Archives for May 2020

In a Post-COVID World, Office Landlords May Be More Willing to Offer Short-Term, Flexible Leases

May 27, 2020 by CARNM

As corporate tenants figure out how much space they may need in the long term, office landlords have little choice but to be flexible.

Faced with a situation where many corporate tenants may be looking at switching to at least partial remote working model, office landlords are getting ready to offer more flexible workspaces and lease terms.
Flexible remote working arrangements could modestly accelerate companies’ adoption of short-term leases, likely serving as a headwind for office demand in the short term, according to a MetLife Investment Management report on office demand. (In the long term, MetLife Investment Management expects limited impact on office demand, forecasting that while many firms will try permanent work-from-home arrangements, a substantial number of those arrangements will not work out).

Prior to the pandemic, the market was saturated with independent flexible space providers, who signed long-term leases with office landlords and then sublet that space on a short-term basis to end users, creating “a potential long-term liability, short-term cashflow mismatch,” according to Will Pattison, head of real estate research at MetLife Investment Management.
“We believe flexible space as a service is here to stay, but the typical lease structure needs to change,” Pattison says. “We believe landlords and flexible space providers should generally be signing operating agreements, similar to how hotel brands sign operating agreements with hotel real estate investors.”

Traditional office lease terms normally range between five and 10 years. Pattison expects traditional tenant renewals in 2020 to generally target one- to two-year terms as tenants figure out what their longer-term space needs will be. Some tenants may downsize, while others may opt to add private offices and lease more space in order to accommodate social distancing guidelines.
“Despite the immediate challenges that we are all familiar with presented by the COVID crisis, the third-party [office space] provider will still be a viable business going forward,” says Al Pontius, senior vice president and national director for office and industrial assets with brokerage firm Marcus & Millichap. “But there will absolutely be landlords, probably more of the larger landlords, that within their portfolios, they allocate a percentage of their space to offering more flexible terms and even a co-working environment.”
This trend was already underway before the pandemic, with traditional office landlords, including Tishman-Speyer and WashREIT, launching their own co-working brands in their buildings to compete with the likes of WeWork.
One of the primary issues with the short-term leases is the less certain property income, according to Pattison. But in the current environment, office landlords may have to work with the demands of the market.
“It’s tough. It’s not amazing for landlords. There’s a reason why landlords like long-term leases,” says Jonathan Wasserstrum, CEO of SquareFoot, an office space rental agency. Having long-term leases makes it much easier to secure mortgage financing.
But, he adds, “The thing people are starting to recognize at the end of the day is landlords are in a service type business where they have clients. Once somebody starts offering something to the market, assuming it’s something that people want, in this case shorter term deals, then you have to figure out how to offer that to your clients.”
Source: “In a Post-COVID World, Office Landlords May Be More Willing to Offer Short-Term, Flexible Leases”

The Newfound Importance of Technology in Property Management

May 27, 2020 by CARNM

A lot of property management technologies will go from “nice to have” to a minimum requirement in the next year.

In one sense, when the COVID-19 pandemic is over—and that day will come—and the world is back to work again, property managers will still be charged with the same traditional core responsibilities, namely to provide homes and workplaces that are safe for tenants, residents and staff.
But the way we approach that basic responsibility will be vastly different from how we did it before. To use a well-worn phrase, welcome to the new normal. If it isn’t already taking place in your organization, it’s time to reconsider traditional modes of operation in favor of alternative approaches. That’s easily said, but it’s also a massive undertaking, which will most likely involve new technologies.
“In the last real estate cycle, property managers, along with the rest of the commercial real estate industry, enjoyed continued success as they developed and grew,” says IREM Innovator in Residence James Scott. “When everything is working, there is little need to do things differently.”
Change, says Scott, who is also lead researcher for MIT’s Real Estate Innovation Lab, comes from a catalyst. The current pandemic is that catalyst.
Technology is the platform upon which change will occur. From access and security to health checks and sanitation, even managing rent deferrals, expanding applications of current systems and the installation of new technologies will kick the industry’s tech focus into overdrive.

“Several years ago, CTOs and IT professionals would make statements that they were cloud-first,” says Yardi Industry Principal Brian Sutherland. “But the paperwork backup proved that to be untrue, and paperwork left everyone exposed. The pandemic has shifted that perspective, and it’s no longer cloud-first but cloud-required, raising the importance of data privacy, control, and integration far beyond the limitations of paper documentation.”
As just one example, Sutherland points to the increase in systems for the management of accounts payable and receivable that have flooded his shop since the outbreak began. Rent deferrals and special accommodations aren’t a new topic for building managers, he says. But their seamless management on the current scale brought about by the COVID-driven economic downturn certainly is.
“Gaps were exposed about the use of paper in those processes,” says Sutherland. “Accounts receivable management is adapting to market conditions, which means managing rent deferrals, special circumstances, and accommodations seamlessly, and doing so on a scale we’ve never seen before.”
“This entails a huge dynamic shift in property managers’ processes,” says James Scott, but one that will allow a smoother and more efficient integration of data. “It will ensure there is as little paper as possible and allow data input and access via various platforms and devices.”
He sees the use of digital tools such as tablets becoming even more mainstream, “so property managers can implement and upload information to reporting systems in real time, and from that integrate information to gain more valuable insights at a portfolio level.”
In addition to enhancements to current software platforms, property management in the new normal is likely to involve concepts that for many of us were not possible just a few months ago. The theme here is the use of technologies that can maximize traditional building processes without compromising individual safety and sanitization.
“Access and traffic control in a building was a relatively simple issue before,” Scott says. “No longer. Orchestrating building access and flow has become very complex. For instance, how can building managers orchestrate elevator volumes?”

