Earnings Call
Cushman & Wakefield Ltd. (CWK)
Earnings Call Transcript - CWK Q4 2022
Megan McGrath, Head of Investor Relations
Thank you, and welcome to Cushman & Wakefield's fourth quarter 2022 earnings conference call. Earlier today, we issued a press release announcing our financial results for the period. This release, along with today's presentation can be found on our Investor Relations website at ir.cushmanwakefield.com. Please turn to the page on our presentation labeled cautionary note on forward-looking statements. Today's presentation contains forward-looking statements based on our current forecasts and estimates of future events. These statements should be considered estimates only and actual results may differ materially. During today's call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Reconciliations of GAAP to non-GAAP financial measures, definitions of non-GAAP financial measures and other related information are found within the financial tables of our earnings release and the appendix of today's presentation. Also, please note that throughout the presentation, comparisons and growth rates are to the comparable periods of 2021, and in local currency unless otherwise stated. For those of you following along with our presentation, we will begin on Page 4. And with that, I'd like to turn the call over to our CEO, John Forrester.
John Forrester, CEO
Thanks, Megan, and thank you to everyone joining our call. With me today is Neil Johnston, our CFO; and I have also invited Kevin Thorpe, our Chief Economist, to participate in the Q&A portion of the call to provide insight into our macroeconomic and market outlook. I am proud of the results we have reported today. And I want to thank our team of exceptional professionals around the world. 2022 was a year like no other. And our team's ability to provide value to our clients in such volatile times is a testament to their hard work and the strategic groundwork that we as a company have been laying to enhance the strength and resiliency of our platform. 2022 was of course a year of two contrasting halves with record results in the first half, offset somewhat by a second half that presented considerable macroeconomic headwinds. Despite the uncertain environment, Cushman & Wakefield reported strong results for the full year. Fee revenue of $7.2 billion and adjusted EBITDA of $899 million, growing 8% and 4%, respectively, were record company highs. Our 2022 results reflect the consistent execution of our multi-year strategy of building a fully diversified global platform with a strong mix of highly recurring revenues. During the year, we continued to invest in long-term strategic growth areas completing and integrating six acquisitions and further enhancing our position in growing asset classes such as life sciences and logistics. A few notable highlights of the year include an exceptional growth year for our occupier outsourcing business as we won and onboarded several of the largest available mandates. Our new business pipelines continue to grow strongly with a mix of competitive second and third generation contracts and first-generation outsourcing as corporates look to reduce costs. We had a successful year with our Greystone joint venture, and we remain excited about this partnership and continue to build out our full-service multifamily platform to drive market share gains in what is now the largest asset class for institutional investors in the United States. Additionally, we achieved double-digit growth in Industrial Leasing, while Life Sciences leasing grew by more than 60% versus the prior year, both reflecting our prior investments in these key growth areas. Lastly, despite the challenging environment in Capital Markets, in the second half of the year, our overall market share for investment sales volume in the U.S. increased 11 basis points in 2022, according to Real Capital Analytics. We finished third overall in total investment sales volumes, while moving up to second and fourth in the industrial and multifamily asset classes, respectively. Our ability to gain market share, even during challenging times, demonstrates the quality of our teams and the impact of our strategic investments in the highest growth sectors in commercial real estate. These notable highlights were accomplished while further strengthening our balance sheet, putting us in an excellent position to take advantage of future growth opportunities. Our industry remains relatively fragmented in many markets and times of volatility provide the opportunity to add depth to our global capabilities at attractive returns. Now I want to turn to 2023 and how the year might progress. We ended the year having experienced a significant downward shift in transactional momentum experienced in our fourth quarter results. Capital sat on the sidelines during the fourth quarter and is likely to remain there in early 2023. In Leasing, the shifting macroeconomic resulted in lower overall activity across most asset classes. However, long-term commercial real estate fundamentals remain strongly intact. There is significant dry powder available for deployment, but market participants crave greater clarity on interest rate trajectory in order to facilitate price discovery. We believe that economic green shoots such as continued moderation in inflationary data and a clearer path for those critical interest rate policies could appear relatively soon. While the Leasing market is likely to remain under pressure in the short term, we anticipate demand for higher quality assets and locations to remain strong. In addition, we expect that over the next few years an elevated level of expiring leases, roughly 300 million square feet per annum on par with levels observed in 2021 and 2022, will keep the office leasing market relatively active. We also continue to feel confident in the scale of