Workplace 2.0 Summit: Portfolio Strategy & Execution

Bart Waldeck:

Welcome to the portfolio strategy roundtable. And our guests, we have Francisco Acoba from EY, Lou from Jackson Cross Partners, and Gabe Burke from Accenture. Welcome, gentlemen, thanks for coming.

We have a series of topics we want to cover. In yesterday’s round tables, we had some slides that were placeholders for topics, and we got some feedback from the attendees. It was kind of better to see all of our faces not have the screen consumed by just a slide that is announcing the topics. So, we’re going to keep it open like this and kind of go through some general questions to start out with. And I kind of want each of your perspective on how you see real estate and the perception and use of it evolving in the minds of companies over the last year and a half or so since this pandemic hit. So, maybe Francisco since you’re front and center from me. Why don’t you go ahead and kick off?

Francisco Acoba:

Sure, glad to. And thanks again for the opportunity to participate in the panel today. So, what we’ve certainly seen in the marketplace over the last few years, there’s been a progressive change in how real estate and the workplace has been looked at by corporations, right? So, historically, there’s certainly the overall or overwhelming perception around, it’s a cost of doing business. It’s necessary to incur these costs to deliver our services to our clients, right. With the push over the last few years towards employee experience and workplace experience and being able to enhance that aspect of an employee life, we had been seeing a change and this is, of course, a pre-pandemic certainly.

Over the last year or more than a year now, as we’ve gone through COVID-19, I think that the thoughts around the workplace and the importance of how the workplace will be used going forward, it’s only involved in a good direction, right? In the sense that the companies are really critically looking at, how should we be leveraging the workplace environment going forward? When we talk about workplace, so we’re just talking about the office, we’re talking about the home environment where employees have been working for the past 15 months. Third places are right in the portfolio. So, thinking about all these parts and pieces, I think the perspective is that the concept of the work has evolved. It will be used more for collaboration than individual work likely. Although I will say that… In the last couple of months, we’re seeing a lot of enthusiasm from corporations around trying to get people back to the office. So, we’ll see how that all plays out, right? I think there’s a little bit of push and pull going on in the marketplace right now.

Bart:

Absolutely. Lou?

Lou Battagliese:

Well, as we’ve discussed Bart, a couple of occasions, I think we move towards lease accounting, ASC 842, and the pandemic created a bookend of visibility of real estate as Francisco said. It had always kind of been a little bit of a cost of doing business necessary, evil management that way. But Lease accounting brought it front and center from an economic standpoint. People in the finance suite and the accounting suites who hadn’t really paid as much attention to some of the decisioning that was going on on real estate lease versus own or how long a lease term or how much capital you put into situation, all of a sudden had visibility and it started to create some change. And then the pandemic and now returning from the pandemic really started to put much more senior level focus on workplace. Employer or employee retention, employee attraction. So, I think more than anything over the last year and a half, we’ve seen an elevation in concern or attention to real estate occupancy workplace that frankly for a number of years before just kind of bumbled along without that much attention and just did the functional service.

Bart:

Absolutely. How about Gabe, how about you?

Gabe Burke:

Well, I agree with my fellow panelists. There is certainly a heightened focus on real estate. What I’ve watched as this pandemic has played out is that a cultural battle has emerged. And it’s been quite interesting to watch as it goes on. As high profile companies have really taken different positions on remote and hybrid work. Significantly different positions, which you did not see before the pandemic. So, as some examples. Goldman Sachs, JP Morgan have both said they want people back in the office. Amazon, Netflix, Reed Hastings has said he’s focused on the office. On the other side of the spectrum, you have Twitter, Slack, Instacart are going the other direction saying, “We want to let people work remotely.” Google, Apple, Facebook, I think are hedging their bet. They’re going with a partial remote or hybrid work and kind of feeling their way through it. But it’s remarkable to watch because if you go pre-pandemic, you did not see nearly as much of a divide in the way companies were thinking, and you didn’t see anywhere near the public debate that is going on between the CEOs. Having been in corporate real estate for almost 25 years, it’s amazing to pick up a newspaper and read CEOs of these big companies talking about their workplace strategy. You just didn’t see that before.

