The Weekly (11/10)

It can be argued that the most dramatic changes from the Covid-19 pandemic came from how and where people worked. Obeying lockdowns and office closures, most people who had the option to avoid in person work, did. What we learned is that most employees can, and actually prefer, to work from home.

The behavioral changes caused by the pandemic—lower office attendance, accelerated migration from cities, and less shopping in office-heavy neighborhoods—will push down demand for real estate and we’re already seeing the impacts. 

Demand for office space has meaningfully declined, partly because of the increase in remote work and also because of a challenging macroeconomic environment. Vacancy rates are increasing across most major cities and the decline in demand has prompted tenants, already worried about return to office policies and the macro climate, to negotiate shorter leases. 

The change in leasing arrangements has impacted the way investors finance (and re-finance, for that matter) new projects. Historically, property valuations and loans were dependent on the stabilized leases that come along with it. If the leasing structure changes, so does the financing.

Cities are facing a new reality in which hybrid work worsens vacancy rates, threatens the vibrancy of neighborhoods, and the local economy as a whole. 

To adapt to that new reality, urban stakeholders could consider adopting more hybrid approaches themselves. 

Solutions include mixed-use neighborhoods that don’t focus exclusively on “downtown” areas dominated by office buildings. A mixed use approach, highlighted by office, retail, and multifamily can create a more resilient real estate structure that gives investors, developers, and cities more confidence in the path forward. 

Redeveloping neighborhoods is, of course, an enormous undertaking so “neutral use” building designs, whose infrastructure and technology could be easily modified to serve different uses, is an imaginative approach to the future of real estate.

A neutral use approach would not only protect real estate owners from changing preferences that are impossible to predict, but also lean into the shorter term lease trend – if tenants are moving in and out more, buildings that are easily adaptable could be more valuable. 

Of course, it’s always easier said than done, but the opportunity cost of conversion has fallen as lower rents and lower occupancy have disrupted the status quo.

A departure from the norm disrupted not only the way we work, but where we work. As such real estate sectors that were once sure bets are no longer so sure, and the behavioral shifts will have impacts on the real estate market for generations to come. 

Cities and developers must come to terms with a new normal in an effort to usher in a new tomorrow. 

There will be obvious winners and losers from these changing trends and it’s obvious that those who lean into creative solutions will fare better than those who remain stuck in the past. 

Have a great weekend,

– Your Titan team