Spencer Levy, senior economic adviser at commercial real estate investment firm, CBRE, said after a “very challenging” period, the future of commercial real estate is “very bright.”
He told Inside the Issues, “For the next 12 to 18 months, we can’t hide the ball. It’s going to be difficult in all the major asset classes, but disproportionately in retail and hotels. But nobody’s going to be immune because office buildings are going to have lower physical occupancy during social distancing and other things that are going to try to ensure wellness. Even industrial will have a tough go at it for a year, but they’re going to bounce back sooner as will multi-family.”
Levy said different aspects of the industry would recover at different rates. After one year, industrial and multi-family buildings should recover. In two years, office spaces would follow suit, and the year after that, hotels and retail operations should be back to normal.
To make these estimations, Levy is looking at how commercial real estate has recovered historically. He has studied the 1918 Spanish Flu, 9/11, and the 2002-2004 SARS outbreak.
“Obviously, [the 1918 Spanish Flu] was horrible from a medical perspective, which caused a significant downturn not only in the economy but most importantly a terrible loss of life. What we’re seeing here is a somewhat better situation than that because of technology, testing, and tracking, and that’s really the key to us coming out of this,” he said. “Once we have those things here, we can have a much more targeted approach for how we open the economy.”
Technology, testing, and tracking are the three things that will guide how Southern California reopens its economy. Levy said some of the most tragic events in human history that have consequently impacted the real estate market have resulted in mass improvements to how buildings are designed and managed.
“You point to 9/11 and the improvement in security. You point to Hurricane Sandy and the improvement in resiliency of buildings from flooding. Go all the way back to 1911 in the Triangle Shirtwaist Factory Fire in New York City that made workplaces even safer because of that terrible tragedy,” he said.
Levy predicted that the COVID-19 health crisis will result in better office spaces with wider floor plans so that employees can physically distance themselves from each other. He’s also heard of business owners buying hard furniture, versus softer furniture made of fabric, since it’s easier to clean.
But the future of office space viability was in question even before the pandemic began. CBRE’s report titled, “Global Outlook 2030,” addressed the idea of the fluid workplace: “Today’s workers enjoy new choices and new spaces to cultivate their creativity, increase their productivity and improve their health and wellness. Unshackled from cubicle farms and assigned work stations, workers today are setting up at coffee shops, in coworking spaces, on couches and at backyard picnic tables—even when they travel. Over the next decade, CBRE predicts this radical reimagining of the workplace will accelerate.”
With improvements in technology like laptops and cellphones, working on the go has never been easier. And many companies were already embracing this fluid workplace culture.
“We saw that as coming anyways,” Levy said. “So this is not a change in trend. But the question is, does it change permanently how people will use offices? In the short term, it will. In the next 12 to 18 months, you are going to see reduced physical occupancy with more calls... But over the long term, we think people are going to revert back to normal office use patterns. And why? Because we’ve been surveying occupiers and tenants for decades, and the surveys all say the same thing: Going to the office makes people more productive, makes them happier, makes them attract and retain the best talent, and it allows your company to breed the culture it wants to create.”
All in all, the only thing Levy expected to change in the long run is how many people are in the office at once and how close people will be sitting next to each other. He also guesses that buildings will install better HVAC systems that will produce cleaner air.
“Decreased density, better HVAC, and other factors mean that we believe that office use in 18 to 24 months will be similar to what you’ve seen before, even if you see some increase in what we call the fluid workplace, people working in different places,” he said.
In the meantime, before the real estate industry bounces back in Los Angeles, Levy said he supports housing homeless people in hotel and motel rooms through the state’s initiative called Project Roomkey.
“Everything we can do to solve [homelessness], even in the short term, is a good thing,” he said.
Levy broke down the hotel industry occupants into three categories: drive-in or staycation travelers, international visitors and business travelers.
“Those that cater to international travelers are going to come back in a much longer time period, but those that are in the first category are going to come back much faster than you expect,” he said. “We’re already seeing staycation markets, hotels, coming back in China.”
According to Levy, his colleague coined the term “revenge retail” for people who are fed up with staying home and want to spend their money on hotel rooms, retail, and restaurants.
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