the death of the urban office building

[Guest cherzeca]

down 51% from February is not nominally 51% of course.  didn't say what February % was

[bizaro86]

 

trying to think if there a reason that locks/unlocks would overstate occupancy? data seems suspiciously good to me.

 

 

It seems possible that it slightly overstates occupancy. My last office job you scanned your pass at a big glass door. If someone else on the floor was on the elevator with you, only one of you scanned.

 

If you're the only person coming in today, that's one scan just for you, but 3 of you on the same elevator would still be 1 scan.

 

Its also possible that scans would understate occupancy. Pre covid-19, I might have gone for a coffee and a lunch outside the building. I bet more people are staying in their buildings now (1 scan per day instead of 3-4)

[CorpRaider]

I would be less inclined to go into my office in midtown where I normally ride the path/subway or take an uber versus driving my Tahoe to my suburbia nightmare office park with a view of a retention pond in Atlanta or Houston where there is really no viable public transportation anyway and the traffic is now slightly less hellish.  So I would buy that NYC is lower than RUS. 

[fareastwarriors]

Korean Air eyes sale of LA’s tallest tower

Debt-ridden airline lends subsidiary nearly $1B to refinance maturing loan on LA’s tallest tower

 

https://therealdeal.com/2020/09/17/korean-air-eyes-sale-of-wilshire-grand/

[fareastwarriors]

https://therealdeal.com/2020/09/18/700m-seattle-office-tower-buy-would-be-among-largest-covid-era-property-deals/

 

The sale price is reported to be 800 billion Korean won, or about $688 million,...

 

The largest tenant at the 701,000-square-foot property is Utah-based experience management company Qualtrics, which leased 275,000 square feet at the building for its co-headquarters last fall. The company also acquired naming rights to the 38-story tower, which was originally known as 2+U.

 

Other long term tenants at the property include Indeed.com, Dropbox and co-working firm Spaces. Its central location in downtown Seattle and stable rent roll attracted the attention of several other bidders besides Hana, according to Maeil.

[fareastwarriors]

JPMorgan Sends Some Traders Home After Worker Contracts Covid-19

https://www.bloomberg.com/news/articles/2020-09-15/jpmorgan-sends-some-traders-home-after-worker-contracts-covid-19?srnd=premium

 

while this does not affect the 2,3,5 year outcome of office REITs, I am surprised they didn't trade down on this.

 

It’s an awful headline / data point.

 

 

 

Wall Street Return-to-Work Push Finds Virus Won’t Cooperate

 

New infections crop up at Goldman Sachs, JPMorgan, Barclays

 

Executives fear productivity and company culture is suffering

 

 

https://www.bloomberg.com/news/articles/2020-09-18/wall-street-s-return-to-office-push-finds-virus-won-t-cooperate?srnd=premium

[fareastwarriors]

Google will try ‘hybrid’ work-from-home models, as most employees don’t want to come in every day

 

 

https://www.cnbc.com/2020/09/23/google-ceo-sundar-pichai-considering-hybrid-work-from-home-models.html

 

more WFH days, not WFH forever...Make sense.

 

 

 

[CorpRaider]

If I had to try and code from one of those shared desks I would never want to come in.

[LearningMachine]

Google will try ‘hybrid’ work-from-home models, as most employees don’t want to come in every day

 

 

https://www.cnbc.com/2020/09/23/google-ceo-sundar-pichai-considering-hybrid-work-from-home-models.html

 

more WFH days, not WFH forever...Make sense.

 

Looks like a very balanced approach.  For us as investors, I'm thinking two implications from his two statements in his interview with the Time Magazine at https://www.youtube.com/watch?v=hpn1rebBfqY:

• More employees could spread out into exurbs: Sundar wants to give employees flexibility so that they don't have to commute 2 hours, e.g. on Fridays, as those commutes prevent employees from being able to make plans with friends and families. This would mean more employees could move farther out, increasing the supply of housing they could consider for living, in turn, decreasing the price of housing within 45-min of campus.
   
  
• Company sites could shrink in size: Sundar wants to have concept of "onsites", when employees get together to meet in person.  If employees are going to meet only for "onsites", this could reduce the square footage needed for company, decreasing demand for office space, decreasing office supply.
  

 

As other companies do the same, looks like this means the impact will be effective supply available will be higher for both office space and housing options.  In other words, vacancy will be higher.  Incremental supply can cause big swings in price as 20% vacancy did in Detroit.

