A Paradigm Shift For Real Estate?
Before the coronavirus crisis, three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — had tens of thousands of workers in towers across Manhattan. Now, as the city wrestles with when and how to reopen, executives at all three firms have decided that it is highly unlikely that all their workers will ever return to those buildings.Real estate is the most important private market asset class large Canadian and global investors invest in. It has delivered steady and high risk-adjusted returns and has provided pensions with steady cash flows over the years.
The research firm Nielsen has arrived at a similar conclusion. Even after the crisis has passed, its 3,000 workers in the city will no longer need to be in the office full-time and can instead work from home most of the week.
The real estate company Halstead has 32 branches across the city and region. But its chief executive, who now conducts business over video calls, is mulling reducing its footprint.
Manhattan has the largest business district in the country, and its office towers have long been a symbol of the city’s global dominance. With hundreds of thousands of office workers, the commercial tenants have given rise to a vast ecosystem, from public transit to restaurants to shops. They have also funneled huge amounts of taxes into state and city coffers.
But now, as the pandemic eases its grip, companies are considering not just how to safely bring back employees, but whether all of them need to come back at all. They were forced by the crisis to figure out how to function productively with workers operating from home — and realized unexpectedly that it was not all bad.
If that’s the case, they are now wondering whether it’s worth continuing to spend as much money on Manhattan’s exorbitant commercial rents. They are also mindful that public health considerations might make the packed workplaces of the recent past less viable.
“Is it really necessary?” said Diane M. Ramirez, the chief executive of Halstead, which has more than a thousand agents in the New York region. “I’m thinking long and hard about it. Looking forward, are people going to want to crowd into offices?’’
Of course, the demise of the Manhattan office market has been predicted for decades, especially after the Sept. 11, 2001, attacks.
Owners of office towers, including two of the largest landlords in the city, Vornado Realty Trust and Empire State Realty Trust, said they were confident that after this crisis, companies would value in-person communication more than ever. That’s especially the case given how isolated some workers have felt since the shutdown began in March, the landlords said.
The number of workers who actually prefer to be in an office because of the opportunity for social interaction is an unknown factor.
Still, when the dust settles, New York City could face a real estate reckoning.
David Kenny, the chief executive at Nielsen, said the company plans to convert its New York offices to team meeting spaces where workers gather maybe once or twice a week.
“If you are coming and working at your desk, you certainly could do that from home,” Mr. Kenny said. “We have leases that are coming due, and it’s absolutely driving those kinds of decisions.’’
“I have done an about-face on this,” he added.
Barclays, JP Morgan Chase and Morgan Stanley are part of a banking industry that has long been a pillar of the city’s economy, with more than 20,000 employees. Collectively, they lease more than 10 million square feet in New York — roughly all the office space in downtown Nashville.
Jes Staley, the chief executive of Barclays, the British bank, said that “the notion of putting 7,000 people in a building may be a thing of the past.”
The company is studying jobs that would be most adaptable to working remotely, a spokesman said, and some employees could be required to show up in person only on an as-needed basis.
James Gorman, the Morgan Stanley chief executive, declined a request for an interview. But he told Bloomberg that the company had “proven we can operate with no footprint. That tells you an enormous amount about where people need to be physically.”
In a recent email to employees, JP Morgan Chase, which until last year had been the largest office tenant in New York City, said the company was reviewing how many people would be allowed to return. More than 180,000 Chase employees have been working from home.
Other major companies, including Facebook and Google, have extended work-from-home policies through the end of the year, raising the prospect that some may never return to the office. Twitter, which has hundreds of employees in its New York office in the Chelsea neighborhood of Manhattan, told all its employees on Tuesday that they could work remotely forever if they want to and if their position allows for it.
Warren Buffett, the chairman of Berkshire Hathaway and one of the country’s most prominent corporate leaders, predicted that the pandemic would lead many companies to embrace remote working arrangements. “A lot of people have learned that they can work at home,” Mr. Buffett said recently during his annual investors meeting.