And I am really just on the edge of my seat to see where some of this goes because… And I read in the Wall Street Journal a couple of weeks ago. Jamie Dimon, the CEO of JP Morgan. And he said, “People are coming back to the office. They’re going to be happy with it. Yes, they have to commute. We know people don’t like commuting, but so what?” Now, that’s a direct quote from him. And on the other side, you have Twitter saying, “Hey, we’re going to let you work remotely and we are going to give you the freedom that you want.” And I can’t sit here and tell you, “I know where it goes,” but it’s certainly interesting to watch. And it comes back to the comments already made by Francisco and Lou is that everybody is so focused on workplace strategy right now. It is more important than it’s ever been. And it makes me a little nervous, but it’s also quite interesting. So, we’ll see where it goes.

Bart:

It’s exciting to say the least. And I apologize. We skipped the whole introduction round because I usually have a slide with your pictures that cues me. So, I know you all so well that maybe that’s why it slipped my mind as well. So, let’s just do a quick round real quick. A little bit about your organization, background and role. Francisco, why don’t you go first?

Francisco:

Sure, happy to. So, Francisco Acoba. Partner with EY based in New York. I’m part of the corporate real estate consulting practice at the firm. I’ve been working in the corporate real estate advisory space now for the past 24, 25 years in all aspects of corporate real estate restructuring or design, performance management, outsourcing. A lot of work in the workplace and portfolio arena as well. And certainly then working in the real estate technology space. Everything from IT strategy to selection, to implementation of large systems. Glad to be with you guys today.

Bart:

Welcome. Lou?

Lou:

Yeah, I’m Lou Battagliese. A partner here at Jackson Cross Partners. We’re a real estate service company based outside of Philadelphia, but do global work. Much of it in the data management, data preparation, lease administration, lease accounting in our advisory practice. And we also have a corporate strategies transaction management platform. So, we have been in almost our 20 years in business. We’ve been focused on corporate portfolio strategy and management.

Bart:

Absolutely. And Gabe.

Gabe:

Yes, I am a newly minted member of Accenture’s Real Estate and Workplace Solutions team. I sit in Silicon Valley, but prior to that, I spent 23 years with Cushman & Wakefield and in Colliers running a portfolio optimization portfolio strategy and global transaction management for a variety of clients. Mostly high-tech.

Bart:

Awesome. So, some very bright minds in the corporate real estate space. So, thank you, gentlemen. I want to circle back to a point Gabe mentioned that it kind of aligns with some of the questions we talked about prior was kind of, where does real estate fit on the C-suite agenda, if you will? I heard an interesting comment in a round table yesterday where a partner from PWC’s practice had mentioned that she’s involved in some board discussions where actually the board above the C-suite is getting engaged in the conversation because of the fear of turnover and other types of things for the same reasons that Gabe mentioned about where you pick your battles or spot in the hybrid workplace. So, where does it fit on the C-suite agenda? And is there any dependency to industry or whatnot, skillsets like high-tech and things like that in the race for talent and other types of things? So, I’ll go round robin here. We won’t always go in the same order. So, Lou, why don’t you jump on that one?

Lou:

I think that it’s almost like a newly minted awareness as I was saying earlier. I think it is important to the C-suite and because it is so front of mind right now about… The description Gabe gave where there’s a lot of different opinion as to whether you’re in the office or at home or in some hybrid situation. I think the senior management is more engaged in that, both from a personal standpoint and from a philosophical standpoint, of what they want the company to look like. And the interesting thing is, it went from a highly tactical business management approach to now a strategic and it kind of skipped over everything in the middle to get to this. And I think one of the things that we’ve seen with a few clients is a little bit of frustration and awareness that resembled what we saw when people first started to try to build data for 842 where people were surprised that the real estate departments lease admin system couldn’t be immediately transferred for accounting that they had never integrated the financial pieces of it.

And I think that what we’re seeing in a couple of situations is a frustration that there isn’t more data. There isn’t more of a clear path as to how to decide this. And frankly, the complexity of all of the factors that senior managers a lot of times aren’t used to dealing with in a deep, detailed type of way. So, I think that there’s been a little bit of a… Again, heightened awareness and more a little bit of frustration that this isn’t an easy fix.

Bart:

Francisco, anything to add to that?

Francisco:

Lou brings up a lot of good points. I mean, I would say that if you think about the C-suite discussions around corporate real estate in the workplace, I would very easily say that in the last year I’ve had more discussions with C-suite executives around real estate and the workplace than the past 10 years. There’s no doubt about it. It’s on the agenda. And part of it also is because… As Lou said, they’re being asked about this internally and externally. The board’s asking external, media is asking them about, how are you thinking about return to office? What’s your workplace strategy going to be going forward? These are not questions that some of these executives received before, right?