[mattee2264]

I think a hybrid model makes a lot of sense. A way of getting the best of both worlds. Also caters for differences in job functions. For example at the momentcompanies tend to like sales teams onsite whereas back office e.g. IT and accounts are being allowed to continue WFH.

 

Perhaps another implication will be that companies try to save money by moving their HQ to cheaper locations. There isn't the same need to have a central location that is easy for people to commute to if people are WFH most days. So you might get little business parks cropping up in the suburbs as opposed to the traditional city office blocks.

 

Either way I think there will be a reset of office rents as leases roll off and a lot more vacant space which will be difficult to repurpose.

[KJP]

Google will try ‘hybrid’ work-from-home models, as most employees don’t want to come in every day

 

 

https://www.cnbc.com/2020/09/23/google-ceo-sundar-pichai-considering-hybrid-work-from-home-models.html

 

more WFH days, not WFH forever...Make sense.

 

Looks like a very balanced approach.  For us as investors, I'm thinking two implications from his two statements in his interview with the Time Magazine at https://www.youtube.com/watch?v=hpn1rebBfqY:

• More employees could spread out into exurbs: Sundar wants to give employees flexibility so that they don't have to commute 2 hours, e.g. on Fridays, as those commutes prevent employees from being able to make plans with friends and families. This would mean more employees could move farther out, increasing the supply of housing they could consider for living, in turn, decreasing the price of housing within 45-min of campus.
   
  
• Company sites could shrink in size: Sundar wants to have concept of "onsites", when employees get together to meet in person.  If employees are going to meet only for "onsites", this could reduce the square footage needed for company, decreasing demand for office space, decreasing office supply.
  

 

As other companies do the same, looks like this means the impact will be effective supply available will be higher for both office space and housing options.  In other words, vacancy will be higher.  Incremental supply can cause big swings in price as 20% vacancy did in Detroit.

 

What are the implications for mass transit systems?  If WFH permanently cut commuting days by 50%, how do, for example, the LIRR (NYC), Metro-North (NYC), NJ Transit (north and central NJ) and SEPTA (Philly) survive? If you don't have those commuter rails, how do people get into the city on the 50% of days they want to come in?

 

Also, what about climate change?  It is common to see companies pushing toward (at least purported) carbon neutrality.  How can you do that if your HQ is inaccessible except by car, which would be the case for essentially all suburban or exurban locations?

 

More broadly, many cities are the hub in a local hub-and-spoke (road and rail) transport network that may be not be so easy to unwind.

[LearningMachine]

Google will try ‘hybrid’ work-from-home models, as most employees don’t want to come in every day

 

 

https://www.cnbc.com/2020/09/23/google-ceo-sundar-pichai-considering-hybrid-work-from-home-models.html

 

more WFH days, not WFH forever...Make sense.

 

Looks like a very balanced approach.  For us as investors, I'm thinking two implications from his two statements in his interview with the Time Magazine at https://www.youtube.com/watch?v=hpn1rebBfqY:

• More employees could spread out into exurbs: Sundar wants to give employees flexibility so that they don't have to commute 2 hours, e.g. on Fridays, as those commutes prevent employees from being able to make plans with friends and families. This would mean more employees could move farther out, increasing the supply of housing they could consider for living, in turn, decreasing the price of housing within 45-min of campus.
   
  
• Company sites could shrink in size: Sundar wants to have concept of "onsites", when employees get together to meet in person.  If employees are going to meet only for "onsites", this could reduce the square footage needed for company, decreasing demand for office space, decreasing office supply.
  

 

As other companies do the same, looks like this means the impact will be effective supply available will be higher for both office space and housing options.  In other words, vacancy will be higher.  Incremental supply can cause big swings in price as 20% vacancy did in Detroit.

 

What are the implications for mass transit systems?  If WFH permanently cut commuting days by 50%, how do, for example, the LIRR (NYC), Metro-North (NYC), NJ Transit (north and central NJ) and SEPTA (Philly) survive? If you don't have those commuter rails, how do people get into the city on the 50% of days they want to come in?

 

Also, what about climate change?  It is common to see companies pushing toward (at least purported) carbon neutrality.  How can you do that if your HQ is inaccessible except by car, which would be the case for essentially all suburban or exurban locations?

 

More broadly, many cities are the hub in a local hub-and-spoke (road and rail) transport network that may be not be so easy to unwind.

