Class A Office Outlook
What are your thoughts on the outlook for Class A office space?
It seems to me that demand will be on a permanently lower trajectory and that will lower rents overall. Land prices will need to decrease in turn. And while Class A office buildings will continue to have high occupancy rates, they will have more tenants, each with less space on average than they had a year ago.
How do you all think major office developers will perform over the next five years in this new environment? If they were targeting 18% IRR’s pre-pandemic, might that come down a couple percent as a result of this transitional period?
I personally think office is going to come back to normal. I don’t think work from home is here to stay. Maybe it becomes 3 days in office 2 at home or 4:1, but overall, I think the office will come back strong. We are starting to see some tech companies who announced WFH forever walk that statement back. I don’t think office will be a great investment over the next 2-5 years, but over the next 10 years it’ll come back.
I view WFH like creative open floor plan office. It was the hot thing for 5-10 years and than everyone figured out they hated it. That’s what WFH will be in 5-10 years.
short term outlook isn’t great, but long term it’s fine. I know this is a ramble and not making solid points, just typing off the cuff on my phone.
regarding targeted returns, I don’t think those will come down. More realistically, prices will adjust and come down, or people will begin to get aggressive if they believe they can get their target. But targets aren’t reality. I don’t believe targets will adjust and remember they are just that - targets. Every opportunistic investor targets 20% IRR and 2x equity multiple, but when you ask if they actually get that...they all laugh, because they really don’t.
Think it’ll be fine. Class A office landlords will just offer concessions & appealing amenities. I think the real squeeze will occur for Class B. Because Class B tenants will just be incentivized to go for Class A because of the great deals in the market today.
WFH is here to stay in some fashion, obviously not 5 days a week like we have it now. But firms will definitely need to offer employees at least 1 day a week to WFH. The only companies I still see demanding that their employees come in 5 days a week are REITs, REPEs, and Owner/Operators - think BX/SW/APG/RXR/REL/VNO/TSH.
Anyone dispelling the future of WFH is delusional or just trying to mislead others. For example, Steve Roth (CEO of VNO) and Marc Holliday (CEO of SL Green) both basically said WFH is trash and it won’t survive. I would take their advice with a grain of salt because they are largest office owners in NYC. They have a vested interest in the future office, WFH messes up their business plan.
Yeah it’s comical when I see linkedin posts from office brokers claiming that there will be no impact on the office sector. Like come on man, no one will take you seriously unless you at least admit that there will be somewhat of a significant impact.
Agreed. It’s wishful thinking on their part.
I think this thought makes sense if the Class A properties can offer those concession packages or lower rents. I see this working for deals transacting in the next 12 months but some of those owners may be stuck chasing deals that only make economic sense to their basis. If values come down and you have someone swoop in and grab a Class A asset at a solid basis and they are underwriting these new TI and concession packages sure this theory holds up but I just don't know if that's what happens across the board.
So I truly believe WFH is not here to stay - people do enjoy it but when you get to the core, we are social animals and the office provides that. Not being in the office makes collaboration much harder and people have been working longer hours. By going back to the office that should drop. On top of that, when 22 year olds join these large corporates, you'll see two things happen: 1) those that are in the office less or not at all won't get promoted and 2) creating a culture with a large proportion of your workforce WFH is hard to keep.
I think WFH is great if you've been at the company 5+ years, know everyone, and have a highly structured role - you play in your box and you know the exact processes you need to do to keep the wheels moving - but if you don't have that, WFH is extremely difficult - especially for new employees. I join a new firm during the height of the pandemic, and the hardest thing I have ever done was get up to speed on a new firm, it's processes, and politics, while during WFH. I think WFH will be like open office floor plans, it was all the rage for 5ish years, and than everyone realized it was terrible and they wanted their cubicle back. Pre-covid, you saw people going away from the open floor plan. I think for the next few years, WFH will be 'all the rage' and than people will realize, wow this is terrible, and begin moving back to a normal, full office, environment.