New York City has withstood and emerged stronger from a number of catastrophes and setbacks — the 1918 Spanish Flu, the Great Depression, the 1970s financial crisis and the 2001 terrorist attacks. Each time, people proclaimed the city would forever change — after 9/11, who would want to work or live in Lower Manhattan? — but each time the prognostications fizzled.
But this moment feels substantially different, according to some corporate executives.
The economy is in a sustained nosedive, with unemployment reaching levels not seen since the Great Depression. Many companies are in financial trouble and may look to shrink their real estate as a way to cut expenses.
More fundamentally, if social distancing remains a key to public health, how can companies safely ask every worker to come back?
“If you got two and a half million people in Brooklyn, why is it rational or efficient for all those people to schlep into Manhattan and work every day?” said Jed Walentas, who runs the real estate company Two Trees Management. “That’s how we used to do it yesterday. It’s not rational now.”
Still, workers do much more than fill cubicles.
Entire economies were molded around the vast flow of people to and from offices, from the rush-hour schedules of subways, buses and commuter rails to the construction of new buildings to the survival of corner bodegas. Restaurants, bars, grocery stores and shops depend on workers for their survival.
Real estate taxes provide about a third of New York’s revenue, helping pay for basic services like the police, trash pickup and street repairs. Falling tax revenue would worsen the city’s financial crisis and hinder its recovery.
“I get worried that the less money that is coming in, then we can pay less in taxes and less in services, and it becomes a vicious cycle,” said Brian Steinwurtzel, the co-chief executive at GFP Real Estate, the largest owner and manager of small tenant office and retail buildings in the city.
Chinatown in Manhattan typifies the bond between office workers and surrounding neighborhoods. While Chinatown attracts tourists, many restaurants and stores rely just as much if not more on workers who typically pour in every day from the Financial District and nearby courthouses and municipal buildings.
“It is not dramatic to say that we don’t know if Chinatown is going to be here when we come out of this,” said Jan Lee, 54, who owns two mixed-use buildings in the neighborhood, including one that his grandfather bought in 1924.
One of his three commercial tenants, a makeup store, has not paid rent since January. None of them, including two formerly busy restaurants, have paid May rent. Mr. Lee has a roughly $250,000 property tax bill due on July 1 that he cannot afford to pay.
“We have lost millions of dollars,” he said, “and millions of trips that people were taking to spend their lunch hour here.”
At Aux Epices, a Malaysian and French bistro in Chinatown, Mei Chau, the chef and owner, used to serve up to 50 people at lunch, mostly workers from nearby office buildings.
On Friday, she reopened the restaurant for takeout lunch. No one showed up.
“I have had a hard time, and I know I’ll have a hard time,” she said.
Landlords, developers and business owners were hopeful just a few weeks ago that the economy could largely reopen in June.
But the reality, they now concede, is that late summer or early fall seems more realistic for a partial reopening, while a true reopening — something that might resemble a bustling New York — will not surface until there is a vaccine or effective therapeutics.
Still, some developers are dubious that the sudden shift in work environments will become permanent in any significant way.
Anthony E. Malkin, the chief executive of Empire State Realty Trust, the owner of the Empire State Building and eight other properties in Manhattan, said New York’s appeal — a diverse and educated work force and large industries, including a fast-growing technology sector — would drive an economic rebound and a desire for office space.
“The absence of social contact through which people are living today is not sustainable,” Mr. Malkin said. “Can you pay the bills from home? Can you process things from home? Yes. But can you work as a team from home? Very challenging.”
Mary Ann Tighe, the chief executive of CBRE’s New York Tri-State Region, the commercial real estate firm, said offices would undoubtedly change, with a mix of employees working remotely. But workers will still want to interact face to face.
“This isn’t the nature of office work,” Ms. Tighe said, referring to work-from-home arrangements.
Steven Roth, chairman of Vornado Realty Trust, one of the largest commercial landlords in the city, said on a company earnings call this month: “We do not believe working from home will become a trend that will impair office demand and property values. The socialization and collaboration of the traditional office is the winning ticket.”
But driven by safety or financial considerations — or both — many companies, big and small, are rethinking the future of work.