So, I think overall, I mean, it’s a good thing for corporate real estate and workplace because it does elevate the discussion and the importance of being able to provide for an effective workplace experience. Fits right into the employee experience and HR and talent organizations. With every major company today are all about elevating the employee experience for their folks from the day that they’re onboarded all the way through to whenever they leave the organization. They want them to optimize that experience so that they become part of that lifelong membership in the company and so forth, right. So, real estate and workplace has a big role to play in that. And I think that this is an opportunity that should take advantage of it, right? Get your seat at the table now while you can.

Bart:

Well, it’s interesting. And interested in your perspective on this, Gabe, but what we’ve seen is kind of a trickle down effect of what you guys are saying. So the C-suite is being asked externally certain questions. They’re looking internally asking those same questions of real estate and workplace leaders who say, “I don’t have an answer to that because we’ve never had the ability to invest in the systems to provide those types of answers,” even though maybe I’ve wanted that for a long time. So, are you seeing that at all, Gabe? Or there’s now a greater appetite and willingness to invest given what we’re seeing?

Gabe:

Well, there’s no question. There’s a greater willingness to invest, but I think that the C-suite is feeling a bit anxious right now, Bart. They all have some very important decisions to make about how they’re going to roll out this workplace strategy. And no one really knows exactly what to do, but they do know that whatever policies they implement will have an impact on attraction, retention of talent. And it’s almost funny to watch because the C-suite employee relationship is almost like parent-child in a way. They have to lay out some rules and guidelines, but at the same time, they don’t want to make their employees upset or angry. Now, I have young children and if my son needs a bath, but wants to first play with his train set, I have a decision to make. Do I want to deal with the tantrum that might ensue if I don’t let him play with his train set? Now, you saw Apple this week came out and said… Or last week. I think Tim Cook made the announcement, “Hey, we’re going to three days a week. It’s going to be Monday, Tuesday, Thursday and that’s the deal.” Well, what happened? Immediately a significant group of employees wrote an open letter complaining that he wasn’t respecting their needs and desires for hybrid and remote work.

So, I think all these CEOs are thinking, “Well what do we do here? What can we implement without upsetting people, but that will also create the right environment where people can collaborate and ideate and be productive?” And no one knows the answer to that, but I think that’s what’s on their mind right now is to what extent… What do we think is best? That’s the first question. And then, to what extent can we implement it without causing internal strife with our employee base?

Bart:

Absolutely. I think one of the other elements we’ve talked about this the last two days is the fact that anybody who tells you what hybrid means before they go back to the office is really not being straight forward because we don’t know. You may pick a line in the sand like you guys are talking about, but until you go back and start living that dynamic environment of people in and out, we don’t know what it is. And I want to translate that to the topic at hand, which is portfolio strategy. There’s a short-term lens and there’s a longer term lens. On the short term side of things, there’s a reality of leases coming up and churn in for renewal. Decisions that need to be made in a very uncertain environment. And negotiating those and then there’s the longer term when you have a better understanding of what work looks like, so you can place those longer-term bets go from downtown CBD, strategy, the hub and spoke or whatever it may be.

So, let’s start with the short-term and Lou, I’m going to ask you this question. Now, how are companies dealing with the short-term portfolio decisions that are now on their laps are coming up in the next 3, 6, 12 months in this climate?

Lou:

I think struggling is probably the best one-word answer because as we’ve talked about, I think there is a gap between what we want to do and what we’re able to do. I think that reality of lease obligations, commitments to space, the investment to reconfigure the space. Those types of things in large companies are significant and that in the short run… And we talked about this in some of the other discussions that there’s only so much you can do within your options and with your landlord, but there is more of people are reluctant to make any type of commitment, even mid-range commitments until that decision about, how many people are coming? How often are they coming? How do we need to set this up physically?

So, what we have seen in the short run is people buying time. Trying to work with landlords to get short-term extensions. “Don’t put a gun to my head today.” If I have a notice provision that’s 12 months out, I’d like to stay. I don’t know what it’s going to look like. Can we move the notice date? Or can we give you a six month or 12 month extension so that it’s not facing us right down the shoot and we can make some decisions. So, I think it’s not very strategic right now because there are so many unanswered questions.