opportunity and the capabilities we have built in other fast-growing asset classes. We expect continued positive absorption trends in industrial leasing in 2023 with employment in the industrial labor market over 1.3 million jobs higher than pre-pandemic levels. With e-commerce, third-party logistics and global re-shoring trends continuing to grow. Our near-term transactional market caution does not apply to our large recurring revenue service lines. In the fourth quarter of 2022, our PM and FM businesses grew strongly up 8% versus prior year, with solid growth across all segments of that business. In particular, our project management business had a strong year as we helped our clients reconfigure and redesign space, most notably in life sciences. We expect the positive momentum in our recurring revenue business lines to continue in 2023, demonstrating the power of our long-term diversification strategy. Looking across our large global platform, I can give some additional color on where we believe market tailwinds will occur in 2023. We have a leading presence in Greater China with COVID-related restrictions now eased after a substantial term of muted activity. We are expecting a solid recovery this year. In addition, we expect the fast-growing Indian economy to continue to expand as the property market matures. In Europe, challenges such as the Russia-Ukraine conflict resulted in a difficult operating environment in 2022, especially towards the end of the year. Looking forward, we are seeing somewhat better inflation data points in Europe, and we believe that ESG drivers and a flight to quality could provide some resilience in the leasing markets as the year progresses. We have a world-class team in Europe that was able to successfully navigate 2022's challenges and we are confident in our ability to continue to execute. We have high conviction in our long-term strategy and in the results of our investments in targeted growth areas designed to drive long-term shareholder value. Our clients come to us for our exceptional expertise, our unrivaled focus on meeting their needs, and our commitment to creating value in every engagement, and they will continue to rely on us to navigate this complex landscape that we all face. In our day-to-day operations, everything we do is built around our four strategic pillars: client centricity, relentless operating excellence, being a leading people and talent platform, and increasingly leveraging our data with analytics that provide unique insight and value. We're focused on exciting growth sectors with a complete suite of services and solutions for both owner and occupier clients around the world. We are building market-leading platforms in these secular growth areas as we continue to transform our business by operating efficiently and at scale, all the while maintaining a focus on our client-first culture and commitment to Diversity, Equity, and Inclusion. We have a well-balanced business model and the foundational work we have put in place over the past several years has positioned us for success in 2022. Given the current economic backdrop, we are being prudent in our investment and capital allocation decisions, prioritizing long-term growth areas, managing our cost base in order to drive further operating efficiencies—which Neil will touch on in more detail in a moment—and positioning the business to emerge out of the current environment firing on all cylinders. We have an experienced management team that has led through previous economic cycles and that knowledge base is invaluable. We also have exceptional leaders and employees around the world proven in the execution of our business priorities. We have the platform, the people, and the expertise to continue taking market share and delivering value to our clients and shareholders. And with that, I'd like to turn the call over to Neil to discuss in more detail our financial performance.
Neil Johnston, CFO
Thank you, John, and good afternoon, everyone. For the full year, we generated fee revenue of $7.2 billion, an increase of 8% over the prior year, and adjusted EBITDA of $899 million, an increase of 4% over the prior year. Contributions from PM/FM and leasing growth, as well as our Greystone joint venture, were largely offset by lower capital market activity, COVID-related restrictions in China, FX headwinds, and higher commission expenses. Adjusted EBITDA margins were 12.4%, a decline of 46 basis points versus 2021, which was generally in line with our expectations and guidance. Adjusted earnings per share for the year was $2, a decrease of 2% versus the prior year. Looking at our fee revenue by service line, for the full year, PM/FM revenues grew 12%, primarily driven by project and facilities management activity. We were especially pleased with the performance of our PM/FM business and the strong growth in our recurring revenues. Leasing fee revenue grew 15% in 2022, driven by a steady recovery in the office sector throughout most of the year and continued solid performance in the industrial sector. Capital Markets decreased 10% versus a record-setting 2021. Turning to the fourth quarter, fee revenue of $1.9 billion declined 14% versus the prior year. The decline in fee revenue reflects lower brokerage activity, which was most profound in Capital Markets as investors remained on the sidelines. Fourth quarter adjusted EBITDA of $220 million declined 35% versus a record prior year comparison. The decline in adjusted EBITDA was principally driven by the lower brokerage activity and COVID-related restrictions in China, which continue to adversely impact our results in APAC. Adjusted earnings per share for the quarter was $0.46, a decrease of 51% versus the prior year. Moving to our fee revenue by service line for the fourth quarter performance across our entire PM/FM service offering was strong, particularly