Allen Matkins’ View from Top: Opportunities Ahead, Despite COVID Challenges Today

By Dennis Kaiser

Allen Matkins’ 13th annual View from the Top conference was held this year as a completely virtual presentation. The high-level discussion touched on a wide range of topics starting with a real estate economic overview and hit on just about every asset class, deal type and market during the full afternoon of seven panels featuring some of the commercial real estate industry’s top leaders.

One of the overarching themes from this year’s conversations, naturally was a look at exactly how the COVID-19 pandemic has played out so far on the CRE markets, as well as what leaders see on the horizon for the industry as a result of the economic disruption, including a number of encouraging perspectives.

Eastdil Secured’s Michael Van Konynenburg perhaps framed it best in his opening economic overview, concluding the “need for yield should drive significant capital to commercial real estate, particularly once we have a vaccine and the ability to underwrite net demand.”

But to pave the way to that outcome, much work lies ahead. Van Konynenburg outlined the questions they are thinking about and talking about with clients. They include how the emergence of a vaccine might ease fears and impact reopening progress. It will also be important to monitor the length and depth of the recession, while determining if the sentiment surrounding public markets (REIT’s) is an accurate predictor of where private markets are headed.

Clearly, there will be winners and losers coming out of the crisis, notes Van Konynenburg. But the long-term implications of the government stimulus efforts, as well as actions such as eviction moratoriums have yet to be worked out. He points out it will be important to really get a handle on both the good and bad, and not underestimate either as the future unfolds.

But make no mistake the COVID-19 pandemic hit the commercial real estate sector hard. Van Konynenburg says post-pandemic transaction activity “came to halt in Q2,” dropping 73% in the U.S. But he reports the good news is they are seeing the pipeline quickly build as a result of the financing markets being open, which he expects will drive Q3 and Q4 activity higher.

Kilroy Realty Corporation’s John Kilroy and Allen Matkins’ Tony Natsis took a look at how the development sector is navigating the challenges presented today. The interactive strategy discussion explored how the pandemic is playing out across office properties. Kilroy expects companies to sequence their office workforce back in phases over next year or so, as they continue to let people have the option to work remotely for a bit longer. Ultimately, he says once the virus is under control and people are able to take their children back to school or daycare, office landlords can start coordinating closely with tenants on larger scale re-entry to buildings.

In the meantime, Kilroy says there’s been a shift in the design of buildings. Even before COVID-19 came along there was a reduction in office density occurring over past few years. He says that trend was already popping up in tech facilities such as the one Kilroy built for Dropbox’s HQ. It features an innovative design that is less dense and creates communities with common areas, which is a trend he expects to continue in the future.

Companies still embrace offices but now require “flexibility on how they occupy” and where they work,” points out Kilroy, which in some cases can be accomplished via tech at home. The “revolution” has been underway the past 10 years in office, he notes, “Covid accelerated trends that were already transforming our industry.”

Tenants tend to want to “control everything now,” making optionality and flexibility critical elements to the workplaces being advanced, adds Kilroy. That means the market could see fewer one-million-square-foot, multi-tenant buildings and more 200,000-square-foot buildings. Tenants are seeking their own entrances, which may make sense given the COVID-19 safety guidance, as well as a touchless environment. Kilroy envisions a day not too far down the road when a key card or chip worn on a lapel will grant building access, turn the lights on, adjust the temperature in a space and activate other building features as part of a more efficient and healthy work environment. Well buildings are now high on the priority list for companies, Kilroy says.

Kilroy believes the remote work environments can only fill a temporary need but that the collaborative and inspirational elements found in a secure workplace can’t be replicated at home or on video calls. “There’s a place for that for sure and it can be productive,” says Kilroy, “but it doesn’t create an environment that stimulates intellectual creativity and ideas,” which ultimately is what companies seek from their talent. Tech is a collaborative enterprise where teams need to be together, notes Kilroy, who says when people get together, they can dream up big ideas. He is bullish on the future of offices, in the right markets, with the right space and for the right companies.

Boston Properties’ Owen D. Thomas, TMG Partners’ Michael Covarrubias and Allen Matkins’s Natsis continued the discussion of macro and micro issues facing the commercial real estate industry going forward, from a perspective of the CEO.

One of the key points made by Thomas was that for many in the industry, the downturn caused by the COVID-19 pandemic was likely the first they’d ever faced, given the length of the recovery and economic expansion since the Great Financial Crisis of 2008. He advised remaining calm and minding costs as initial steps to take. And for developers, they placed spec development projects on pause, though believe it was appropriate to continue projects already under construction.

Covarrubias believes it would be wise wait for the virus to be “put to bed” before moving forward on projects, in the meantime they will “keep our knitting going.” He notes there’s a need to be connected with others because it creates chemistry, thus offices aren’t going to be obsolete because there’s a sense of camaraderie in offices. Much for the same reason, once it is safe again, people will want to attend the theatre, go to a baseball game or fly to Europe.

The future could encompass a mix of both in-office and remote work a portion of a day or on certain days of the week. But input received from companies by Covarrubias indicates owners want their teams to return to an office because they understand that’s where culture and community can be created, and where the best onboarding, mentorship, and apprenticeship happens. It will also help alleviate the stress and confusion that is taking place as remote employees blur the lines of work and home, often feeling that ‘I am living at work by working at home.’

Other presentations throughout the afternoon included a summary of Allen Matkins/UCLA Anderson Forecast CRE Survey by Allen Matkins’ John M. Tipton. The Western Region Investment Sales Markets Predictions and Update was delivered by a panel that included NKF’s Kevin Shannon and Eastdil Secured’s Stephen W. Van Dusen, which was moderated by Allen Matkins’ Crystal T. Lofing.

The Landlord/Tenant Discussions of Space Utilization During and After the Pandemic included panelists Kilroy Realty Corporation’s Robert Paratte, Viacom CBS’s Ellen Albert, Cruise’s Sara Baldi, TMG Partners’ Matthew Field and Allen Matkins’ Elizabeth J. Wilgenburg.

The Leasing Markets Predictions and Updates for Major U.S. presentation included panelists Paramount Group’s Peter Brindley, Boston Properties’ Rod C. Diehl, CBRE’s R. Todd Doney, and JLL’s Christopher T. Roeder, and was led by Allen Matkins’ Natsis.

The final panel of the day featured an in-depth discussion of the current and future effects of the pandemic on development, permitting, and construction. The group sharing their insights included Related Companies’ Steve Eimer, Hunter Properties, Inc.’s Derek “Deke” Hunter, Jr., McCarthy Cook’s Thomas E. McCarthy and Brookfield Properties’ Jack Sylvan, which was moderated by Allen Matkins’ Mark R. Hartney.

For comments, questions or concerns, please contact Dennis Kaiser