In over 30 years of involvement in US real estate, I have never encountered a dilemma in institutional office investment similar to what we are experiencing today. About half of my peers at Barings, and around the industry, are expecting a decline in office demand as they envision WFH becomes the norm and businesses move to downsize their investment in pricey urban office space. The other half envision a RTO marked by the need to expand space per employee to allow for social distancing, dividing teams in the office, and between urban and suburban locations. Writing from my home office (actually my breakfast room) outside of Chicago, with no commercial office within miles, our Chicago Barings office at Wacker Drive and Madison Avenue seems like a distant memory – and one I would like to get back to!
During my years of institutional investing, office investment has held a special place in my heart since I am a former member of the Equity Office team. Sitting at the side of legendary investor Sam Zell, I learned firsthand of the importance of having an executable vision that would attract more than its fair share of office tenants, and negotiating a strong lease to create value for the owner. Today, good office leases and the strength of the underlying tenant businesses are helping all of us who own office buildings weather the short-term storm.
But, how will those tenants behave in the mid- to long-term? How will the demand change? Will there be a shift in the demand among markets? Since we are looking to forecast human behavior, the likely outcomes are wider than ever.
Early indications are that while WFH has been legitimized, office space for collaboration and creativity will still be in high demand. Not only does it foster culture and creativity, well-designed office space helps employers attract and retain talent. Initial reports are that prospective office tenant focus has turned to the building systems in place – will they allow for touchless entry? Is there an abundance of natural light, ventilation, high efficiency air filters, temperature controls, access to outdoors? Can the office building offer an optimal and productive work environment? The pandemic has accelerated tenant focus on a “Well” or “Healthy” building.
As you read this, in Boston’s Seaport District, the 315,000 sf Boston Headquarters for MassMutual, Barings parent, is under construction. Much care has been taken to design it to a LEED Platinum status, and also to focus on creating a work environment which will support productivity, wellness and comfort. At the same time, Barings has made a forward commitment to purchase 701 Rio, a 120,000 sf office building currently under construction in Austin, TX. It is five stories and within close walking distance to downtown, residential options and shopping venues. Equally important is that the building’s state-of-the-art systems, access to open air terraces, and relatively small size offers a prospective tenant a building with a healthy work environment, within a sustainable framework. In my mind, both of these buildings are perfect post-pandemic office buildings.
What does this imply for US office investors as we evaluate opportunities in the coming months? Class A office buildings incorporating state-of-the-art systems to provide “wellness” of the work environment will be the winners in the years ahead. If the re-positioning of an older building is under consideration, adequate capital expenditures must be budgeted to upgrade the systems to meet today’s tenants’ healthy building requirements.
In addition, the locations of these buildings, Boston’s Seaport District and Austin, TX, are illustrative of the markets which will benefit in the post-COVID environment. The Seaport District is easily accessible on foot by a well-educated workforce and offers the best of Boston’s live/work/play options, while Austin, TX, is often high on the list of “Most Livable US Cities” because of its affordability, and residential and entertainment options. It, too, has a very well educated workforce. Office investors should filter for and invest in markets such as these – screening for connectivity between residential/recreation/shopping and the workplace – while also considering the availability of an affordable lifestyle.