in our project and facilities management businesses, with PM/FM in total up 8%. Capital Markets fee revenue declined 52% in the fourth quarter, with all segments declining versus a record-setting fourth quarter of 2021. Leasing revenue decreased 10% versus the prior year. Despite continued labor market strength, many office occupiers tempered decision-making during the fourth quarter while awaiting increased macroeconomic clarity. In the industrial logistics sector, when absorption was down sequentially, the fourth quarter still marked the ninth straight quarter in which absorption surpassed the 100 million square foot mark. Valuation and other declined 10% in the fourth quarter as a result of lower activity in our valuation business. Turning to our segment results for the quarter, Americas fee revenue declined 18% year-over-year, with strong 6% growth in PM/FM, more than offset by a 9% decline in Leasing and a 54% decline in Capital Markets. Adjusted EBITDA of $163 million decreased $88 million versus the prior year, principally driven by the lower brokerage activity and partially offset by the positive contribution from our Greystone joint venture. In EMEA, fee revenue declined 11% with PM/FM up 6%, Leasing down 11%, and Capital Markets declining 41% versus a challenging prior year comparison. Adjusted EBITDA of $29 million declined $26 million versus the prior year, primarily driven by lower brokerage activity. In Asia Pacific, fee revenue growth of 2% was driven by the performance of our PM/FM service line, which grew 19% for the quarter, partially offsetting this growth were declines in Leasing and Capital Markets, which declined 16% and 38% versus the prior year, respectively. The declines were most pronounced in China due to COVID-related restrictions. Adjusted EBITDA of $27 million was down $41 million versus the prior year, driven by declines in China. Moving to our balance sheet, our financial position remains strong. We ended 2022 with $1.7 billion of liquidity, consisting of cash on hand of $645 million and availability on our revolving credit facility of $1.1 billion. We had no outstanding borrowings on our revolver, and net leverage was 2.9 times at the end of the fourth quarter. Subsequent to the fourth quarter, we amended a portion of our senior secured term loan, extending the maturity date of $1 billion of the $2.6 billion outstanding to January 31, 2030. Our goals with this refinancing were to extend the maturity of our debt profile while also increasing the flexibility of our balance sheet by spacing out our maturities. We achieved both of these goals with outstanding execution on the deal. Our new maturity profile coupled with our ample liquidity puts us in an excellent position to pursue our long-term strategic priorities. Now moving to 2023, given the current macroeconomic uncertainty combined with typical second-half seasonality in our business, it is unrealistic for us to provide specific guidance at this time for the full year. However, I would like to provide some high-level insight as to how we're thinking about the business this year and what we are planning for as a result. Our recurring revenue PM/FM business is well positioned in the current environment to provide stability, and we expect to generate low to mid-single-digit revenue growth in 2023. In brokerage, we anticipate the environment to remain challenging during the first half of 2023 with brokerage declines similar to Q4 of 2022. We do anticipate sequential improvement in the year-over-year brokerage trends throughout the course of the year, with the timing and strength of these improvements depending on many factors, including the path of price discovery in Capital Markets and more clarity on occupier decision-making. Additionally, we expect that Leasing declines will be less pronounced than Capital Market declines. We will provide an update on our expectations as clarity in the market improves. Looking specifically at costs, as a reminder, on average about 45% of our costs are variable, 40% are semi-variable, and roughly 15% are fixed. Cost profiles vary by service line, but generally, we would expect decremental margins of roughly 40% to 50% in brokerage and incremental margins of 10% to 20% in PM/FM. As a result, the anticipated declines in brokerage during 2023 will result in overall margin pressure, which will reverse as brokerage recovers. As stated on our third-quarter earnings call in the back half of 2022, our teams identified specific actions to drive further operating efficiencies. We have already begun executing on these initiatives and anticipate achieving $90 million of cost savings in 2023. We expect these cost savings to more than offset any inflation in our semi-variable and fixed cost base. However, they will not completely offset the temporary margin contraction from the anticipated brokerage revenue decline, as we believe it's important to maintain a strong position to grow share in the recovery. Given these expectations for the year, particularly as it relates to brokerage revenue, we expect that the phasing of our EBITDA contribution will be more backend weighted to the second half of the year, similar to what we experienced in 2021. In summary, I'd like to leave you with the following. Although we are currently experiencing short-term macroeconomic headwinds, long-term commercial real estate fundamentals remain strong. We've developed a rigorous approach to scenario planning and cost management over the years, and that focus and discipline continues in 2023. Finally, through active balance sheet management, targeted cost actions, and strategic investments, we are in a position of strength, both for the anticipated recovery in brokerage and the continued growth in our recurring revenue businesses. With that, I'll turn the call back to the operator for the Q&A portion of today's call.
