CBD Recovery: Big City Markets Defy COVID Expectations

[Music] welcome to america's commercial real estate show your source for market intel forecasts and strategies hello i'm michael ball this item is brought to you by buxton look you can take investment analysis marketing and site selection to a whole new level with mobile and predictive analytics check it out at buxtonco.com well today we're going to talk about cities cbds you know a lot of folks are out there saying that hey these large cities these major markets kind of losing their appeal that the office high-rises and these large cities are is dead the cities are dead or that it's going to be years and years and years before people want to go back into these buildings well i've found an expert and you've heard him before that has studied these types of things his entire career please welcome hugh kelly he's a principal with hugh kelly real estate institute he's a cre counselor and you've heard him on america's commercial real estate show before and you've loved him he's back hugh thanks for joining us sir hey thanks for inviting me back michael it's a it's an honor and and you you heard in the opening as some folks are pretty negative about the major cities the cbd districts and and frankly you know a lot of the high-rises in a lot of these large cities uh the tenants aren't occupying a lot of these properties yet but here we are where what august 2021 hopefully we're getting near the end of this pandemic what do you say to folks who say these cities and these large office buildings are no longer ever going to be the same again well you know uh it's not the first time i've heard that outlook for uh for cities most recently i think uh we're coming up on the 20th anniversary of the 9 11 event and right after that the very same same things were said that no one would ever go to a high-rise office building again that corporations would never again consolidate their operations in a single uh location location but we're going to want to scatter and that the primary cities the new yorks the washingtons the chicago's the san francisco's were just two easy targets of opportunity for terrorism and so uh it was going to be the smaller cities around uh the country uh uh that uh large employers were going to gravitate to well those were wrong on all counts and part of the reason for that is that uh the trend uh uh to urbanization is 150 years old now in the united states and urbanization means the metropolitan areas uh not just the downtowns but that movement of people jobs businesses and capital to uh to a rather small subsection of urban america is the dominant trend and one which i think has been disrupted but will reassert itself yeah i remember after 9 11 people were saying that hey who's going to want to be in a high rise again and uh and you're right it's like we think based on what we're seeing and feeling right now and we think that's going to last forever you are you seeing any uh indicators to you uh that suggests that these cities and and large office towers are going to come back well you know yes i i have two categories of of uh evidence to to look at in in that one is what i would call soft indicators and others uh that are hard indicators and you know let's let's look at the the hard indicators first um there are some 320 plus or minus metropolitan areas in the united states the largest 20 of them generate one half of all of the goods and services produced in the country half of our gdp comes from 20 metropolitan areas 70 percent of our gdp comes from about 500 of the three thousand counties in the in the u.s is very very concentrated um and if you expect gdp to be increasing and has already reached pre-pandemic levels if you expect that to be increasing it's going to increase in the place where gdp is most concentrated so that's the first thing and then you know i took a look at the employment numbers for metros and it's the june numbers that are the most recent and there are some real surprises in that michael the fastest growth not the total number of jobs but the fastest growth rate has come from the big cities from the big metros the 12 months ending in june the new york metro grew 8.9 percent so did boston in terms of its jobs philadelphia is 7.8 percent there have been strong metros in the sun belt but they don't even approach those numbers you know phoenix is up 6.6 atlanta's up 6 percent denver's up 6.6 and mid-sized metros like austin about seven point three percent nashville six point eight percent raleigh seven point seven percent you know not up at the levels of the new yorks and the boston's uh and so you know the hypothesis that these cities have reached the end of their economic vitality is just belied by the data so that's the the hard indicators and you can look at that in terms of leasing activity and so on and so forth but there is soft indicators in the office market as well if you go and read the broker reports that are coming city by city around the country you know you see that touring activity you know tenants actually out going and looking at space which is a leading indicator of future leasing it's up in denver uh los angeles says the touring activity is up to 71 percent of pre-pandemic levels manhattan has exceeded pre-pandemic levels of touring according to the brokers of journalists lying lasalle houston tells the same story so touring activity is up and then the other thing is what's happening in terms of subleasing right when uh all this space was given up big employers started to put a lot of their space out for a sub sublease but now prime tenants are signaling their intention to return by taking back some of that uh sublet space you know seattle brokers say that that tenants have started withdrawing their sub leasing space in anticipation of reoccupying this fall very few spaces have come to market in the seattle downtown recently in washington dc again a concentrated downtown tenants have removed 1.4 million square feet of sublease space since this january you know and boston uh says that 35 of all the relocation deals in its metro area have been subleases and that's a new high for them so you know the soft uh indicators and the lot the hard indicators are pointing in the direction of resiliency and uh of uh you know renewed competitiveness for the downtowns now that doesn't mean things are great this is a tenants market it's an occupiers market it's a market that's been dislocated it's going to take a while to to to work it out but you know one of our great temptations is to extrapolate the short term into the long term and say that's the trend and then once you've done that so say that trend is an indication is of where we're going to end up and flatten out that's shoddy thinking yeah you need to to think in a more evolutionary and a more uh dynamic term right and one of the things we need to to get these uh central business