Francisco:

I would echo with those things, Bart. It’s not very strategic, but I think that’s partially by design, right? Because they’re wanting to take that tactical look right now until they can figure out what they’re going to do later on. And Bart, you mentioned the topic of hybrid work, and the fact that everybody has a different definition for that. We don’t really know exactly what that means yet in many cases. And I would call out, I think, the important distinction between hybrid work, but also hybrid workplace, right. To support that hybrid work which is, as you said, a bit ambiguous right now. We have been… As we talk to clients. We have been supporting the concept of don’t make major capital investment decisions right now regarding the workplace.

Some organizations just say, “Well, do we have to redesign the workplace and run all these massive capital projects?” Get ready for people to come back, but yet they admit, “Well, we don’t exactly know how we’re going to be using the workplace.” When people get back to the office, how often are people going to be here? What’s the workplace purpose going to be going forward? What do we need to accommodate in the workplace in the future? So, figuring that out is important and that’s going to take a little bit of time, right? So, taking the next 6, 9, 12 months, whatever it is, to figure out how is your organization going to use the workplace going forward is very important. And it’s not going to be a one size fits all. It’s going to be different for most organizations. That may be end up being some trends and similarities across industries or sectors, but it’s going to be very much a company by company situation, given culture and protocols and whatnot.

One of the things that we have been suggesting to organizations is take this time to talk about investment in technologies. Deploy some of the technologies that are now available to help you track and monitor how the workplace is being used. What activities are happening in the workplace? What’s the actual use of space? What portions of your floorplan are being more heavily used than others? Right. To talk about use patterns. Then leverage that information to make your decisions around the portfolio long-term in 12 or 24 months or whatever that might be depending on the decisions that we made, but right now it would be probably not the right time to make some of these big, expensive capital decisions because you don’t have all the data.

Bart:

We’ve talked about this before and it kind of relates to this concept, at least, in the short term. A term you’ve used before which is kind of a flexibility premium. So, where are our tenants needing to give, if you will, or landlords in the short term as the unknown and unwillingness not or lack thereof to tie up long-term decisions?

Lou:

Yeah. The flexibility premium as we’ve talked before is usually in the concept of the entire portfolio, right? And I think that’s one thing that companies can do to stratify the portfolio. You can’t attack everything right now, given the short term demands, but you can start to look at our core properties, our core locations, our strategic, our transitional, and those things that you may be able to gain some efficiencies with. So, from the standpoint of most companies, particularly in the office arena, are usually in three to five year cycles with their leases. And so, it’s not going to be too painful to try to realign the space needs with the space that you have, but in the… So, where they have constantly renewed on short-term, they’re now in a situation where that may benefit them to that, but overall on the long-term play, particularly with the capital that’s going to need to be invested as they reposition the workplace, I think it would serve them well to look at staggering those terms, and that’s where they can work with the landlords.

The last thing the landlords want is a lot of six month or one 12-year short-term tenants and someone wakes up one day and 30% of their building is vacant because company consolidated. So, they’re going to have to find some middle ground and as we’ve spoken before, I think the larger, better heeled, better financed landlords are usually doing this with an open hand to the big companies. The private investors, smaller landlords, folks that have a pressure in other areas like retail or other parts of their business, they’re not as… They can’t be as flexible because of the pressure. So, I think that every situation is a little bit different depending on who the parties are, but overall, I think most people on the occupier side are trying to buy time.

Gabe:

Yeah, to your question, Bart, about how are companies reacting to all this? To me, they are reacting to… They are reacting to the pandemic the same way they did previous recessions, even though this wasn’t a recession just like in the early ’90s or dot-com bust, and the recession of 08/09. They react by putting big plans on hold and simply biding their time and renewing leases on a short-term basis as Francisco and Lou have already stated. So, that’s how I would describe the reaction there.

And then on… I like Francisco’s comment about hybrid work and Lou said it as well. You kind of right now… You can’t make big decisions. You kind of have to feel your way through it because we don’t know where this is headed. And I know a lot of people are kind of very enthusiastic about hybrid and remote work, but I personally… And I know this sounds like blasphemy to say this, Bart, but I’m not totally convinced that we’re going to have a major increase in hybrid work. And the reason I say that… I know it sounds crazy to say it right now. Although the concept of hybrid work is very popular, living with it is quite another story. And simply put, many people don’t want to share their desks. And this is something that CFOs have long been interested in. They’ve seen the low utilization rates. They’ve seen the potential cost savings, but it really hasn’t become a major standard because of so much pushback from employees. It’s not that they mind coming in three days a week, but they do mind sharing a desk.