 

Maybe there are short-term to medium-term hiccups for transit, but I wonder if long term, businesses located on the outskirts will be able to afford to move their shrunk footprints into Manhattan for its central transit-accessible location, giving themselves access to wider pool of employees to pick from, or choose to do their "onsites" in a central location accessible through transit for most employees in the region.

[thepupil]

"Data from Brivo, a company that provides access-control systems for workplaces, shows that “unlocks” at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third."

 

https://www.wsj.com/articles/americas-offices-sit-half-empty-six-months-into-the-covid-19-pandemic-11600344000?mod=hp_featst_pos4

 

thanks for sharing. these numbers are shockingly high. I am amazed that half of people are back in some places. the NYC REITs have been saying 10%-20% of people are back and I would've guessed 15-25% elsewhere (in the US). this article is very different than what my impression is from following the REITs.

 

weird.

 

trying to think if there a reason that locks/unlocks would overstate occupancy? data seems suspiciously good to me.

 

Maybe the nuance is that higher rent type of tenants (tech/finance/law etc) that are in the blue chip buildings are functioning better remotely whereas some others are more eager to get back to the office?

 

Vornado speaking yesterday at BofA

So, it's going to take some time. Today the utilization rates remain in the low double-digits, that's up from the summer, but we expect that to be 20%, 25% probably as we get further on the [year], as companies are going to remain conservative. But at the same time we're also selectively starting to hear companies that had planned to come back January 1, that are now saying, You know what, let's make that October. Maybe it's going for a third, maybe it's for half.

 

to follow up here, ther'e a bloomberg article today saying Manhattan office is about 10% full and other major cities are more like 25%. If you pro forma'd for the real estate industry's 50%+* occupancy in Manhattan, you'd probably be in the single digits.

 

 

*for the record, I think this is kind of dumb for them to be "leading by example". Can you imagine the headline if Related/VNO/SLG's/BPY's leasing/acquisition team gets covid? tenants will return because they want to/feel good about doing so, not because their landlord is in the office.

 

 

[SharperDingaan]

"Maybe there are short-term to medium-term hiccups for transit, but I wonder if long term, businesses located on the outskirts will be able to afford to move their shrunk footprints into Manhattan for its central transit-accessible location, giving themselves access to wider pool of employees to pick from, or choose to do their "onsites" in a central location accessible through transit for most employees in the region."

 

Standard practice is an "on-site" in the burb, and the bigger "on-sites" in the central location. Rent the space as you need it, do your motivational (sales) meetings downtown, versus some resort somewhere. Minimizes the Covid risk, and saves on the airfare/accommodation/ancillary costs.

 

Subways/metro's are funded from climate change related fee collections.

Drive a SUV? Pay more gas tax on your monster, and some of it goes to covering the costs of the lesser polluting subway/metro.

 

SD

 

[LearningMachine]

Standard practice is an "on-site" in the burb, and the bigger "on-sites" in the central location. Rent the space as you need it, do your motivational (sales) meetings downtown, versus some resort somewhere. Minimizes the Covid risk, and saves on the airfare/accommodation/ancillary costs.

 

Thanks SharperDingaan for sharing.  To help us learn more, would it be possible to share more, e.g. your general source of "standard practice",  and what frequency your source indicates for "on-site" in the burb and bigger "onsites" in the central location?

 

In the tech world pre-Covid, some leadership teams did "offsites" once a quarter to a year and the location was determined based on making sure everyone could get there easily.  Sometimes the location could be another building within the same company or a conference room at a hotel nearby.  So, I was thinking Sundar was drawing an analogy to "offsites" when he mentioned "onsites".  Because these onsites will now probably be done by all employees not just leadership teams, and they are meant to replace regular face-to-face daily meetings, maybe the frequency could be more than a quarter to a year, e.g. maybe once a month, or more in some unique cases that would benefit from higher frequency.  I was thinking the location would be based on what works the best for the employees in the region since over time, a team could be formed from employees across the entire region not just one suburb.  Over time, the location that would work for all employees in each team would tend to be a centrally accessible location.

 

Some companies might also want to cater to both (1) young talent that wants to come into office more frequently, and (2) senior talent with families that would rather work from home.  I think this is why Facebook, Apple, Amazon and Google are acquiring/leasing sites in Manhattan for the young talent to come in more frequently, and to potentially do "onsites" there as well for senior talent.

 

All that said, looks like we both agree that the square footage needed would be so much lower than what it is today.  This will end up causing both (1) company permanent sites to shrink in size, and (2) senior employees with families to spread out more into exurbs or smaller towns nearby as they need to make the trip to "onsites" only once in a while instead of daily.

