When Twitter said it would be all right for employees to continue to work from home after the coronavirus threat recedes, it definitely spelled trouble for the real estate business and all assets connected to it.
This is on the heels of other tech giants, such as Google and Facebook, telling employees they should plan to work from home the rest of the year. Twitter has 35 offices globally and close to 5,000 employees.
For the real estate industry, real estate investment trusts and all real-estate linked assets, this news echoes what’s been on most minds: How will working in office change going forward? Will remote working become the norm, and if so, what will happen to real estate prices?
“We are cutting back on office space,” says Jim Gladney, chairman and CEO of Troy, Michigan-based Portfolio Solutions, which has $1.5 billion under management and manages 800 families.
When Gladney bought the firm five years ago, it came with a 12,000-square-foot building lease for a handful of employees. They were tied to the lease, which will end next year, and they are looking to buy a much smaller building, “reducing the firm’s office footprint by two-thirds.”
He says the pandemic served as a “real world” test for the firm’s updated technology. “We have thought about [not buying the building],” especially as 90% of their clients live more than an hour away. “But it might be nice to have a place to go and if our team wants to be in the office, they can.”
In the meantime, the former private equity executive says the effect of working from home has been positive for his team and clients. “They are happier, more productive, and have more teamwork. Every morning we have a morning huddle on Zoom and then they can get back to serving clients.”
Further, Gladney says that the virtual advisor model allows them to “service clients anywhere in the country, as well as it expands talent pool” as they can work remotely.
Having flexibility to work from home also is appealing to Next Retirement Solutions’ team, says Paul Neuner, managing director and partner. He says he has heard anecdotally that a third of firms won’t go back to a physical location. The main group that wants to continue to work from home are millennials, he says. Neuner added that people are becoming more comfortable doing Zoom meetings.
Perhaps the pandemic caused a surge into remote offices, but it already was a trend, says consultant Angie Herbers, founder and CEO of Herbers & Co. “Many of our clients began to cut back on office space in the past five years due to it being an unnecessary cost to serve clients,” she says.
“The rise of digital work made it easy for advisory firms to have limited space for employees to come together when needed but also work remotely as they wanted. These accommodations significantly helped firm profit margins and allowed them to invest in more growth. … With many of the firms we consult, the ‘hybrid’ type of approach works very well. … I foresee downsizing in commercial real estate but not a total elimination of it. I believe most firms will settle for a hybrid approach,” Herbers added.
A Dour Market
These views were echoed during a recent webinar that looked at the state of real estate and REITs, moderated by Artivest Chief Investment Officer Matt Osborne.
“Is it different this time?” Osborne asked his panel, when considering the “unprecedented speed of the virus, speed of market decline and the extent and dislocation of all sectors of the capital markets.”
David Grumhaus Jr., co-chief investment officer of Duff and Phelps, which has some $11 billion in real assets and REITs, noted that the first quarter was a disappointment, adding that they see a “square root” recovery, where the market would come back but be flat, “especially if there is a second wave of COVID-19. … So we need to be more cautious.”
Jon Barlow, founder and CEO of Finitive, an online marketplace for private credit, said his firm was preparing for an L-shaped recovery, stating that many banks have curtailed lending, or even stopped it. “Many borrowers are not making payments, or having problems paying off debts, so nonbanks are worried,” he said, adding that the firm believes “there will be a chain reaction of defaults.” He said that the Fed’s reaction was helpful but he didn’t see a return to pre-COVID-19 activity.
Osborne agreed that the “rosy outlook for equity is hiding a lot of damage in the credit markets, it seems.”
Grumhaus said this recession will be especially tough on retail and lodging, which make up about 15% of REITs. Areas that are thriving are cell towers and data centers.
The energy infrastructure has been “destroyed. That’s largely a part of price, with both COVID-19 and demand,” but also transportation is hurting with toll roads and airports. “In the past these have held up,” he said. “But today, they aren’t doing well from an economic perspective.”
Regarding commercial real estate, Terrell Gates, founder and CEO of Virtus Real Estate Capital, a private equity real estate fund manager, said that there may need to be more square feet per employee for social distancing, so there “might be demand for suburban property.”
But realistically, he sees the growth of e-commerce continuing. “Maybe [a company] doesn’t need all 40,000 square feet, so there will be headwinds in all areas of commercial real estate,” he said.
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