December 1, 2021
By Samantha Rowan
The slow return to offices and the divergent preferences of different tenant groups took center stage at the 2021 PERE America Forum.
Tenants are delaying a return to the office sector, with panelists at a PERE America Forum telling attendees Tuesday that there is a need for more robust amenity packages and a wider swath of options for companies dealing with complicated needs as they try to re-engage with their workforces.
The panel was moderated by Heidi Learner, Americas head of Real Assets Research at CBRE Investment Management, with panelists Jonathan Pearce, executive vice-president of leasing and development, office and industrial at Ivanhoe Cambridge; John Rivard, chief investment officer at Accesso Partners; Reid Weppler, head of real estate at Covene; and Tingting Zhang, founder and CEO of TerraCotta Group.
Learner kicked off the panel with some statistics, noting that while office-using employment nationally is just 1 percent below where it was prior to the pandemic, vacancy rates are up about 4.5 percent. “Labor has come back but clearly occupiers have not,” Learner said, asking the panel what their number one concern was in terms of pulling the trigger.
Ivanhoe Cambridge’s Pearce had a simple answer, drawing on the Montreal-based pension investor’s global investment and development business. “I speak to tenants all the time and I can tell you: no one wants to be first,” Pearce said. “We saw a lot of tenants kick the can down the road and now we’re seeing a lot of tenants migrate into something short-term and flexible until they get a better idea of how this impacts their business.”
Rivard noted that Hallandale Beach, Florida-based Accesso Partners, an office and multifamily owner and operator, has seen a correlation between the size of the firm and a return to work. Use of public transportation versus driving is a secondary factor. This has meant that Chicago, for example, has lower occupancy rates than markets in Texas. The size of the tenant matters, too: “There is definitely higher occupancy the smaller the firm,” he added.
Weppler noted that this has been felt at Convene, with the New York-based flexible workspace provider seeing a lot of short-term contracts from tenants who are still trying to figure out their space needs.
At El Segundo, California-based TerraCotta, the lender has seen a divergence between office space based on tenancy. Zhang noted that the private equity firm has seen more creative-type tenants back in their space more regularly.
“Our fund focuses on value-added bridge lending strategies and we finance real estate transactions that serve the economy of the future, like media, tech, science and biotech,” Zhang said. “When we track the growth in employment in those sectors and then benchmark those vacancy rates, you can see there is a mismatch in how the office market is being tracked.”
Zhang noted that the kind of properties TerraCotta focuses on tend to be very clustered – and the company uses location as a vector as it looks at loans. “We monitor the growth of the cluster and the expansion of its boundaries, which enables us to look at a loan visually,” she said. “The first vector is location, the second is the built environment and the third is looking at controlling variables and market condition.”
Amenity arms race
Learner asked how tenants will be able to draw their teams back to the office, with Pearce responding that it is a complex, non-binary question.
“I like that I have a home life and work life but some people love working in sweatpants, walking 10 feet and starting work,” Pearce said. “We have to be empathetic to that and create choices, create outdoor spaces, create hub-and-spoke models. It shouldn’t be binary, home and office.”
Office amenities were a focal point of the conversation, with panelists noting that the need for services has become amplified.
“It used to be the traditional buy it, fix it and sell it kind of model,” Pearce said. “You could put a couple of dumbbells in the basement and call it a gym. I think everything related to amenities is on steroids, you want to elevate food and beverage, you want hospitality themes coming across all of our different service lines, and you don’t want a security person, you want a concierge.”
Onsite healthcare has been a major differentiator and a few providers have even been trying to offer childcare, Weppler said.
Hitting pause on segments, sub-markets
The panelists agreed that market selection is not an on/off analysis, with Pearce explaining that Ivanhoe Cambridge looks closely at sub-markets and specific neighborhoods. “We have to understand how we could play a part in the fabric of that market,” he added.
Rivard, who said Accesso tends to avoid gateway markets, looks more closely at the impact on demand, vacancy and rental rate growth.
“How will concerns about safety or taxation affect tenants’ decisions to occupy a space?” Rivard said. “We are seeing a divergence between urban and suburban markets and gateway and non-gateway markets. If you look at rental rate growth, occupancy and valuation – those are the things that could continue to affect occupancy if you have crime, regulation and higher taxes in the big cities.”
Globally, amenities, transit access, location and experience are central themes for all users. “One thing I will say is that working from home isn’t a viable option for some parts of the world,” Pearce said. “Those populations have been in the office.”