districts happening again is to get people back in their office space right so the restaurants the retail that everything starts working and gets more vibrant you live in the new york area you've been in the city a lot recently what are you seeing you know it's it's it's real it's really interesting uh i was in a few months ago to sit down uh with uh with my own banker uh it's weird for me to think that i have a banker but i have a banker uh and he you know he knows that basically i'm a real estate guy so he's saying what is it gonna how will i know that things are getting right he works for chase you know you know chase uh has been very visible through jamie dimon and saying you know we're committed to bringing our employees back and so on but he says how am i going to know i said look on the sidewalk look at the number of people walking on the sidewalk but most importantly look at the street carts when you see people lined up again at the falafel stand and the you know the the uh uh the the salad uh food truck and and you know uh the sabret carts you know you'll know that people are again in their office buildings and they're coming out and doing and we're starting to see that we really are um i was in uh manhattan just a couple of times in the in the last couple of weeks because i need to um to get some new suits we have some family weddings coming up uh weddings that were postponed because of the pandemic and so now i've got to refresh my wardrobe a little bit you know i've been wearing shorts and shirts like this for uh you know for the last year and a half and so i need to get more presentable attire so i went in to shop for a couple of suits and i'm walking through and sure enough uh as i get off the subway at 42nd street uh and sixth avenue at bryant park there's a line to cross the street you know the crowds are are to some degree back now some of them are tourists but more and more are people who are going to to work um and i'll tell you the two things complement each other because as the um as visitors come back to new york city and enliven the street life that means that the uh retail and the restaurant is uh seen as more vibrant and and viable the theater is reopening uh we my wife and i went to a show uh just uh on august 7th our our 45th wednesday wedding anniversary the theater was packed theater was packed uh and uh that means that the things that attract office workers to come into the office and then stay and work and take advantage of the nightlife that's around is becoming more available to them so i'm expecting that's going to happen now we're still in a public health emergency thank god that new york that which was the first epicenter is in pretty good shape at this at this point as most of the large cities are actually um but this ain't over yet uh in terms of of covet you know last fall i published an article that said had enough disruption yet and then the subtitle was reflections on the first summer of covet and people turned to me when this came out and said you're expecting a second summer coated with the vaccines coming and i said yeah this is the novel coronavirus we're still learning about it we're not going to solve this problem with a sniff up step of our fingers and um i think we're going to learn to live with it but cities are are are beginning to to to do that i think employers will figure this out for themselves and their their workers and i'm not among those who believe that cities will die because of it well here let me ask you that kind of brings to mind timing and i know every kind of city and area of the city may be a little different but let's use manhattan as an example what would you expect the timing to see uh vibrancy like uh like 2019 i want to say i don't think it's exactly the right question michael um and here's why i think the future is not well considered by looking in the rearview mirror that the vibrancy of the mid-2020s is going to look a bit different from the vibrancy of uh the pre-pandemic europe um and so expecting us okay now how can we rewind and get back to where we were in 2019 is not the direction i think of i think we need to say how are we going to adapt ourselves to this new situation and what is it in the quality the structure and the dynamic of cities that's going to uh have a vitality that looks somewhat the same but also looks somewhat different from what we've seen in the past um just the way the vitality of 10 years ago was not the vitality that cities had let us say when um i was growing up in the 1950s and the 1960s those cities changed structurally they changed uh in their operations and their functions from the 1950s and 60s until the early 21st century we should expect cities to be changing they should be they will be smarter they will be more flexible uh they will be more technological and the cities that uh that do that that don't look to to uh be exactly what they were in 2015 16 and 17 are the cities that will uh that will have the most dynamism and those places that i mentioned before seem to be doing that well the new yorks the boston's the washington dc's the denver's the atlantas are the la's with the entertainment industry evolving and of course places like seattle and and austin and nashville yeah yeah and and you uh you mentioned it's a bit of a tenants market in most areas and buildings around the country and and a lot of the cbd's i lead a group that sells office buildings and the institutional investors that we deal with are still real bullish on office buildings uh long term so what do you see as kind of maybe a near-term and long-term impact for real estate in these central business districts moving forward okay right now right now uh what i'm seeing very very strongly is a flight to quality and that's typical of um dislocated markets because in dislocated markets the spread that is typical between the high quality building and the commodity building begins to compress and that spread in price gives occupiers tenants the ability to upgrade their space and to nail down that upgrade for five years seven years ten years at prices that are either discounted directly in terms of the rent or are discounted in terms of above normal ti's landlord concessions of very of various kinds promises of enhanced operations and so and so on and so what i think is that that the spread between of demand the spread of demand between commodity buildings and high quality buildings is going to very strongly tilt in the short term towards class a properties and even properties you might consider trophy properties here in new york for example one vanderbilt place which is right next to grand central terminal is just finished and it's 90 percent least it's the most expensive space in the city of new york and yet because of where it is and the quality of the building that's where the tenants are going to but not at the levels that the that the uh developers