Now, and the employee’s version of Shangri La they would come in three days a week and have their own desk, but it’s hard to imagine leadership would tolerate the cost of that. You’re going to have utilization rates below 40%. So, I think if people want hybrid work, they’re probably going to have to share a desk. And that’s exactly what Twitter announced. They have already come out and said that we’re not doing assigned seating anymore. We’re going to have social spaces and we’re going to have focus spaces and that’s what’s going to be, but I think some employees might hate that. So, I don’t know where hybrid work is going, but back to the comments from my fellow panelists, I think feeling your way through this, doing trial runs, test cases, that’s the strategy right now. Gauge the reaction from your people and the productivity as you go.

Bart:

Absolutely. So, back to the dynamic between landlord and the tenant. Often, the landlord, depending on the situation and the tenant, one or the other is kind of in the driver’s seat, if you will. How has the pandemic affected that dynamic between the two? And have you seen that shift as we’re starting to get closer to returning to the office? So, anybody who wants to jump in on that one.

Gabe:

All right. There was a long enough pause there. I’ll jump in. There’s no question that we are shifting to more of a tenants market. Well, let me caveat that. It really depends on what space you’re in. If you’re in the life science space and you’re a landlord… Okay. You are Frank Sinatra sitting on a rainbow with a roll on a string right now. Okay. But if you’re in office space or retail, it’s a bit more precarious simply because we seem to be headed in a direction where we might use less of that type of space. We don’t know yet, but it feels like that.

And so, I think landlords with that product type are feeling a bit nervous. Here in Silicon Valley, the first six months of the pandemic, you didn’t see any change. There was a lot of resiliency, but if you look at the last quarter or two, you started to see asking rates slip a bit. You started to see vacancy rates creep up a bit. I don’t think it’s a major difference at this point, but I think that there is a difference in negotiation now compared with February of 2020. In February, the landlords were in total control. Now, I think the tenants have taken back some of that.

Bart:

Anything to add, Lou or Francisco?

Lou:

I would agree with Gabe. I think that there is… It feels like a tenant market is coming. The landlord investment ownership of particularly office buildings, particularly in major markets, big CBD buildings is a long-term proposition. And for the last eight years, nine years, we’ve seen an escalating market, right? Demand for space, rents increasing, people investing in unique setups, the cost of fit out which… Landlords used to peg at 30 or $40 a square foot for conventional office is north of $100, $120 a foot that people were spending. And they were getting corresponding rents to that, and they were getting good returns certainly compared to industrial or single tenant net lease cap rates. Office investment was doing pretty well.

Everything that we’re dealing with now is contrary to long-term stability and depending on the asset, depending on where you are in the market, you’re either going to be the asset that people are attracted to or you’re going to be scrambling for a dwindling size demand. So, it does feel that way, but in the short run, the market hasn’t adjusted to a short-term tenant view. So, you will see some landlords digging in hard. Yeah. I’ll let you cut your space back, but I need a five-year commitment or I need a some other kind of relief in the deal. So, it is going to be a little bit more arms-length, but I would agree that I think the tenant uncertainty is going to give them a little bit more flexibility in the negotiations.

Gabe:

Just one quick point dovetailing off what Lou said. The short-term leases will cause a significant change from the capital contribution that tenants received from landlords. Landlord show up to negotiate… Or excuse me. The tenant shows up and says, “This is our wishlist,” but the contribution for the landlord is directly tied to the length of lease. Shorter leases means less capital contribution. So that will be a change.

Francisco:

And just one other point to add to that whole discussion. And again, as Lou was saying in major markets, there’s still a lot of activity and investment going on, right. And there’s big deliveries that are in the coming years and even more that are being announced for five and six, seven years out. In New York alone, I mean it’s probably tens of millions of square feet that’s announced, right? They’re coming to be delivered in 25, 26, 27. So, there’s that perspective from the owner-investor side, right? That the assets will survive and we’ll push through this. Although we are seeing that those buildings are being announced as smarter buildings, right. Very much energy sustainable designs, right? So, they’re beginning to really market and think about all those programs that are, again, top of mind for executives as they think about, where do they want to place their new headquarters or their new operation? That’s part of the equation now.

Bart:

One last kind of question off this discussion on the short-term side of things, a lot of the options that have come up for renewal are forcing renegotiations because they aren’t fit anymore for the reality of what was previously assumed would occur. Lou, what has that done to the amount of negotiations at renewal? I assume it’s been a big uptick because likely those options maybe aren’t a good fit anymore.