 

[SharperDingaan]

Hate to disappoint ....

 

The bigger 'off sites' are primarily sales junkets, tax deductible if there's a business purpose. Typically quarterly, exotic locales, & to reward top performers - nothing to do with employee needs/wants. Downtown NY/Chicago/Miami/etc does not compare to Rio/BA/Bali etc.

 

Of course, top performers bitch, but when competitors are doing the same thing .... there's no real competitive disadvantage. Standard practice varies across industries, but it's all about cutting overhead - at 33% margin, every 1M in OH reduction offsets 3M in lost sales.

 

It's not hard to reduce the rent bill by 1/3+, solely by re-configuring existing footprint.

Most could cut their footprint an additional 10-15% as well, as growth needs are not going to meet original projections.

 

Downtown 'glamour' also has an image problem.

• Most of the workforce have family responsibilities that are easier to manage, and cheaper, when the commute is shorter - it is also a lot less frustrating getting to/from the 'office'. Relocating to the 'burbs, is the same as a raise for many.
   
  Of course the 'glamour' office downtown still has cachet, but it's maybe 25% (top quartile) of the total space requirement, at best. There's just too much downtown space, and much of it - just not prestigious enough. Obviously, not what your broker wants to tell you!
  

Sure, demand may eventually come back to 'normal', but it's not going to be for quite some time yet.

Even if mass quantities of a fully effective covid vaccine were immediately available tomorrow.

 

SD

 

 

 

 

 

 

 

 

[CorpRaider]

"Data from Brivo, a company that provides access-control systems for workplaces, shows that “unlocks” at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third."

 

https://www.wsj.com/articles/americas-offices-sit-half-empty-six-months-into-the-covid-19-pandemic-11600344000?mod=hp_featst_pos4

 

thanks for sharing. these numbers are shockingly high. I am amazed that half of people are back in some places. the NYC REITs have been saying 10%-20% of people are back and I would've guessed 15-25% elsewhere (in the US). this article is very different than what my impression is from following the REITs.

 

weird.

 

trying to think if there a reason that locks/unlocks would overstate occupancy? data seems suspiciously good to me.

 

Maybe the nuance is that higher rent type of tenants (tech/finance/law etc) that are in the blue chip buildings are functioning better remotely whereas some others are more eager to get back to the office?

 

Vornado speaking yesterday at BofA

So, it's going to take some time. Today the utilization rates remain in the low double-digits, that's up from the summer, but we expect that to be 20%, 25% probably as we get further on the [year], as companies are going to remain conservative. But at the same time we're also selectively starting to hear companies that had planned to come back January 1, that are now saying, You know what, let's make that October. Maybe it's going for a third, maybe it's for half.

 

to follow up here, ther'e a bloomberg article today saying Manhattan office is about 10% full and other major cities are more like 25%. If you pro forma'd for the real estate industry's 50%+* occupancy in Manhattan, you'd probably be in the single digits.

 

 

*for the record, I think this is kind of dumb for them to be "leading by example". Can you imagine the headline if Related/VNO/SLG's/BPY's leasing/acquisition team gets covid? tenants will return because they want to/feel good about doing so, not because their landlord is in the office.

 

Yeah that is stupid and cringey.  Not as bad as the plea that the Related guy penned for the WSJ, but cringe.

 

W/R/T some of the other comments above, I agree we could see things shaking out with the BSD guys and gunners fighting for space in the trophy/downtown space and the more drone workers being in a hoteling situation at the nice digs downtown with the BSD views (and the network effect of proximity to the decision makers at clients/potential clients and popping over and meeting bob the billionaire for lunch if he's available to take a meeting, etc...) and wow I just talked myself into thinking this is all galaxy brain bs and not much will change.

[Rod]

I think it's worth noting that as electric cars and buses displace internal combustion engines the experience of living and working downtown will go up significantly due to much reduced air and noise pollution.

[cubsfan]

https://www.nationalreview.com/corner/new-yorks-restaurant-disaster/

 

Some of these big cities are looking like real disasters long term--

 

Half of New York City’s bars and restaurants are in danger of permanently closing in the next six months as a result of financial fallout from the coronavirus, according to an audit released Thursday by state comptroller Thomas DiNapoli.

 

The comptroller found that in the next six months, between a third and a half of all city bars and restaurants could close their doors for good, eliminating over 150,000 jobs.