Not all of the answers to such questions are clear yet, Scott admits. But some are, such as the use of keyless entry systems, motion-activated doors, and hands-free fixtures in restrooms. Next-generation sensors are available to help identify areas that need more frequent cleaning. Scott also sees the possibility of robotic sanitizing systems as a possible alternative, especially in commercial settings where they’ll be a more practical solution than in multifamily environments.
Which brings us to the topic of cost. All of these applications come with a price tag, and they—or some of them at least—may very likely become the cost of doing business. “In the past, a lot of these features were ‘nice-to-haves,’ but going forward, a lot of these features will be a minimum requirement. The terms ‘wellness’ and ‘healthy buildings’ will become commonplace in the real estate industry this year as we try to help people get back to work. People need to feel safe. The buildings that can showcase they have the safest work environments will be the ones tenants demand.”
Source: “The Newfound Importance of Technology in Property Management”

The Long-Term Threat to Office Demand is Getting Real

May 26, 2020 by CARNM

While many companies are declaring they plan to shift to permanent remote workers, others believe that these companies will change their footprint to focus on suburban locations.

About a month after the US lockdowns for the pandemic began, Morgan Stanley CEO James Gorman told Bloomberg Television that it had become clear to him that the firm could operate with “much less real estate.” The productivity of Morgan Stanley’s hastily-assembled remote workforce turned out to be strong enough that he could see a future where “part of every week, certainly part of every month, a lot of our employees will be at home.”
As the pandemic wore on, more and more companies were coming to the same conclusion, either mulling out loud the benefits of a permanent remote workforce or actively making plans to move in this direction. In a Gartner survey in April, 74% of CFOs said they intend to move at least 5% of their previously on-site workforce to permanently remote positions post-COVID 19. Nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions.
Examples of such firms include Nationwide, Barclays and tech firms such as Twitter and, most recently, Facebook.
CEO Mark Zuckerberg announced last week that up to half of Facebook’s employees could be working remotely in five to 10 years.
At first, office landlords were unsure what to make of these announcements. It seemed to be a trend but then again, emotions have been riding high during the pandemic. And more than one analyst has noted that similar intentions were vowed after 9-11—namely that companies were expected to move to the suburbs to escape high profile, urban buildings—which never came to fruition.
But increasingly analysts are starting to project a change in demand for office space in the intermediate and long-term following COVID-19.
“We might not see immediate distress in the office sector,” says Victor Calanog, head of CRE Economics for Moody’s Analytics, in a video on the subject. “However it is subject to risk in the intermediate and long run.”
Calanog, though, believes this shift will not necessarily lead to a mass movement of employees working from home, but rather a return to—does this sound familiar?—suburban office parks. “If dense, urban areas fall out of favor, nearby suburban offices may become popular,” he says. Besides their larger footprint, suburban offices typically have rents that are about 50% less than prime locations, which will be attractive as the economy is expected to struggle for a while.
It is possible that companies will forget their plans after the pandemic, Calanog says, much like what happened after 9-11.
“But the longer this crisis goes on, the higher the chance that change will set in and become semi-permanent,” he says.
To be sure, the jury is still out on whether remote working will become a widespread and permanent trend. Many doubters, though, seem to accept that some change will be necessary and that may well include a suburban presence.
Last week Boston Properties CEO Owen Thomas told CNBC that remote working will be a temporary trend.
“The ability to mentor younger employees, the spontaneous collaboration and creativity that occurs, and also the culture that companies develop, it’s very difficult to do it when we’re all on Zoom” he said on Squawk Box.
Thomas appeared to echo the possibility that in response to the pandemic, more companies will move to the suburbs. During the interview he pointed to some businesses’ moves to set up smaller, satellite offices in the suburbs instead of asking employees to commute to downtown.
In another example, earlier this month former Google CEO Eric Schmidt told Face the Nation that he believes that office space will be in greater demand after the pandemic subsides.
“We’re going to have to think about hub-and-spoke systems where local people don’t travel so far because they don’t want to be in public transit for so long,” he said per Business Insider.
Companies will have to come up with flexible arrangements because some employees will want to be back in the office and others will be afraid of the possible exposure to COVID-19, he said.
“So imagine that there are three or four people: one will go to the office, one will stay home, some will go to some local or near-their-town working environment,” he said. “It will change the pattern.”
Source: “The Long-Term Threat to Office Demand is Getting Real”

May 2020 LIN Properties

May 26, 2020 by CARNM

At the May 2020 Virtual LIN Meeting held on May 19, 2020, 13 excellent properties were presented.
Thank you for presenting properties and attending the meeting!
View the May 2020 LIN properties here.
View the May 2020 LIN Thank Yous here.