Lou:

Yeah. We spoke of this one in the session the other day. And most of the options is, to use the Wall Street term, are underwater because they don’t align with the need. They certainly do not align with the term that a lot of companies are looking for and the square footage doesn’t match up one way or the other. So, there will be a little bit of a game of chicken. Once the option notice period lapses, now it’s a one-on-one negotiation. And if you have a high value building where you can put replacement tenants in, the tenant is at a significant disadvantage, particularly if they’re looking for some short term flexibility, the cost of relocation is significant and to pick up and move to another building. And to Francisco’s point and to Gabe’s point, you’re not going to get the TI allowance in a short-term deal.

So, you almost have to recognize that what you’re going to see… I think in my opinion is, once the options lapse, you will see if people have to stay for the reasons we’ve talked about. You’ll see a higher premium on the rent that’ll be inverse to the term. You could see 125%, 150% rent for a two year renewal, and you could see more of a market rent for a five-year deal, and you might get something that’s 25% below market for a 10 year deal. But I think you could see that kind of variability. Again, all of it is subject to the market and the building and the parties.

Gabe:

Just one other comment on that part. One thing to watch for with these option renewables is if we wind up to what extent we wind up with some form of arbitration or even legal disputes. There are many options and leases that are done at what’s called fair market value. And the lease itself has a mechanism if the tenant and landlord can agree, the lease will have a specific mechanism for determining fair market value. It’s usually some form of baseball arbitration. And I think it could be quite common for tenants and landlords to disagree on what that value is. I don’t know, but it’s something to watch for. And will we see more arbitrations and disputes over what fair market value is? Will we see that happen more?

Bart:

Great point. Okay. Let’s shift to the longer term. And this is, again, going to be a hard question to answer, but I’ll still ask it because we don’t know what hybrid work is. There’s been a lot of talk of different types of models that people may go to, hub and spoke, whatever it may be. Are you seeing any type of prevalence in a particular strategy and is that varying by industry or anything like that as far as what some of the longer term approaches may be? Obviously, cost reduction is always in the forefront of looking at ways to reduce occupancy costs, but without knowing exactly how much space you need and how it will be used. It’s a tough thing to do, but what are some of the longer term considerations you’re seeing?

Francisco:

I think it’s a little early to say that there’s any sales, certainly trends and execution, right? But from the perspective of, what are people thinking about? Certainly to your point, the hub and spoke concept is there, especially around trying to look at opportunities to help minimize some of that commute time, provide spaces that are sort of… You have your hub in the center of a city and then your spokes are out in the places where people live that you can help with their work-life balance. A lot of organizations are more aggressively looking at the opportunities relative to serviced offices, right? To see how they can leverage that.

Now, again, it goes back to the flexibility premium, right? That we talked about before, but that may be something that organizations are willing to pay for certain portions of their portfolio where that makes sense. That might be the appropriate answer. So, I think it’s a little early to say that there are any trends… And again, what’s happening out there, but as far as what are people looking at, I think those are certainly two of the things that are certainly top of mind right now.

Lou:

I would add that it’s going to vary obviously because of the different workforces, right. There’s a huge part of this is a labor component, the attraction and retention of the talent, but I think the other thing is what’s getting the headlines is our major installations, right? A million feet in New York or half a million square feet in San Francisco or Silicon Valley. The market and the job of the CRE team is much more granular than that. And what you decide at the headquarters from a labor relations standpoint may have to get carried through to regional or other types of locations. And I don’t think that a lot of thought has gone into that yet. I think, again, what’s leading here is, where’s the pain? And the pain is the CEOs are being asked, what are you going to do about all the people in Manhattan? Or what are you going to do with the people in Austin?

But when the dust settles and they make some decisions on how they’re going to approach those places, then what’s left for the CRE team is going to be to try to rationalize that across a much broader portfolio, which in a lot of cases also includes places outside the United States. So, it is long-term. This complexity is only going to get bigger and more challenging. Right now, it’s… Again, it’s in the headlines and it’s in the C-suite, but when someone makes a final decision on where they want people to work and how often they want them to be in an office, someone’s going to have to execute that through the entire portfolio.