Operator, Operator
Our first question comes from Anthony Paolone with JPMorgan. Please go ahead.
Anthony Paolone, Analyst
Yes, hi. Thank you. I guess, first question, just want to understand the comments in the slide deck around brokerage declines in the first half. If I think about the fourth quarter like capital markets was down, I think 53%. Should we take that as your view of what the first half of '23 will also be down in terms of order of magnitude? And I guess same for Leasing.
Neil Johnston, CFO
Yes, sure. Tony at this point, very difficult to project what's going to happen even through the second quarter, but at this point, as we have planned and done scenario planning and looked at the year, we believe that that sort of range for Capital Markets and that's sort of a range for Leasing as well. We're planning for the first half. We are expecting sequential improvements each quarter, and so we expect that to improve especially in the back half of the year.
Anthony Paolone, Analyst
Okay. For PM/FM, you reported 8% growth in the fourth quarter, and you mentioned low to mid-single digits. Given your substantial janitorial business, could you clarify how much of that growth is related to janitorial services? Is it aligned with that growth figure or is it pulling the overall number down a bit? I'm curious about the core trends in that area.
John Forrester, CEO
Hi. Tony, this is John. Yes, I look at the PM/FM as a whole, there is no real specific difference in the short-term dynamics between each of the sector service lines that make up that bucket of revenue. What we've seen is a very strong 2022. As I've said in the prepared remarks, we had a really outstanding year in some of the very large contracts that we brought on. So therefore, I guide, you think about that business more over a period of two to three years, driving that type of average growth as opposed to last year being a blowout year followed by a more muted one. That's not how we see that business because contracts come on, they get integrated and then we go through the sales cycle again. But ultimately, a component to a pipeline, particularly in our outsourcing business, which is growing very, very substantially year-over-year, makes us feel very good about the continued strong growth.
Anthony Paolone, Analyst
Okay. Thanks. If I can ask one last one, since I think we have Kevin on. Just any view on where office market vacancy rates should ultimately settle out once leases are cycled through and sort of the new world for space uses kind of dialed into people's footprints?
Kevin Thorpe, Chief Economist
Yes, sure. I appreciate the question. I guess a couple of points. And I'll lay out the forecast. So I think just in thinking about the office sector, the outlook, I think it's really important to recognize that office demand last year was beginning to stabilize. We just sort of focus on the U.S. U.S. net absorption started to float into positive territory in the first half of last year. In fact, a third of the markets that we track were starting to absorb space again. Even with remote work, we are seeing all these green shoots, stronger demand for space. Return to office was trending higher. Not what it was pre-pandemic, but trending higher, and lease duration starting to normalize back to pre-pandemic levels. From my perspective, these green shoots were confirming our thesis that eventually job the relationship to job growth and demand for space would reestablish itself has started to do that. Now, when we look into this year, the baseline, we're anticipating a mild recession. Risks are high—a high, potentially mild recession. And typically during periods like this businesses do look for ways to cut costs and get more efficient with headcount in space; that's just sort of the recession playbook. Will that actually happen in this cycle? It's certainly being seen in spots in the tech sector, for example, but will that be a trend across the board? I think that's really hard to say. It's worth noting that businesses have already gotten a lot more efficient with their space since the pandemic started. If the mild recession is truly mild, that may not translate into significant job losses. We also mentioned in the prepared remarks that demand for space is somewhat inelastic. Businesses need space to operate their business, and there is always a regular churn in leasing. What we're tracking is a significant number of leases expiring over the next couple of years. The baseline outlook for office vacancy is at 18.2% in the U.S. We have that trending to 20% through the recession and then stabilizing and trending lower from that point forward.
