Office Real Estate Likely to Begin Rebound in 18–24 Months, Say U.S., European Experts
Though the office sector’s viability is looking poor in the short term, its longer-term outlook is much rosier, speakers said at the ULI Virtual Fall Meeting on Thursday.
“Going forward, the next 18 months, 24 months, I am definitely on the more pessimistic end of the spectrum,” said Amy Price, managing partner and co-head of US for BentallGreenOak. Real estate is a cyclical business, she noted. “We’re going through a massive global pandemic and recession, so it’s not surprising that we’re going through this,” she said. “But longer term, I’m much more optimistic.”
Marnix Galle, ULI Europe chairman and executive chairman of Immobel, agreed. “I’m an optimist long term,” he said. “In the next 18 months, we’re going to suffer less than we have currently. There will be a couple of percentages higher in the core markets, and more when you go further out, but I think in a five-year period we can get through this.”
“Fundamentally, I am optimistic for a couple of reasons,” said ULI Americas Executive Committee member Matthew Kelly, chief executive officer of JBG Smith Properties. “If you go back to January and February, one of the things we heard frequently from our tenants was that they can’t find talent. While there is record unemployment, there is perhaps an opportunity to reshuffle the labor force to allow the fastest-growing businesses to reach their full potential.”
The panel heard international views of the situation as Europe faced the threat of additional lockdowns. “A lot of people haven’t been staying at home,” Galle said. “Looking at France and Germany, 80 percent of the workforce was at the office for the last couple of weeks.” Now, with the threat of lockdowns, this progress looks to be halted.
He said core markets remain strong in Europe, but weakening can be seen in the suburbs. The development process has slowed, and it is affecting different cities in different ways. “For example, in Paris, if you bought one of those shiny new towers, you may be in trouble,” he said. But central business district of Brussels is a strong market and will remain so.
“When COVID struck, the pause button got pressed,” said Price. “It’s very hard to be a buyer or a seller right now. In our office portfolio, we saw tours and interest drop to zero. Many of our investors hit pause on making new investment decisions. We’ve seen a little bit of a shift recently, but overall, investors have had to figure out how to allocate capital in the new normal.”
Kelly said COVID affected everyone’s portfolio’s differently. “We didn’t miss a beat even during lockdown because construction was deemed as an essential service,” explained Kelly, whose company is building out National Landing in Arlington, Virginia, as Amazon’s new headquarters. “We look at this climate for a favorable one for pricing new construction.”
In response to a question about whether the pandemic has created an acceleration of trends or a deflection, as pointed out in Emerging Trends in Real Estate® 2021, released this week by ULI and PwC, Faron Hill, president of Peregrine Oak, said, “City center is trending down. We’re all seeing periodic announcements of office buildings in cities such as New York and San Francisco, but nothing to the level we saw before.”
The panelists agreed that the pandemic is going to fundamentally reshape the sector in numerous ways.
“I do think that there may be an acceleration of some of the de-densification that has been going on,” said Kelly. “I think when it comes to wellness, generally that was an important focus pre-pandemic. Post-pandemic, I think you’re going to see a lot more touchless systems such as using an app on your phone that manages garage access. Another thing we’ve been hearing is tenants wanting to reconfigure their space that has fewer assigned seats really close together and more random ad hoc and lounge areas.”
Said Galle: “In Europe, employers have been promising employees that the ‘chicken coops’ are finished—that when they come back to the office they’re going to find wonderful spaces to talk to each other and work. We’re going to have to deliver on those promises because we’ve raised the expectation level. And again, it’s about accelerating the changes that were happening before COVID.”
The panelists all agreed that telework is here to stay. “If telework becomes a more broadly utilized tool post-pandemic—which I believe it will be—that actually serves to cut into those headwinds that were holding back the economic growth of cities,” said Kelly. “Long term, I actually think there’s a lot of reason for optimism if you look through the lens of capital cost and access to capital.”
Kelly warned panelists not to bet against cities. “London and Paris survived the plague, and look at them today, he said. “I do think as soon as possible [as we] are able to come back to those locations, when people are able to be in these vibrant, walkable cities, the office will come back.”