Small Planet, a small software developer in Brooklyn, said about half its work force is likely to continue working remotely even after the city reopens.
“The world is going to be different when we come out of quarantine, and our habits and how we use office space will absolutely be different,” said Gavin Fraser, the company’s chief executive. “It really took the lockdown, if you will, to accelerate those trends.”
I recently covered how coronavirus has infected various segments of real estate. Much like the stock market, anything related to travel, tourism and brick and mortar retail has been clobbered and anything related to e-commerce has thrived.
This morning, Yahoo Finance’s Alexis Christoforous and Brian Sozzi spoke with Fundamental Equity Managing Director Nora Creedon about how the real estate industry can make a comeback after COVID-19:
Creedon rightly notes there is a bifurcation going on in real estate where logistics properties are in high demand and hotels and malls are getting hit hard. She covers a lot more and I embedded the interview below because she offers great insights.
As far as office space, she said "humans are social creatures which thrive on interactions" but admitted every company is rethinking its real estate footprint.
She also said the impacts of these shifts as they play out are way beyond the office and will hit multifamily as well.
Think about it? Why live in a condo in downtown Manhattan, Toronto, or whatever major city if you don't need to physically be at work every day? The whole point of living downtown especially for young millennials was to have the ease of living nearby work and experience the nightlife of the city.
Coronavirus has killed this way of life. Sure, some people still prefer living downtown but a lot of people will prefer moving as far away as possible from highly dense areas.
The new reality is it doesn't matter where you live as long as you log in and produce the work that is required. The most important thing in the new normal isn't living near where you work, it's having access to a great internet connection.
Ari Levy of CNBC reports working from home is here to stay, even when the economy reopens:
We asked experts in various fields for their best predictions on what the world will look like when the coronavirus pandemic finally recedes. In this segment of our series, ”The Next Normal,” we examine what happens when office life reopens and what becomes of remote work.My take? Working from home is here to stay and smart employers will not only embrace it, they will plan everything around it and thrive over the next decade.
While President Donald Trump pushes states to allow businesses to reopen, companies in technology, financial services, insurance and other industries that can successfully function over internet lines are choosing to keep their people home.
Long commutes have been replaced with heavy Zoom use, and workers in big cities are in no hurry to sit on crowded subways and buses during rush hour.
Corporate leaders are waiting for some reliable combination of mass testing, therapeutics, contact tracing and possibly even a vaccine, before they’ll consider it a worthwhile risk to send employees back into the traditional workplace. Another consideration is child care, and with schools closed across much of the country and summer camps unlikely to proceed as planned, kids are likely to be at home during the day at least for the next few months.
Facebook said last week that most of its employees will be allowed to work from home through the end of 2020. Google parent-company Alphabet plans to open offices for up to 15% of workers as early as June, but the majority of people who can work from home will continue to do so, perhaps through the end of the year.
“We’re going to see this come back more slowly than you might have expected,” said Liz Fealy, who runs the global workforce advisory group at consulting firm EY. “Especially in organizations where people believe employees can be equally productive at home.”
A staggered return
Fealy said that she’s hearing companies talk about a variety of different ways to start sending employees back when they believe it’s safe.
One general theme is a staggered return, with people coming to the office in waves based on individual risk levels, and increasing in numbers as contact tracing improves.
Another approach could be “clustering employees on teams” so if there’s an infection it’s easier to identify who is most exposed and needs to be quarantined. Corporations are already looking to employ phone-based contact tracing to help track employees who have been in close proximity at the office, then use that information to inform workers who may have been exposed and ask them to self-quarantine.
Across the 198 global offices of Fidelity National Information Services, a financial technology company, roughly 95% of employees are working from home. Chief Risk Officer Greg Montana doesn’t see that lasting forever, but he says there’s no returning to the pre-coronavirus days of packed buildings.
From his home setup in Jacksonville, Florida, Montana told CNBC that the first phase of a return to the office will be for those employees who are itching to get back, either because they feel isolated in their current confines and yearn for human contact or because they’re struggling to be productive. Even that small initial wave is unlikely to begin until late in the third quarter or early in the fourth, Montana said.