Anthony Paolone, Analyst
Great. Thanks for that.
Operator, Operator
Our next question comes from Chandni Luthra with Goldman Sachs. Please go ahead.
Chandni Luthra, Analyst
Hi, this is Chandni Luthra from Goldman. Thank you for taking my question. I'd like to talk about the $90 million cost savings that you talked about briefly. What are the areas that you're targeting? What are the temporary actions in there? And what are the segments that are going to be most impacted with these actions?
Neil Johnston, CFO
Sure, Chandni. The majority of those costs are permanent costs. They focused on efficiency. So rather than just going in and doing temporary cuts or randomly taking up cost, we've been very, very focused to make sure that the business stays strong and we continue to drive our efficiency. Remember, this efficiency journey has been a three-year journey, and so this is just a continuation of that; it really spans all costs and all geographies.
John Forrester, CEO
One thing I'd add, Chandni, is that intuitively, of course, you'd be focused on taking costs out of that part of your business that's going through a low-volume period. Interestingly, of course, the brokerage business is actually a very light cost business. If you are going to drive substantial cost savings to try to cover all the decrement of revenue falls in transactions, you'd actually have to cut hard into the infrastructure that's driving the growth on the services side. That will be the case for all organizations like us with a diversified model. So the key for us is to ensure that we focus on stripping out, say, inflation that's coming through from our own service suppliers and in the work that we do and allow ourselves to maintain a world-class workforce. So that will come out. As I said in the prepared remarks, firing on all cylinders, because we do believe the fundamentals are absolutely in place for a strong recovery at some point.
Chandni Luthra, Analyst
Got it. And as a follow-up, I'd like to talk about leverage a little bit. How do you think about your leverage target in 2023? Where do you think leverage is going to track? Is there going to be some cadence that we should think about? And then as a follow up, within that you obviously recently amended a portion of your term loan. Could you discuss how we should think about your interest expense in 2023?
Neil Johnston, CFO
Sure. So Chandni, let me unpack that a little bit. If we look just at leverage, our long-term target remains intact. Our leverage over the long run is to be in that two to three times range. We ended the year at 2.9 times, so well within that range. Going into '23 with an expected decline in EBITDA, you will see that leverage temporarily move up. But I think what's much more important is liquidity. We have over $1.7 billion of liquidity. We feel like we are in a very strong position from both leverage and liquidity standpoint. In terms of extending the term loan B, we just saw a unique opportunity in the market as we came into the year. We have a $2.6 billion term loan B that's expiring in '25. So we do have time. But coming into the year, we saw spreads move in and we saw a lot of demand for our paper. So we had a very successful transaction where we just pushed out $1 billion to 2030. The goal there was really just to space out our maturities and give us a very flexible balance sheet to strengthen our balance sheet overall. In terms of interest rate cost, the increase from that was very small—50 basis points—so less than $5 million. It was cost-effective in terms of the transaction itself. However, we will see interest go up slightly in 2023 just because of SOFR increasing. I would remind you that about 80% of our debt on a net basis is fixed, so that does reduce the impact of floating rate debt moving.
Chandni Luthra, Analyst
Excellent. Thank you.
Operator, Operator
Our next question comes from Stephen Sheldon with William Blair. Please go ahead.
Patrick McIlwee, Analyst
Hi. This is Pat McIlwee on for Stephen. As a follow-up to Anthony's question and John's response to it. It sounds like everything is going well in the PM/FM business, and I understand it's a pretty unique operating environment. But given the guidance, is there some conservatism baked in there? Or what factors were you considering when building that after what was a pretty strong quarter and year for that business here?
John Forrester, CEO
Thanks for the question. It's actually something that we think about a lot. We are by nature conservative with guidance, particularly in an environment like this. A lot of our growth that comes through in the PM/FM business is based on wins and contract changes in a given year. Sitting here in January, yes, we've got a very strong pipeline, and we feel good about our ability to retain and win business. But ultimately, the success rate within that retention and renewal will make the difference of 100 basis points to 200 basis points here or there. The guidance we've given, we feel very positive that we will achieve more than that due to our continued market share. However, it's based on the availability of contracts at a given time and when they are on-boarded. Just to give you an idea, in particular, the global outsourcing markets, the pursuit of a contract bid out or renewal can be as long as 18 months. So, really, we are bidding on contracts today that won't show up as revenue until potentially the back end of 2024, others on a much shorter timeline could show up as soon as Q2. So that's just really where we will give caution to that guidance number at the beginning of the financial year.
