Class A Offices Moderated JLL’s Vacancy Increases

In a challenging quarter — Q3 profit down 57% year over year and nine months off 89% — there was at least some good news for JLL in an area that might not seem obvious given current markets.

JLL had “maybe a little bit more vacancy, but not that much,” Global CEO Christian Ulbrich told Yahoo Finance in an interview. “We tend to focus very much on the high-end, kind of the grade A buildings in the large metropolitan areas.”

One of the patterns GlobeSt.com has seen and heard from multiple sources and studies is that there’s been a move to quality. Companies paring back on space often look to better quality offices. Not that Class-A office is impervious to pain. Property values even there have been down. But operating an office space can still bring in NOI.

That, however, is the moderating good news. Office was still hit hardest in investment activity, with residential, hotels, and retail faring “comparatively better,” Ulbrich said in the most recent earnings call. Investment activity in the third quarter “remained subdued across asset classes.”

Earnings were still a significant hit in profits. Overall fee revenues were down 13%, with markets advisory off by 17%, capital markets dropping 26%, and LaSalle slipping 11%.

“Interest rate volatility, tighter lending standards, and elevated price uncertainty continued to put downward pressure on transaction volumes,” Ulbrich added. “To put this into perspective, global commercial real estate investments totaled $131 billion in the third quarter reflecting a year-over-year decline of 48% and a sequential quarter decline of 14% according to JLL Research.”

JLL followed the lead of CBRE Group and Cushman & Wakefield, both of which said that they didn’t see conditions greatly improving until the second half of 2024.

“It’s not our typical practice to update mid-term targets during the fiscal year, but we believe additional color is needed, given the prolonged softness in transaction activity our industry is experiencing,” Ulbrich said. “If you recall, when we confirmed our mid-term targets for 2025, our baseline assumption was for recovery to begin in the second half of 2023. Based on what we know today, we do not expect a recovery in transaction activity to take place in 2023 or early 2024.”

Which means an expectation of mid-to-late 2024, coming in roughly where the others had estimated.

“As a result of the industry-wide softness in transaction activity, we are extending the timeline to achieve all of our mid-term targets beyond 2025,” he said.