Before the recent increase in US interest rates, Cushman & Wakefield (CWK) and Newmark (NMRK), respectively the second and fourth largest brokerages in the world, relied on high leverage and cheap debt to fuel their growth.  The high risk of this strategy employed by Brett White, the former CEO of C&W, and Barry Gosin, Newmark’s CEO, has been exposed as both companies have been hit by a much higher cost of debt at a time when revenues are falling due to low transaction volume.  This lack of transaction activity itself is a symptom of sharp increases in interest rates and lack of available financing that have put many owners of CRE assets into distress.

The lull in transaction volume has taken its toll on the stock prices of all the large global brokerage houses over the past two years, but none have been hit as hard as Cushman & Wakefield and Newmark which have lost roughly 60% of their market capitalization. Debt-to-equity ratios are approximately 225% for C&W and 125% for Newmark.  The highly leveraged position of these platforms puts them at a severe competitive disadvantage as their onerous debt has resulted in dramatically lower operating margins, cost cutting, and curtailed investment for expansion.  The situation for these firms is tenuous: difficulty obtaining financing or further declines in revenues will make their problems worse and could lead to a major loss of talent.

In Latin America there is less use of leverage than in the US and because of this there has been comparatively less market distress for CRE assets.  At a time when many Latin American markets are showing resilience, it will be increasingly difficult for C&W and Newmark to make the necessary investments to compete effectively when they are saddled with the financial problems of their parent companies in the US. 

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