Marlon Trotman
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Jones Lang LaSalle (NYSE:JLL) continues to weather the headwinds for commercial real estate created by rising interest rates and work-from-home trends. The ECB announced its first rate cut in June, and the Federal Reserve is expected to cut interest rates in the U.S. in the second half of 2024. There are signs of a recovery in commercial office, with global rental volumes improving following a 7% year-over-year increase, and the retail and hospitality sectors continue to recover strongly due to robust travel demand and rising wages. I believe the recovery in the real estate industry will spur increased funding for new projects, and JLL's services-based business is well positioned to benefit from these new fees.
introduction
JLL is one of the global leaders in commercial real estate, with 106,000 employees and operations in more than 80 countries, providing a wide range of services to landlords, investors and occupiers.
lease
Asset Management
Facility Management
Project and Development Services
Investment Management
Advisory Services
The real estate industry has been in turmoil for over four years following the events of 2020, yet as a service industry that relies on skilled real estate professionals, employee numbers have only been reduced by less than 3% from the highest levels recorded in 2019. Since these reductions, employee numbers have actually increased by 17%, which I think highlights their resilience as they have weathered one of the most challenging periods in the real estate industry since the 2008/2009 financial crisis, although of course the impact was minimised by government financial support at the time. The increase in employee numbers demonstrates their intention to move forward as a stronger business once real estate becomes favoured by investors again.
Business Update
Q1 2024 results were strong compared to the same period last year, with revenues up 9% to $5.1 billion and adjusted EPS up 150%, from $0.71 to $1.78. The increase in EPS was primarily driven by higher revenues, capital markets transactions and cost reductions across the business. Results were mixed across business segments, with Market Advisory, the group's second largest division, up 5% year-over-year in revenues and Capital Markets up 6% year-over-year in revenues. Work Dynamics, the group's largest revenue generator, saw revenues increase 11% year-over-year. Additionally, the two smallest business units, JLL Technologies and LaSalle, were down 12% and 11%, respectively, year-over-year.
The commercial real estate market remains troubled, with the majority of transactions frozen and developments postponed or cancelled altogether. Global vacancy rates for Q1 2024 rose to 16.5%, continuing the downward trend in occupancy since 2020. The US market remains the most troubled region, mainly due to a 10-15% decline in available space due to new leases. This is a clear indication of the continuing headwinds in this sector, with tenants needing less space for various reasons, especially with employees working from home no longer needing dedicated workspaces.
In Europe and Asia, new commercial real estate leasing has been negatively impacted by a shortage of modern, energy-efficient office space in central locations with access to public transport. These markets have less availability of hybrid and remote work options compared to the U.S., which has lower vacancy rates and a more stable office market. However, a pause in the development of new real estate projects has created pent-up demand for modern, energy-efficient commercial space as companies strive to provide attractive workspaces to promote employee health and retention.
JLL's workplace and property management platform is customized for companies looking to become an employer of choice, enabling JLL's teams to upsell existing clients and increase revenue at a time when new business is few and far between. Technology adoption in the real estate industry has lagged behind most other industries for a variety of reasons, but this ultimately comes down to it being a fragmented and mature industry with limited technological developments compared to other industries.
On a positive note, the Investment Management business has ramped up debt financing activity across the U.S. since the beginning of 2024 through a variety of transactions, including:
$425 million refinancing of Las Vegas' Miracle Mile Shops
Raises $375 million to fund acquisition of mixed-use campus in San Diego
$520 million investment in Brooklyn waterfront mixed-use development
$750 million in construction financing for mixed-use development near Harvard University in Massachusetts
$869 million refinancing of a 25-asset domestic industrial portfolio.
Prospects and Opportunities
As mentioned above, technology is crucial for companies in the real estate industry, which is why we are investing in PropTech as a venture capital firm through JLL Spark. Getting involved from the VC stage allows JLL to uncover PropTech ideas that have the potential to revolutionize the industry and differentiate itself from competitors. PropTech is one of the most exciting developments in real estate, and although technology adoption has been relatively slow, we expect this business unit to be a driver of future growth for JLL.
Having transitioned from technology to finance, JLL was recently crowned the top debt originator for commercial and multifamily portfolios for the 11th consecutive year. While the deal market has been somewhat sluggish over the past few years and traditional lenders have been reluctant to fund real estate transactions, I believe JLL is well positioned to capitalize on growth in the debt origination market as investors return to real estate.