Patrick McIlwee, Analyst
Okay. Thank you. And at a higher level, as the trends in returning to office seem to plateau a bit in a future work environment looks a bit more hybrid in nature. Can you just talk about how that impacts your longer-term outlook for both leasing and PM/FM business? Also, is there anything you can share on your exposure to office properties in one or both of those business lines?
John Forrester, CEO
Happy to. I'll talk about the office sector with regards to how they show up within the organization, and I'll pass over to Kevin, who will have more data on the market as a whole. What we're seeing, and I think this is typical of our peers, is the proportion of revenues derived from office activity right across the platform from transactions also within our PM/FM business has been falling primarily as the size of the other asset classes has been growing. So, actually, our revenues are still very strong in office. But as reported, they've gone from a small majority over 50% to just below 50% over the last 12 months or so. We expect that to continue to fall as a proportion, even though we may well see growth in our office-derived revenues over time. We've been successful in taking market share, and we see opportunities to build and grow teams still in offices in markets where we are underrepresented. We have very high-quality teams who are maturing and growing their ability to penetrate and win. I would just guide that the office will remain fundamentally a very large part of our portfolio but ultimately become less the anchor over time, particularly as multifamily and industrial continue on their secular long-term growth. Kevin, do you have any observations about the return to the office and utilization?
Kevin Thorpe, Chief Economist
Yes. So if we kind of go back to January of last year, this was during the Omicron surge, roughly 18% of workers were at the office on any given day. I think I mentioned earlier, that's now hovering closer to 50%. If you just do back-of-the-envelope math on that, it indicates that there are roughly 9 million more people back at the office in the U.S. on any given day versus the same time a year ago. The pre-pandemic norm was closer to 70%. I'm not sure we'll ever get back to that point again, but with a recession potentially imminent, and the pandemic seemingly stabilizing, we are seeing more companies desiring to have people back in the office more regularly. I do think that's important to the office recovery, and I do expect the in-person attendance to continue to drift higher. Even if we assume that 50% is the new norm, businesses still need to accommodate for when there are more than 50% in the office on any given day. This peak space need for the days when you have the maximum number of employees in the office for teamwork and communication and so forth is ultimately going to drive demand for office space. So we do have occupier space, and the amount of occupied space is continuing to grow through the end of the decade. At this point, which means the office leasing pie also grows; it's just going to be more concentrated in the higher quality segment of the market.
Patrick McIlwee, Analyst
Yes, definitely. It's very helpful. Thanks, Kevin, and thanks, John.
Operator, Operator
Your next question comes from Michael Griffin with Citi. Please go ahead.
Michael Griffin, Analyst
Great, thanks. Maybe switching to more of those non-traditional real estate asset classes. You've got exposure to lab/office. I think the growth in logistics. I know you've talked favorably about data centers in the past. I mean, how much across your existing business segments do you expect this to grow as sort of a percentage of the pie? Any commentary about positive secular trends you're expecting in the near term would be helpful.
John Forrester, CEO
Okay. I'm probably going to toggle this with Kevin, again; he'll have the data at hand more specifically. And I'd make a couple of comments on the level of activity we are seeing from sectors in office. I think a lot has been written and said in the last few weeks about the utilization of office, particularly by the tech sector and layoffs that we are seeing there. What's the impact of that on the office market? What I would say is throughout what has been a very long career with a lot of them working in offices, I've seen that there has always been a particularly driven sector engine that has driven the market. It was just before the millennium 2000 that financial services, particularly investment banking was driving a very large proportion of high-quality office uptake globally. Professional services through and just after the GFC became the big driving engine of office growth, and then we've seen technology, of course, over the last 10 years being that driver. There's always been a growth engine. What we're seeing now actually is the diversification of use being the growth engine. So ultimately a lot of the absorption that we're seeing in the alternative classes like datacenters, last-mile logistics, and life sciences is accommodation that would ultimately have been offices in prior cycles. Our strong fast growth markets can take our revenues from life sciences this year, with a 60% increase in revenue year-over-year, giving you an idea of the rate of growth in these markets, and they're going to take the place of technology as the engine of growth. Overall, we still feel relatively positive about the office sector as a whole because there are always some drivers of demand growing and some becoming more muted within that. I'll pass over to Kevin now; he's probably got more accurate data.