From the people I've talked to, enjoying WFH has been directly correlated to how ambitious they are. Friends, family, in administrative roles or who have peaked out seem to love it while I feel most finance types hate it. Never worked in IB or Big Law, but can only imagine the shitty hours creep those guys are going through since they can literally work at anytime. Even us, putting in the odd 70-hour week, it's easy to rationalize staying up till 2 b/c you can still get your 6 hrs of sleep by rolling out of bed and logging in at 8 am.
Personally, communicating with my boss has been a living hell during COVID. He's a super busy guy and there is no replacement of being able to just walk in his office when I can see he's not doing anything. Versus calling, emailing which are totally different and feel more annoying.
WFH is here to stay.
There's no way you can convince a workforce to come into the office 5x a week anymore. I see the office being a meeting place instead of a work place. If you have a big meeting, IC, sure come into the office. But for people to grind out models in the office until 3 in the morning? I don't see it.
I've gained so much of my life back due to WFH because there is no commute (2 hours a day right there, 10 hours a week). I don't know about you, but all my investment banking friends can't imagine going back to the office and losing those precious 1-2 hours a day lost to "getting ready" and commuting.
I find the sentiment coming from most junior to mid-level workers on this forum claiming WFH is “here to stay” and there’s “no way” people will be back in the office 5x a week pretty funny. At the end of the day if the seniors are in the office then you’ll be right there with them. Try telling your boss you’re not coming in on Mondays or Fridays when he/she is there and let me know how it goes. My office started going back in October and it started as 2-3 days a week. A month later it was 3-4, then it was 4 and now it’s 4 plus every other Friday. I think it’ll be like this for a lot of places. I also think it’s easy for people who still haven’t been back since last March to not understand and or remember why companies used office space in the first place.
Believe me, I totally understand not enjoying your commute and the wasted hours staying at the office till midnight when that work could be done at home. Of course IB analysts dread the idea of going back to the office but the problem there is the company culture not the physical space in which they work. Removing yourself from the problem doesn’t solve the problem.
The best companies will offer flexibility but I can tell you from first hand experience I’m already seeing the definition of that change.
TLDR: The blue blood companies were the first movers hopping on the WFH from train at the beginning of the pandemic and now we’re seeing them lead the charge on the return to work plans (ie Amazon, Google, BAML, JPM etc.). Look to them to give you the answers
Where is this notion of "seniors" wanting to back 5x a week? My "seniors" all own houses in the suburbs and would much rather roll out of bed at 8 AM instead of 6 AM in order to hop on a train.
Our office has been "open" since Summer 2020 and the only people who really go into the office are "juniors" with crappy WFH set ups (i.e. sharing apartments) and admins who sort through the mail.
5x a week in the office is a thing of the past. You can't be competitive in hiring talent if the requirement is 5x a week in the chair.
I’m just telling you from my experience if they want you in the office you’ll be in the office. If you think the Amazon/Google and BB banks are losing recruits because they have inferior WFH policies then you’re delusional and you’re even more delusional if you’re the one turning those jobs down for the same reason. The best talent will end up there regardless.
Every company is obviously different but we’re already starting to see major companies back track on their original support of WFH 4-6 months ago and I think that trend will continue. Personally I agree flexibly is important but humans are creatures of habit and I think a year from now we’ll see more people working 4-5 days in the office rathe than the 2-3 crowd.
You're delusional if you think we're going back to 5x a week in the office.
Creatures of habit? Most people have been work from home for a year+ with net profits up massively. How's that for habit?
Ok so if you think a lot of workers will remain WFH at least part time, which I agree with, then presumably each tenant will require less space and the demand in cities will continue to fall over the next 5-10 years as tenants downsize their spaces. So how do you think that will impact rents, land prices, and office development returns over the next 10 years?
Whether WFH is "here to stay" or not, Class A office buildings won't be severely affected. Class B and Class C are going to be the question.
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