do in this environment. Decision makers traveling to see space. It just has inevitably slowed things down. And clients very directly tell us that. They tell us that they're not in a decision-making mode or their decision-making has been delayed for those reasons. Not knowing how the space is going to get laid out when they move into it or when they move out of it. And so, again, it's so important as all of us think about what this means for our business, the use of office space and the impact of COVID on leasing or office occupancy. There's the absence of decision-making that's taking place that will come back and happen when we get to the other side of COVID. And then there's the different way space will be used on the other side of COVID. It's really important to separate those two things. Okay, that all makes sense. And then last one for me, just looking to grab some comments from you on HANA. You've noted that you're targeting to have 10 units open by early next year now. You know, given your comments around office considerations and the outlook for the future, I mean, does this become more of a priority looking ahead, or is it being rolled out, I guess, about as you expected maybe a year ago? Yeah. So we believe that given what we've learned about the way space is likely to be used going forward, several things. greater flexibility, more satellite-type uses because of people working from home, companies hesitant to put capital in because they're not sure how they're going to think about their space long-term versus short-term. We believe that there's evidence that flex space like HANA will become more necessary than it is today. But like every other kind of office space out there, most markets around the world, people aren't going into the office space in the short term. They're working from home because of COVID. So in the short term, Han has been impacted materially. It performed like we thought it was going to perform this quarter. But in the short term, it's been impacted materially like every other kind of office space has been in the long term. We believe that it could be a more prominent strategy than it has been historically, and we're pretty encouraged about the prospects for FlexSpace and HANA. Okay. Thanks very much for your time. Thank you.

We'll go next to Patrick O'Shaughnessy with Raymond James.

Hi. Good afternoon. How are you guys thinking about pressure on office rents weighing on leasing and capital markets revenue when transaction volume does more fully rebound?

So as we look at the level of activity that we see today, there has been a smaller impact or a lesser impact on the secondary and tertiary markets relative to the large top 25 cities in the world. So as we look at the space needs, I think near term there will be less impact on rents in some of those smaller markets, and particularly on smaller size leases. um in in those cases and in certain asset classes or property types like industrial um as well as multifamily on the capital market side i think you'll be able to see more price discovery happen sooner but certainly from an office perspective we're watching those smaller markets and those smaller space transactions really lead the path for that price discovery and we would expect that as covid begins to attenuate and we have a vaccine and and better we would be able to see more occupancy levels increase in office space, and that should lead to more leasing decisions, as Bob alluded to, and help to drive more capital market transactions in office. So we certainly would expect there to be In terms of capital market activity, transactions happen where you have strong credit rent rolls, long-term tenant leases in place. Those transactions are happening. Where we're seeing the pause is really in the largest cities and in value-add asset class space where there's just too much risk for underwriting today.

But when you do see the bid-ask narrow in some of the major city centers in New York and Boston and San Francisco and those transactions start to happen again, Is your thought that the rents and the building prices have to move lower in order to kind of hit that market clearing level? And if so, is there a concern that that presents a long-term headwind in terms of the commission that you're making off of those transactions?

I would say it's really ultimately going to depend how leasing decisions are made post-COVID. I think it's too early to say specifically where rents are going to go relative to where they are today. There may be some distressed assets where you do see some concessions. But, you know, it's not as though there's massive amounts of vacancy or new assets coming online. You really have to see a radical shift in terms of occupancy need all at once. And you have to remember most of these leases are coming up on a renewal cycle over a long period of time. You don't see massive changes in terms of occupancy being able to execute it, being able to be executed in a very short period of time.

Got it. And then I guess in the theme of major city centers versus secondary and tertiary areas, how are you thinking about the potential impact of urban flight on the multifamily business? As people want to maybe live in the suburbs and not in the city centers, do you still see the same sort of structural demand for multifamily units as maybe you would have expected a year ago?

And multifamily has really been driven by an underlying affordability issue around housing. And so we don't see that abating. And in fact, it's getting more challenging for individuals from a single family perspective. So we certainly think there continue to be secular tailwinds for multifamily.

Got it. And the last one from me, and sorry to go back to margins again, but specifically with regard to your global workplace solutions, that approximately one-third of the margin expansion was driven by structural improvements. Does that imply that the remaining two-thirds was due to more temporary cost reduction measures and those costs do come back in a more normalized environment? Correct. Great. Thank you. Thanks.

We'll go next to Michael Funk with Bank of America.

Yeah, thank you for the question. Just excuse me if I could. So going back to your market share comments in the U.S., the 20-day basis points during the quarter, you know, can you comment on just what you're seeing in the 4Q if you expect that market share, you know, gap to improve? And then, you know, what do you attribute that improvement to?

So, Michael, I think it's a bit too early to speculate on market share for the fourth quarter. It's certainly something that we were pleased to see, and we will continue to monitor it, but I think it's just too early to make a call on that.

Okay. Maybe a couple more if I could then. So, I mean, obviously early on, you know, COVID put a pause in all the activity, and you commented before that you have very strong capital availability driving the sales cycle right now. Are you seeing any impact over in Europe from the recent uptick in COVID? Is that causing some of the potential clients to pause?

It's way too soon, Michael, to make a call in terms of how that's going to impact the market in Europe.

Okay. I'll try one more time then. So the comment about more of the activity towards the low end of the market, you know, type of deals and then you know more you know more multi-family industrial are these more opportunistic deals and you know is there enough potential pipeline there to continue that um you know or is do you think it's more uh more shorter term benefit and you know we need to see you know more of a full recovery to see i guess carry through on the sales cycle you're asking about the fourth quarter Well, even third quarter, what you're seeing in third quarter, that's a deal that got done during third quarter, you know, types of deals, obviously smaller deals, whether or not those kind of reflected more of a kind of normal course of business or this large enough pool for that to continue to help to drive, you know, similar types of activities.

Yeah, so one phenomenon that I think we will see happen in the fourth quarter is the 1031 exchange activity around transactions from a capital markets perspective. That tends to be when we see quite a bit of multifamily transactions come to market in that smaller to mid-tier range. So that is something that we would expect to help buoy the market, particularly in the U.S. But we do have transactions happening within the sales part of our business. You know, there are, well, you know, diversified, strong credit tenant, long-duration rent rolls, underlying certain assets, as well as certain office assets, as well as certain asset classes like industrial and multifamily that are commanding a tighter bid-ask spread, and that's resulting in transactions happening in the market. So, you know, we certainly think there are transactions out there to be done, and that was evidenced in the third quarter around our leasing and sales results. But it's certainly a more muted market just because there is such a significant pause going on around decisions that are being made, particularly in office.

Thank you for your time.

Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to Bob Cilentic with closing remarks.

Thanks, everyone, for joining us today. enduring this move from morning to afternoon, and we look forward to talking with you next time when we report our year-end results.

Thank you. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.