Bart:

The talent side is a really interesting variable in this. As Gabe, you were mentioning some of the large wall street firms and potentially what we’re seeing in the tech sector are on opposite ends as far as people coming into an office yet they’re recruiting from often the same top schools that they’re from a talent perspective. So, then we also have the news of the mass exodus of people moving out of New York City or out of San Francisco to different areas of the country with lower cost and maybe different lifestyle that they were looking to have. How much of that do you think is media hype? How much are you really seeing in these key markets? Francisco in New York. Gabe in San Francisco and then Lou, you on the East Coast as well.

Gabe:

Yeah, I’ll start that one off. That’s such an interesting question because what you see in the headlines, it’s never… I don’t find newspaper headlines to be false, but they can leave you with the wrong impression sometimes. And during the pandemic, there was a ton of reporting about companies that were… The way most reporters put it was moving out of the Bay Area like HPE, Oracle, Uber, Airbnb or maybe downsizing their operations here. Salesforce and Yelp made some big moves as well. The way a lot of it was reported was “HPE leaves Silicon valley. Oracle leaves Silicon valley.” Well, that is not going to happen. Now, HPE and Oracle may have a new home base, but they still have major operations here. And it will remain that way.

And another facet of that was where people decided to live. And there was another narrative running through the media, at least in the Bay Area. I think New York and Silicon Valley were quite similar like everyone’s leaving. Everyone’s leaving Silicon Valley. They can work remotely. They’re going to go anywhere. And we did see some of that, but as things played out, we also saw that the numbers didn’t quite bear out that narrative and that it really wasn’t an exodus. And I think maybe in certain parts of Manhattan and I spoke to someone the other day who lives on the upper west side and said he hadn’t seen that big of a change where he lived. So, I think that the pandemic continued some trends that were there. Maybe it increased them slightly, but I think that what was reported was exaggerated.

Francisco:

I would agree with Gabe’s sentiment there. I mean, if you think about New York, yes. At the beginning of the pandemic, there was a reported “exodus” of several hundred thousand residents, right? 500,000 or whatever it was, but what didn’t get reported as clearly afterward was within the last six months already, rents had already started to go back up because people are coming back, right. So, it’s the classic supply demand. People saw the opportunity to come back in when things were a little bit cheaper. So, a lot of people came back, right. Came in, but that doesn’t really get reported, right. It’s just the people who were leaving that gets reported every day, but with rents already going back up in the own market in New York City as well. Prices are already going back up, right? So, it’s a sign that hopefully the recovery is on its way. And that the thoughts of New York City and London and other places will be dead, I think is probably a little bit over-hyped.

Lou:

I think I would add just anecdotally. The mega trend, which is the 20-somethings and 30-somethings who are sought after for hiring, still seem to prefer living in the urban centers. They want to be in the cities, 24 hour cities. That’s where they want to be. And that’s ideally where they want to work. And so, business could follow them there. And on a personal note, having a 27 year old who spent a year living back in the suburbs while his business was shut down couldn’t wait to get out and get back to New York or LA or wherever they were going. So, I think that the businesses will go where the talent is. And if that’s your demographic of what you’re trying to hire, I don’t think anything that has changed in the last year that all of a sudden those people, I don’t want to call them kids, but those are professionals, they don’t want to be on the suburban campus walking the dog.

Gabe:

I just want to make another similar comment about a trend that I think might’ve been exaggerated and that was around workplace, and I’ll just be quick, but there was a lot of talk about how we’re going to have the six-foot office and everything was going to be spread out, and we’re going to have these wide offices. And I think that… I’m not going to say it’s gone away, but I think that has turned out to perhaps not quite be true. And I know Apple ran a survey of their employees a few months ago and they said, “Hey, we either want to come back to the office we knew or not at all.” So, I think people, the employees want an office that isn’t necessarily spread out, so to speak. So, I just want to mention. That was another trend that didn’t play out the way we thought.

Bart:

Vaccinations picked up, cases and hospitalizations went down. I think it’s accelerated a lot of the timeframes for when people were thinking going back and then a lot of the same dynamics that you’re talking about, Gabe. To wrap up here, I just… There’s too many unknowns about where work is going for every individual company, but that doesn’t mean you sit on your hands. You need to plan out scenario, plan, come up with different options of what you might do and kind of game theory it out, if you will. What are some of the frameworks or processes that you’re taking your clients through to get them to explore those different scenarios and options, and then the ramifications of them on their business?