kind of hoped for at the beginning 150 180 000 square foot not happening but still enough to make this a successful financial development i hear in nashville that first of all the urban core is substantially outperforming the suburbs and in the core it's the trophy buildings that are that that are doing the best um it's another story here in austin you know with uh california companies migrating they're not going to migrate halfway across the country to get secondary space that's not that's not the deal they're going to come and find the best places and the best economies that they they can't even houston says that flight to quality is a major trend that the metrics for the newest vintage buildings the ones that are highly amenitized you know are far stronger metrics than uh than market uh market averages you can see even see that in a place like charlotte you know in charlotte the class a office vacancy is about 500 basis points lower in the cbd than it is in this in the suburbs which is where most of charlotte space is right and comparing class a to class b even in the downtown there's about a 150 basis point greater tightness in the class a space than in the class b space so a real shift in tennis taking advantage of a dislocation now once that works is its way through the market's going to have a period of stability i expect we're not going to see very much construction going on in most of the cities in the country and then you're going to see a uh you know a a restructuring of the way the central city and its related suburbs do i think i think this is not a zero-sum game i think there's a complementarity between the suburbs and the downtowns uh but uh i think both can thrive in an economy that's expected to expand albeit moderately between now and 2030. you know we're going to have a catch-up period that'll be fast a catch-up period that will have some drama to it over the next 18 to 24 months but then uh we level off a bit i expect that i expect that leveling off is going to mean that absorption will uh will be moderate and new construction will be very hard to uh to pencil up yeah what's interesting uh when you think about the timing of a rebound if if you will and and i do some work and live in a market where um the rebound has been amazing and and the consumers are flush with cash people are really tired of being alone or being in their homes and and a lot of the businesses are just doing better you know than they have in a long time but i guess when you look at the rebound if you want to call it that of the central business districts uh probably really depends on how much these big companies feel it's safe to to have folks back you know in the subways and back in the office buildings right yes it's true and atlanta is kind of the paradigm of a whole bunch of uh of cities in which uh the downtown is is per se a relatively small part of the overall market right uh you know downtown in atlanta is one thing midtown there's a lot uh uh you know i guess a whole different dynamic to uh to it and then you've got um you know the areas in uh uh in in around the north belt beltway um and up uh georgia 400 uh you know so it's it's it's a more diffused uh uh area um and i think dallas performs like that for example uh i think phoenix performs that to a great degree an even greater degree uh you know so uh metropolitan atlanta i think has more opportunities in its center than than than a phoenix does uh you know so you have to take cities one by one by one and look at their business at their business structure uh and uh you know i mean the two new big developments uh in atlanta i think are are the anthem and the and the papa john uh headquarters buildings and you know one's in midtown the others in in the northwest suburban uh uh area uh whereas in new york cities you see virtually no suburban development of office buildings uh and yet you have the hudson yards development you've got tremendous activity in downtown brooklyn for example which has now a skyline which it certainly didn't have when i was growing up you what would you leave our audience with related to the major downtown central business districts uh and their future you know i think i i i think uh peter linneman at the at the wharton school uh university of pennsylvania had an interesting uh piece recently in which he said you know if you think that downtowns are stressed now you just don't remember what how they was stressed uh in the late 1960s and early 70s when there was a huge exodus from these center cities that's no longer the case and the reason for that is and we've talked about this michael uh is that the top 10 or 12 cities downtowns are where people come not for a job but for a career and uh as long as that's where the opportunities for career be that in finance in law in professional services in education in technology uh you know in marketing advertising all of these these these growth areas right as long as you're coming not to get a job but to build a career then the things that the agglomeration characteristics of of cbds are a real competitive advantage uh for the 10 or 12 cities that can provide that and i think the employment statistics that i led off with here are the first bit of hard evidence validating that that will again be the case in the future as it has been prior to this uh covet disruption well said you i i agree i think the major cities will come back and i think they may come back stronger than people think right now because of kind of what we've all been dealing with you callie thank you for joining us sir listen always nice to to be invited and particularly to know michael that you're going to ask questions that that forced me to think harder than i've thought before so that that that's really useful to me so i appreciate that great thank you for joining us and thank you for joining us around the country let us know what you think and we appreciate connecting with you we appreciate you sharing the show uh and uh letting folks know uh what what you think about the comments on the show today so until next week be sure that you always lead learn and laugh and join us next week for america's commercial real estate show america's commercial real estate show is brought to you by buxton take leasing site selection and due diligence to the next level make the right decisions with on-demand mobile data visit buxtonco.com by bull realty for proven commercial real estate asset and occupancy solutions contact me my email is michael poolerealty.com by commercial agent success expert level commercial real estate broker training cloud access won up to 21 one hour videos visit commercialagentsuccess.com thank you for reviewing subscribing and sharing america's commercial real estate

Channel: America's Commercial Real Estate Show

Views: 115

Rating: 5 out of 5

Keywords:

Id: KoYY8AtPB20

Length: 31min 1sec (1861 seconds)

Published: Tue Sep 07 2021