Spencer Levy, chairman of Americas Research and senior economic adviser at CBRE, presented to the Counselors of Real Estate on Sept. 10. Here are highlights from his presentation:
CBRE has broken down asset classes into what we call our “one, two, three” scenarios for recovery. We expect the multifamily and industrial class to come back in year one, the office class in year two, and retail and hotel classes in year three.
We’ll start at the scary end of the spectrum: retail and hotels. Today I’m in Maryland, between St. Michaels and Easton. Ten years ago, Easton was dilapidated and broken-down, but today it’s beautiful. A resurrection happened here and in places such as Frederick, Md., and Times Square in Manhattan. These transformations show the resilience of retail and hotels in troubled locations and times.
Industrial has performed extremely well from the perspectives of capital markets and fundamentals. In fact, CBRE’s outlook for industrial is better today than it was pre- COVID. Amazon announced in early fall that it’s hiring for another 20,000 jobs.
Multifamily is also doing well, but not in the major markets, including New York, San Francisco, and Chicago. Transitional issues exist in student housing and senior housing. Many younger people have said, “I’m going to ride out the storm in my parents’ house.” The problems will pass, probably next year, when more students return to universities.
In the office sector, the biggest problem is price discovery. Tenants don’t know what the values are because they don’t know what their rents will look like in six months to a year. We need to see people ready and willing to trade before we can reach recovery.
We’re bullish on office over the long term. A Stanford University study in 2015 found that working from home is effective for efficiency but not productivity. In other words, workers who don’t go to an office have trouble getting what they need professionally—for example, learning how to communicate and getting promoted. And a Harvard Business Review study said great companies focus on productivity, not efficiency. [Editor’s Note: JPMorgan Chase required its most senior sales and trading employees to return to their offices in September after noticing a productivity decline, according to Fortune.] Where we’ll settle is in a fluid workplace, meaning workers will do their jobs from the office, their home, their car, or even outside of a restaurant in Maryland.
We know there will be an office upgrade cycle. McCarthy Cook, a CBRE client, is installing a hydronic HVAC system, using water to transport energy, in a $500 million office building it’s developing in West Hollywood, Calif. The system will pump hot and cold water through pipes in the walls rather than using forced air. That’s the future of clean air.