Francisco:

Well, happy to kick that off. So, we’re going back I think here. The way we’re thinking about this with clients is really going back to the basics and understanding… Again, number one, understanding the talent, right? And how that talent is going to operate in the new workplace. You do have to have some sense of, to what extent are they going to leverage this hybrid model going forward? You have to begin to make some assumptions and then run some scenarios, do scenario planning. So, you have to understand the talent and understand specifically also what activities are likely to really take place in the office tomorrow versus in the past, right? So, there’s a tendency right now to think that it’s good there’s going to be more push towards collaboration and specific defined events and so forth that would occur in the office, training, other things, and certain things that are more individually focused will heads down to work will continue to be done at home, avoid the commute and so forth and so on.

But it’s not even that clear cut, right? Because I think you have individuals where they would say to you that they’re completely tired of working remotely, and they want to be back in the office, or in many cases, they don’t have the environment at home to be able, wherever they’re living, to have an effective workplace, environment, right. Maybe they have roommates or they don’t have a proper office. It’s not ergonomic. They’re working in a kitchen table. You can’t do that forever. People made it work over the last 15 months, but is that sustainable? And we’ve already heard stories around a productivity drop that some companies that have been running surveys and doing some analysis of coming back and said, “Well, yeah. We were as productive as we were. We could have been for a while, but now a year later, it’s actually, we’re beginning to see some drop in productivity.”

There’s a little bit of… Maybe there’s some complacency, distraction. So, lots of factors to take into account. So, being able to run the scenarios and the analytics, it’s not just about the space, it’s about the talent, the people, the work, all of that together. So, it’s a much more complex equation and just running… It’s not just how many square feet do you need per person? That’s just the beginning.

Bart:

And I know Lou you talk about kind of core assets and other stuff. So, what’s the framework that you kind of work with clients?

Lou:

I’ll put a plug in for the session we’re doing a two o’clock with Zach Forrest and I, but I think what we’re talking about is getting the band back together. When we did the run-up to lease accounting, most companies, most clients built cross-functional teams to do that, right? And it was interesting in the early years of those projects. People who worked for the company for 10 plus years, 20 years were introducing themselves. People from accounting and from real estate and from procurement, from legal, from environmental health safety. So, the concept of taking a holistic view and using this as a jumping off point to really take a center of excellence approach, and to get people charged with workplace and portfolio management, getting a cross functional team together that’s permanent.

And so, when you make and solve for the major installations, the strategic and the core assets, then you have a framework for how you carry that through the whole portfolio. And again, it’s not a huge investment in manpower. It is a realignment of manpower, but it also has to do with organizational authority and how people report because in a lot of cases, CRE as a service organization can be optional depending on how a company designates, who reports to whom. So, we’re trying to convey… Again in the middle of an emergency, we’re trying to convey taking a more holistic view and using this as a great example of the benefits that are out there for that.

Gabe:

That’s an interesting point, Lou, about how the CRE reports. And that’s a good point. Some CRE organizations run as a center of excellence. And really serve who they refer to as the customer or the employees. And that has to do with the power structure within the organization of the employees. I think a key element here, Francisco touched on, it is assessing the way people want to work rather than just defining the office and saying, “This is how you will work,” but understanding how they work best. Now, as an example, many people in the consulting world are loving all these virtual meetings because they get to stay home and they don’t have to travel. Well, Francisco, when I talked to you about six months ago, you said, “Hey man. I’m a road warrior. I want to get back on the road.” And I love that. But it’s a good example of how differing people can feel. And I think putting people in the environment in which they’re comfortable is probably a great way to increase productivity. I think that assessment’s going to be critical.

Bart:

I think it’s been said a little bit differently in several of the sessions is, it’s more about purpose. So, what am I wanting to do? And I’ll pick space based on that. So, instead of the other way round is, no matter what my purpose is, I’m going to go into the office. So, if I want to collaborate, if I want to do heads down, individual focus work, if I want to do other types of things, I have the flexibility to pick different spaces, whether that’s at home co-working or in third place, whatever you want to call it, or in company facilities as well.

So, that concludes our time. I really want to thank Francisco, Lou, and Gabe. A fantastic discussion. Very interesting. A lot to come in this area. So, I’m sure you’ll all be very busy with your clients planning out the future, but thanks for joining Workplace 2.0. We do have another session here starting in about four minutes. And as Lou mentioned, that’s around advancing real estate through the concept of a center of excellence. So, we’re looking forward to Jackson Cross’s presentation on that in just a few. So thank you, gentlemen.