[LearningMachine]

I think it's worth noting that as electric cars and buses displace internal combustion engines the experience of living and working downtown will go up significantly due to much reduced air and noise pollution.

 

When elevators came to buildings, desirability of high rises went up. 

 

Because of human need for in-person connection with other human beings and human need for in-person specialized services, I wonder if resolving issues resulting from density will unlock more desire for density.

 

When fully autonomous cars come to cities, I wonder if it would be similar to elevators coming to buildings?

[Castanza]

I think it's worth noting that as electric cars and buses displace internal combustion engines the experience of living and working downtown will go up significantly due to much reduced air and noise pollution.

 

When elevators came to buildings, desirability of high rises went up. 

 

Because of human need for in-person connection with other human beings and human need for in-person specialized services, I wonder if resolving issues resulting from density will unlock more desire for density.

 

When fully autonomous cars come to cities, I wonder if it would be similar to elevators coming to buildings?

 

Is the leap from a human driven car to an autonomous vehicle really the same as stairs to elevators? Seems apples to oranges. In fact I would wager that an entire city of autonomous vehicles would be extremely frustrating as a rider. It will be as if everyone decided to have their 80 year old grandparents drive them around. Could you expand on autonomous vehicles causing a greater desire to live in a city specifically?

 

Personally I think autonomous vehicles would cause more urban sprawl as commuting distances would be less of a chore? If they get good enough you could argue speed limits could go up another 10-15 miles per hour. I could sit in my car, eat breakfast, check emails, or take a nap on my way to the office. Living 1-2 hours from work wouldn’t be an issue.

[LearningMachine]

Is the leap from a human driven car to an autonomous vehicle really the same as stairs to elevators? Seems apples to oranges. In fact I would wager that an entire city of autonomous vehicles would be extremely frustrating as a rider. It will be as if everyone decided to have their 80 year old grandparents drive them around. Could you expand on autonomous vehicles causing a greater desire to live in a city specifically?

 

Personally I think autonomous vehicles would cause more urban sprawl as commuting distances would be less of a chore? If they get good enough you could argue speed limits could go up another 10-15 miles per hour. I could sit in my car, eat breakfast, check emails, or take a nap on my way to the office. Living 1-2 hours from work wouldn’t be an issue.

 

If I were to consider the dimensions of (a) human time and (b) human effort, both (i) taking the stairs and (ii) driving around & parking in a dense city like Manhattan would see an improvement with elevators and autonomous cars, albeit different levels in cities vs suburbs.  With autonomous cars, improvement in human time might be bigger on a percentage basis in dense cities than in suburbs.  I also agree that improvement in human effort wouldn't be as big with autonomous cars as it was with elevators.

 

By reducing (a) and (b), I think autonomous vehicles can make both (1) exurbs and (2) denser cities more livable.  Some folks prefer #1, e.g. families wanting space for kids and pets.  Some folks prefer #2, e.g. singles wanting human connection with many other humans.

 

Here is a write-up that takes a balanced approach to the topic without getting religious about one extreme vs. the other: https://medium.com/jordan-writes-about-cities/will-autonomous-vehicles-lead-to-greater-sprawl-or-greater-density-yes-4e32b0fb3d35

[LearningMachine]

How Twitter built its work-from-anywhere culture over time by offering work-from-home to compete for talent instead of competing just on compensation: https://www.washingtonpost.com/technology/2020/10/01/twitter-work-from-home/?arc404=true

 

Wonder how many companies will follow this wave permanently?

[thepupil]

https://www.bisnow.com/washington-dc/news/office/walmart-labs-putting-full-herndon-building-on-sublease-market-as-it-shifts-to-remote-work-106189?utm_source=outbound_pub_7&utm_campaign=outbound_issue_42573&utm_content=outbound_link_10&utm_medium=email

[fareastwarriors]

Netflix Triples London Office Space With New Headquarters

 

https://www.bloomberg.com/news/articles/2020-10-07/netflix-triples-london-office-space-with-new-headquarters?srnd=technology-vp

 

 

The producer of programs including “The Crown” is taking over the lease on an 87,000 square-foot (8,082 square-meter) office building on Berners Street from current occupant Capita Plc, according to people with knowledge of the deal who asked not to be identified because the information is private.

 

Netflix, which has 269 employees in the U.K., currently rents about 30,000 square feet of space in two nearby buildings, one of which will be retained, one of the people said. The changes will give the company a total of about 100,000 square feet of office space in the capital.