Kevin Thorpe, Chief Economist
Yes, sure. A couple of data points that I think might be helpful. First, just on high-quality office. Since the pandemic started in the U.S., over 100 million square feet of space has been absorbed in the highest quality segment, newly built, with sustainability features and prime location, seeing positive absorption in that space. What I find interesting is that, in terms of the office stock in the United States, less than 10% of the inventory qualifies as this highest quality product. So, think about how massive the opportunity is to reposition office assets to move them up the relevancy curves. So that's office. Industrial logistics, I'd say there's no evidence so far that there's been any slowdown in demand trends globally. In the U.S., as Neil mentioned in his remarks, there is very strong absorption in Q4, and very low vacancy in EMEA, the same holds true with a very low vacancy rate of 3.5%. In Canada, we had a record quarter of absorption, vacancy under 2% in Canada. We do need to be mindful of the recession and keep a close eye on the demand drivers, e-commerce, and the state of the consumer. But the long-term tailwinds are very strong for industrial logistics. Over time, e-commerce will continue to grow in the U.S. and globally as more people shop online. Demand for last-mile space will remain fierce, given the push to deliver products quickly to consumers. So, the consumer spending pie will continue to grow. There are many reasons to be bullish longer-term on industrial logistics, and certainly our investor clients agree. Retail has been a surprise. There is still very strong pent-up demand for experiences, even as we enter an economic downturn. Retail fundamentals remain strong, vacancy is the lowest it has been in 10 to 15 years, and rent growth in retail is being observed. Multifamily is another darling for investors; regardless of cyclicality, people need a place to live, and household formation will continue to grow. Multifamily is the number one asset class now in the United States and is growing very quickly globally. Also, datacenters clearly have strong demand drivers. Data consumption is growing, so we are very confident in the long-term tailwinds and fundamentals in properties.
Michael Griffin, Analyst
And Kevin, on that—let's call the 10% highest quality, those trophy buildings, Class A kind of stock. You mentioned the vacancy expectations. I think 18% for this year, maybe going to 20% next year. Do you have a sense of what that is for that highest end of the market?
Kevin Thorpe, Chief Economist
About half. If you isolate the newly built, prime sustainably featured, all the key aspects of what we define as prime office, vacancy in that product is somewhere between 10% and 12%, and it's lower than that in some key cities, like Manhattan.
Michael Griffin, Analyst
Got you. And then just maybe one last one, sort of on your general macroeconomic outlook for '23. I think you might have mentioned in the prepared remarks anticipation around or a recession at some point this year; that's probably no surprise. I'm just wondering your thoughts, maybe Kevin, this one's best geared for you, sort of where you see inflation maybe getting toward the back half of this year, expectations around rates peaking at some point, any additional commentary there would be helpful.
Kevin Thorpe, Chief Economist
Yes, sure. Just to preface, any forecast should be taken with caution. The situation is fluid with lots of unknowns. Our baseline does call for a mild recession, and the indicators I am studying still point to that. The yield curve remains firmly inverted, confidence is down, and inflation is high. It was June of last year in the U.S. at around 9%, and that has trended lower to 6.3%, according to the latest headline inflation year-over-year in January. This is heading in the right direction, but there are still wage pressures. It's going to be difficult for inflation to get back to target until we see the labor markets cool off, and that will take time. We expect CPI inflation to trend lower towards the end of this year, finishing in the U.S. in the 3.5% to 4% range. For the 10-year Treasury yield, we model this hovering in the U.S. in the 3.5% to 4.5% range for the next 12 months, then settling in at 3.5% beyond that. Our expectation is that growth will resume in 2024, that the recession will clear by Q4 of this year, indicating solid confidence because of the strong underlying fundamentals we have entering this potential recession. Overall, household balance sheets are in excellent shape, and there are strong savings. I do believe that once we get past the inflation problem, the Fed will pivot to lowering rates in early 2024, at which point we should see the economy start to rebound.