“We are really focused on the health and well-being of our employees,” said Montana, who’s part of a 40-person crisis management team that’s meeting twice a week to work on the company’s reentry plan.
Montana said that FIS wants to make sure employees are getting temperature checks, masks are readily available and deep-cleaning processes are in place for meeting rooms. The company is also putting together procedures for travel, so employees can go to a website, type in the desired destination and determine if it’s advisable to make the trip.
In the meantime, the company has been issuing virtual private network licenses to employees so they can access the network remotely and offering wireless hotspots to those who lack reliable home Wi-Fi.
“If you’re able to be productive at home, we want to get you what you need to be productive,” Montana said.
At consumer products giant Newell Brands, parent company of Sharpie, Coleman, Rubbermaid and Crock-Pot, Samantha Charleston is leading the return-to-office task force.
Charleston, a vice president in human resources, told CNBC by email that she’s working with local leaders across each of Newell’s regions to determine how and when to begin the return process, taking into account government recommendations, office readiness and input from employees gathered through weekly surveys.
Like FIS, Newell is content to take its time, as Covid-19 breakouts continue to emerge in various parts of the U.S.
“For the time being, Newell Brands is continuing our remote work structure for the majority of the office population,” Charleston wrote. “The repatriation process back to the office will be slow to make sure we take every safety consideration on behalf of our employees.”
Remote tools are exploding
Experts say that even when the coronavirus is in the rearview mirror, many of us will still be working from home.
Now that so many companies have been forced to function with a remote staff and to adopt technologies that enable collaboration from a distance, they’ve already made the necessary investments, and they know they can save money on office and real estate costs. According to Global Workplace Analytics, employers can save $11,000 a year for every employee who works remotely half the time.
In addition to Zoom, Slack and Microsoft Teams, products like design software Figma and knowledge-sharing tool Guru have seen growth accelerate as companies cobble together a suite of work-from-home products. Alex Konanykhin said his company, TransparentBusiness, which helps customers securely manage remote workforces, has seen an 800% increase in subscriptions since March 1.
Some companies are also paying for remote mental health services and online learning sites for employees. And they’ve seen positive results.
“In some cases, productivity has accelerated,” Charleston said. “A benefit of the new situation is it has given employees an outlet to try new things, think differently, share ideas and find solutions.”
Chris Bedi, chief information officer of IT automation software provider ServiceNow, says the terms remote work and work from home are going to disappear.
“There’s just work, and it’s work from anywhere,” said Bedi, in an interview last week.
He said that the talent war will also fundamentally change, because employers will quickly realize that they can start hiring anywhere and attract a whole new set of prospects. And even though there’s a level of Zoom fatigue that’s setting in from nonstop video calls, the travel market is forever changed, he predicts.
“The concept of getting on a plane for six hours for a two-hour meeting and being jet lagged, people are going to go — why?” Bedi said.
Jeff Snyder, founder of Inspira Marketing Group, said his company approved the purchase of external monitors so the 90 employees with desk jobs could easily get up and running at home. Inspira has an additional 300-plus employees who work in the field doing event-based marketing, a business he says has been “crushed.”
Snyder said his human resources team has been actively reconfiguring the offices in Connecticut, New York and Chicago to allow for social distancing and cap the number of people that can be present at a time when they do start coming back. The company has also ordered 10,000 masks.
Despite all the available safety measures, Snyder’s not expecting many employees to rush through the door at their first opportunity.
“We know it’s not a light switch where all the sudden it’s game on,” he said. “There’s going to be zero pressure forcing people to come back.”
Tech companies like Twitter, Google, and Salesforce will let their employees work from home for as long as they need but other companies in all spheres of the economy are doing it too.
There is a fundamental paradigm shift going on and in the nature of work and there are good and bad points to all this:
- Working from home isn't everyone's preference but it's here to stay.
- Employees don't need to stress every morning to commute into work. They can sleep a lot better and wake up to log in to work.