JLL's dedicated market research team provides quarterly and annual status reports for major global markets. While each region has its own unique challenges and opportunities, a key factor expected to impact each market is interest rates.
In the US, the first interest rate cut is expected in October, following the ECB's 25 basis points cut in June. The Bank of England was also expected to cut interest rates in June, but has not announced one at this time. However, expectations of a June rate cut have been dampened as the recent CPI report did not trigger action from the Bank of England. The latest information indicates that the Bank of England may cut interest rates in August.
Data centers have become a key area for JLL, and the sector's development comes at a key time following a decline in global office development. Data center development has gained momentum in recent years, particularly in the United States, where inventory for the first quarter of 2024 increased 24% year-on-year. Additionally, Europe has grown 20% year-on-year and is an increasingly important market.
In the data centre sector, JLL supports clients with site selection and property management services, meaning it is involved with the project team from the start of the project, maintains the relationship throughout the operational life and generates a stable revenue stream through property management.
The graph below shows the impressive surge in data center development in the major European markets of Frankfurt, London, Amsterdam, Paris and Dublin. 2024 is off to a very strong start, with JLL estimating that 1,587MW is currently under construction in major European markets, with a further 969MW in the planning stages and due for delivery over the next three years.
Competitors
Before discussing the risks to JLL's business, I think it is worth commenting on competition in the real estate industry: real estate has always been a competitive industry, and the professional services that JLL provides are considered to be a resilient and profitable sector within the industry, creating intense competition for new jobs and skilled labor.
The following competitors, along with JLL, form the “Big 4” in commercial real estate. Each business has a specific area of expertise, such as project management, financing, and pre-construction, but there is much overlap in services between the competitors. The largest competitor is CBRE (CBRE), followed by Jones Lang LaSalle, while Cushman & Wakefield (CWK) and Colliers International (CIGI) are much smaller but direct competitors.
Shareholder Returns
Over the past five years, JLL has slightly underperformed its closest competitors, CBRE and Colliers, with its share price up 49%, while Cushman & Wakefield has underperformed its peers following a recent string of negative earnings.
JLL eliminated its dividend in 2020 in the wake of global lockdowns, and to date, the dividend has not been reinstated despite improving free cash flow. At this point, I believe the company is correct in its decision not to distribute a dividend given commercial real estate headwinds and a 1.9x net leverage ratio. However, with interest rates expected to decline and earnings robust, I expect a small dividend to be reinstated in the not-too-distant future to keep shareholders happy.
Share repurchases were just $20 million in the first quarter of 2024. For the remainder of 2024, share repurchases are expected to offset stock-based compensation, so shareholders aren't actually benefiting from these buybacks, they're simply being kept in the status quo by stock compensation.
risk
Geopolitical tensions affect investor business confidence, delaying investment decisions and creating supply chain challenges. JLL is a global company with operations in 80 countries, and geopolitical issues can increase risk levels in certain regions.
Interest rates remain high, causing a slowdown in development and transactions as investors stay on the sidelines. JLL's own market research suggests that lower interest rates will return investment in the real estate sector to historic levels, with the second half of 2024 being the starting point for a recovery.
Technological advances are slow in the real estate industry. JLL operates its own business units, providing technology solutions to clients who want them, but their contribution to sales is relatively small. Competition from PropTech products that are better suited to end users could disrupt JLL's in-house technology division, and continued innovation and further acquisitions may be necessary to keep up with these advances. Of course, acquisitions create their own risks for the acquiring company as it seeks to integrate outside technology into its existing products, but JLL has proven adept at M&A deals.
Final thoughts
In conclusion, after a long period of quiet in the real estate industry (excluding industrial and data centers), I believe we will see a notable increase in activity across the real estate sector in late 2024 and into 2025. JLL has weathered these headwinds over the past four years and now appears well positioned for success. While competition is fierce and clients can easily switch service providers at times, JLL's strong first quarter report shows the company's solid revenue is improving, supporting the company's reputation for delivering high-quality services.
Given the recovery in the real estate market and strong growth in subsectors such as data centers, I believe Jones Lang LaSalle is a buy for those seeking exposure to the real estate sector and/or diversifying away from capital-intensive physical real estate ownership.