Michael Griffin, Analyst
Got you. That's it from me. Really appreciate it. Thanks.
Operator, Operator
Our next question comes from Doug Harter with Credit Suisse. Please go ahead.
Unidentified Analyst, Analyst
Hi, it's Will on for Doug tonight. We're just curious if you guys have had any early conversations, if there are signs of early conversations with buyers or sellers in the market that give you any real sort of confidence in how the markets might perform in the coming year?
John Forrester, CEO
Will, is that question aimed at the Capital Market side?
Unidentified Analyst, Analyst
Yes.
John Forrester, CEO
I think what we've seen so far this year across all markets, sectors, and geographies from capital markets is actually a remarkable level of positivity from investors. There is a significant amount of dry powder, which has been mentioned many times on these calls and in our peers. There seems to be a very clear view that as the fundamentals become transparent, there will be high levels of activity in both sales and acquisitions. The fundamentals of the global capital markets remaining a very large opportunity for us remains extremely strong. It's really a matter of when; whether that's in the back half of this year or potentially later depending on the outcomes that Kevin mentioned. What we're seeing on a client by client conversation basis—I've been around many of the largest investors in the world in the last couple of months—and they remain ready to deploy.
Unidentified Analyst, Analyst
Okay. Great. Thanks.
Operator, Operator
Our next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem, Analyst
Hi, just two quick ones. So just trying to connect some dots here. So looking at the guidance for PM and FM, the revenue expected in the low to mid-single-digits. But I think I also heard your earlier comments that the incremental margins for PM and FM would be decremental. I think that's what I heard. My question is if I'm just thinking about that PM/FM adjusted EBITDA number, are we supposed to see that as sort of a flattish or maybe even negative? Without sort of giving guidance, obviously, how should we think about how that flows through?
Neil Johnston, CFO
Yes. To be very clear, we do not see decremental in—we were talking about incrementals on the services side. So the contribution margin as we grow our services business is in the 10% to 20% range. We're just providing that as a contrast to the decrementals we will see as brokerage declines and just giving guidance on the expected mix change in revenue, especially as we go through the first half of the year. So very clear, we do expect growth in EBITDA in the services business.
Ronald Kamdem, Analyst
Got it. So for the PM and FM basically sort of similar growth on the EBITDA line as the revenue line. Is that sort of fair?
Neil Johnston, CFO
Yes, that's fair.
Ronald Kamdem, Analyst
Excellent. And then my follow-up question is just, I guess my second question, just trying to sort of cash flow. Can you remind us in terms of the conversion rate from adjusted EBITDA to sort of a free cash flow or operating cash flow number, whatever you prefer? What that would have been historically? How does that affect '23? And how should we think about that capture rate changing in '23 and going forward?
Neil Johnston, CFO
Sure. Yes. As we've said before, our long-term free cash flow conversion rate—when I say free cash flow conversion, I'm referring to conversion from adjusted EBITDA—our target is 30% to 40%. As we look at cash flow given the changes we see during the year, especially over the last two years, where we saw strength in the first half, weakness, and then strength. What really should be looked at over a cycle, so as we give that guidance of 30% to 40%—that's a mid to long-range guide that is over the cycle. Looking back historically at the last two years, we look at '21 and '22. As you look at that free cash flow conversion, it was slightly below 30%, around 28%; but right in line with the guidance that we gave earlier last year. For '23, we expect that conversion to be lower given the anticipated weaker brokerage margins in the first half of the year, which should improve throughout the year, as we indicated.
Ronald Kamdem, Analyst
Great. That's it for me. Thank you. Super helpful.
Neil Johnston, CFO
Right.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to John Forrester for any closing remarks.
John Forrester, CEO
Thanks to everybody for joining our call today to hear our 2022 full-year results. As we said, it was a strong year, despite the challenges, and we believe 2023 is going to be another challenging year, but one which we are very well positioned for. The long-term fundamentals of our industry and our position within that industry remain strong. As a company, we're energized by the opportunity that volatility and complex markets provide in the macro environment. We always end up taking market share and coming out stronger in periods like this. The benefit of the scale of a diversified platform makes us feel very good about the opportunity to continue to grow the organization, lean into our strategy, and drive outsized returns. So thank you all for joining, and speak to you next time.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.