- Millennials prefer working from home but so do senior partners at law firms and accounting firms who don't want to be exposed to COVID-19.
- Companies are looking to cut costs and improve productivity and renting large office space is questionable in a post-COVID-19 world.
- Tech companies are increasingly shifting to work remotely and they are increasingly major anchor tenants of top office buildings so if they are doing this permanently, there's big trouble ahead for office buildings.
- Also, tech companies hunting for talent are setting the new trend by allowing their employees to work from home indefinitely, and others will follow their lead or risk being left behind in the talent war.
- The name of the game is flexibility. Employers offering their employees the flexibility to work from home will not only attract the best talent, they will be able to diversify and attract more women with young children and even people with disabilities who are more comfortable working from home.
- This shift in work opens up the possibility of further globalizing the service sector. Goldman Sachs recently said it will honour job and internship offers to 1,460 Indian graduates and students this summer, the equivalent of a quarter of its workforce in the country, forging ahead with expansion plans despite uncertainties due to the Covid-19 pandemic. Who's to say Goldman (and others) won't hire cheaper offshore labor to do jobs they are currently paying professionals a lot more to do?
- So, if companies are going to hire more women with young children and people with disabilities, that's good but if they use this new normal of working from home to offshore service sector jobs, that's not good as it exacerbates inequality and it's deflationary.
- There is a fundamental shift going on in terms of the nature of work, working from home will make it easier to hire more disadvantaged groups but it will also make it easier for big companies to offshore high-paying service sector jobs to India, China and elsewhere.
- Working from home is much better for the environment, no question about it, so from an ESG perspective, it makes a lot of sense to allow people the flexibility of working from home.
- Where are we most exposed across public and private markets?
- Are recent trends transient or permanent? If permanent how do we adapt?
- From an ESG perspective, what are the pros and cons?
- Do we have the requisite skill set to understand all the risks and are we taking a holistic view to understand the repercussions across individual portfolios and our total portfolio?
It's very hard to extrapolate trends into the future but my thinking remains working from home is here to stay, competition for talent will heat up and any organization which isn't prepared, will be a laggard.
Real estate is undergoing a paradigm shift. Long gone are the days of schlepping into an office, waiting with hundreds of others to get into an elevator to go work at some cramped open office space.
Will there be ramifications on multifamily real estate? Undoubtedly there will but maybe not right away until people gauge how their company is rethinking its real estate footprint.
The long-term risks to pensions? There are plenty and it will affect everyone.
There will also be negative impacts on other asset classes. For example, if people are working from home, it will impact revenues from CPPIB's highway 407 as well as CDPQ's new REM project. I can list a hundred other investments from other pensions which will be impacted.
In other words, this is a major, major shift and you need top minds to figure out how it will impact the entire pension portfolio.
I've only presented one side of the argument and I know there are some who think this is positive for commercial real estate but if I was a developer, I'd shift my attention away from offices, malls and even condos and focus exclusively on logistics.
Then again, I was thinking why not create satellite offices in each major suburb which are designed in a way that respects social distancing and allows those that want to still go into an office the possibility to interact with others.
In other words, you don't need one major building downtown with all your employees, spread them out into smaller satellite offices according to where they live.
But again, why do this if people prefer working from home? Most companies won't invest a dime in developing satellite offices if their employees are just fine working from home.
All I can say is there's a lot to think about when it comes to the death of the office:
Is there a paradigm shift going on in real estate? You bet, this goes way beyond Amazon and logistics properties, there are wide ramifications across public and private markets.
Below, Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Fundamental Equity Managing Director Nora Creedon about how the real estate industry can make a comeback after COVID-19.
Ms. Creedon is very intelligent and she knows her stuff, offers great insights.
Also, the pandemic is reshaping the workplace, which is now more flexible and remote. Owen Thomas, CEO of Boston Properties, joins "Squawk Box" to discuss whether it could have a lasting impact on the commercial real estate market. Great discussion, listen carefully to this exchange.
Lastly, trader Karen Finerman on the future for commercial real estate. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour and Steve Grasso.