This article was produced by Allen Matkins.
The annual Allen Matkins “View from the Top” event looked a little different this year, having gone virtual for the first time in its 13-year history. But that didn’t stop nearly 1,700 attendees from gathering online to hear panels of the country’s top industry leaders – including economists, investors, developers, owners, and brokers – discuss the latest trends in commercial real estate, how the pandemic has had, and will have, an impact the industry, and what’s in store for 2021 and beyond.
Here are the top takeaways from this year’s premiere CRE event:
1. A Rapid but Uneven Market Recovery from the Pandemic Downturn.
Michael Van Konynenburg, President of Eastdil Secured, gave another excellent summation of the current economic climate. Though the pandemic has caused widespread market volatility and unemployment, a fast economic recovery has also occurred, in large part due to the federal government’s fast response that has pumped trillions into the failing economy. In fact, the U.S. economy has never before experienced such a precipitous market decline and recovery—it has taken only five months for the market to recover from a 34 percent decline. But the winners in this recovery are not across the board—the likely winners will be logistics, data centers, life science, and innovation markets, while the most challenged markets will be retail (particularly malls), the hospitality industry, and commodity office.
2. COVID-19 Will Bring a Widespread Expansion of Office Touchless Technology.
While it will take a while for office landlords to coordinate with their tenants to phase employees back to working in-office full-time (in less dense layouts), Kilroy Realty Corporation’s Chairman of the Board and CEO John Kilroy reports that “office technology is now stepping forward in ways it hasn’t in the past to make the touchless environment more expansive.” From automated lighting and elevators to sinks and toilets, Kilroy believes that it won’t be long before an employee will have a chip or keycard on their person that will activate many aspects of their office life when they enter a room, such as turning on the lights, opening and closing blinds, turning on air conditioning, and more. This technology was already in development before the pandemic, but the collective desire to get back into the workplace has made it a high priority for companies and rapidly accelerated its implementation. We can expect offices to look very different in that regard a year from now.
3. Employee Office Culture Will Return.
Though many were excited about the newfound possibilities of working from home early on in the pandemic, many employers and employees have now come around and found that it is less productive than working in an office environment and doesn’t work as well as they initially thought. Working in an office is “about building culture, building community, onboarding employees, building mentorship and apprenticeship,” says Owen D. Thomas, CEO of Boston Properties and Global Chair of ULI. It also wears on employees to have that line between work and home life blurred—“Am I working from home, or living in my office?” Work from home will certainly be a bigger part of the work environment moving forward, but it appears that many companies and employers who went all-in on the work-from-home model early on are now seeing the downside of it and want their employees to return to work. We should expect a hybrid of office and work from home in the future.
4. The Office of the Future Will Prioritize Collaboration.
“We’re really looking closely at how office space may get away from being an area for dedicated work spaces, and how it will morph into more of a living room setting that addresses comradery and connection,” noted Robert Paratte, Executive Vice President of Kilroy Realty Corporation. As it has become clear that remote working has worked better for “head-down” type work and less well for collaborative and creative projects, we may see offices in the coming months and years be re-imagined as spaces that omits the sea of desks where isolated work is done (such work can stay remote). This will be to make more room for wider, less dense floor plans complimented with extra outdoor spaces that encourage the in-person interaction that is so valuable for creative and collaborative work.
5. Global Capital Is Still Looking to Invest in the U.S.
If an attractive asset such as life science or logistics goes on the market right now, interested parties are going to be limited domestically and coming primarily from abroad. Both Kevin Shannon, Co Head of U.S. Capital Markets of Newmark Knight Frank, and Stephen Van Dusen, Managing Director of Eastdil Secured, agree that the U.S. is still the safe haven for capital, creating a global appetite for U.S. investment—Korean investment in the U.S. alone has tripled in the past year. Investment interest is coming from Europe (particularly Germany), Asia (particularly Singapore and Korea), and Australia, which are all looking to invest their capital where the economic growth and demand is happening. With cap rates in European cities in the 2.75 percent to 3.5 percent range, the yield that’s available domestically is comparatively attractive in conjunction with their hedging costs.
6. COVID Is Accelerating Technology Trends that were Already Occurring.
According to Matthew Field, President at TMG Partners, “What’s happening with COVID can be seen as ‘the Great Acceleration,’ accelerating things that were already at play before March.” Warehouses and online retailing, personal fitness, and telemedicine were already trending before the pandemic hit, and this technology has just grown more rapidly due to the pandemic. Of course, hotel, travel, and the hospitality industries have taken a huge and devastating hit and will take time to recover, but as a whole, we will see a lot of societal transformation and innovation born out of this rapid technological acceleration.
7. Leasing Transactions Continue to Be Extremely Slow.
Chris Roeder, Managing Director at Jones Lang LaSalle reports that leasing activity has significantly dropped and that everyone is spending their time preparing for when the world is safe enough to bring life back to a state of normalcy. As Rod Diehl, Senior Vice President, Leasing, at Boston Properties stated, “Until we have a vaccine, I’m afraid that we’re going to be treading water.” A lot of sublease space has also been added to the market over the past few months, and it will be a challenge to fill it all with so many uncertainties about the future still in place.
8. Renewals Will Dominate the Leasing Market for the Next Year.
Our leasing panel agrees that over the next three or four quarters, short-term renewals are going to take up the majority of the office leasing market. Peter Brindley, Executive Vice President at Paramount Group predicts that as tenants begin to identify and discover how they’re going to re-configure, improve, and use their space in a safe way, they’ll be more inclined to relocate and start to execute on those strategies. At that point, the pendulum should shift away from renewals and back towards leasing as tenants realize they need to move to create safe office spaces for their employees.
9. Construction Is Generally Moving Forward on Schedule.
In discussing the effects of the pandemic on development, permitting, and construction, developers reported that projects that were already in process before the pandemic have moved forward with few delays overall. There have been some challenges in navigating on-site safety measures for contractors, but significant delays in construction have been few and far between.
10. Permitting Challenges Are Widespread.
On the other hand, the permitting process has been significantly more challenging for developers and has led to many delays. Building departments, which are already operating with an antiquated, non-digitized system, are working from home and don’t have the supervision, collaboration, or resources that they would have working in the office, significantly slowing down the permitting process. According to Thomas McCarthy, Co-president at McCarthy Cook, operating within a regulated environment when the regulators aren’t at the office has been a major challenge: “To get permits and plans approved with the City [of Los Angeles] has been difficult at minimum and at times a nightmare.” Steve Eimer, Executive Vice President at Related Companies, adds that this issue will probably get worse as these permitting departments’ revenue from taxes shrinks due to the pandemic, putting them under further strain.
For more information about the Allen Matkins 13th Annual “View from the Top” please go to https://www.allenmatkins.com/view-from-the-top/2020.html.
About Allen Matkins
Allen Matkins, founded in 1977, is a California-based law firm with more than 200 attorneys in four major metropolitan areas of California: Los Angeles, Orange County, San Diego, and San Francisco. The firm’s areas of focus include real estate, construction, land use, and environmental and natural resources; corporate and securities, real estate and commercial finance, bankruptcy, restructurings and creditors’ rights, joint ventures, and tax; labor and employment; and trials, litigation, risk management, and alternative dispute resolution in all of these areas. For more information about Allen Matkins please visit www.allenmatkins.com.