CBRE Economist Sees Favorable Signs For Office Sector, Wider Economy

The global chief economist for commercial real estate giant CBRE says he’s optimistic about the long-run outlook for the office sector in spite of businesses’ rapid adoption of technology that facilitates remote meetings.

In a recent podcast conversation, Richard Barkham told host Spencer Levy that while the near-term prospects for the asset class are dim, he’s confident that demand will bounce back.

“I remain convinced that the office sector is viable in the long term,” he said. “It’s where people meet. It’s where creativity happens. It’s where clients get helped. That’s where we train and bring in younger people into the workforce. And all those things are going to need to reestablish themselves.”

Barkham acknowledged that the flight away from full-time office work for many employees is likely to be permanent. While 63% of office employees traveled to their workplace all the time before the coronavirus crisis, and pre-crisis projections forecast a dip to 52% by 2030, so estimates now pin that number at between 20 and 25%.

“We’ve had the wind behind us over the last 20 or 30 years, which is continual growth in the office sector, continual growth in the amount of space that’s devoted to office,” he said.

But he also said there’s reason to hope that a readjustment in how space gets used could offset this trend, as concerns about exposure to future pandemics result in the allocation of greater space to each employee.

Barkham continued that the outlook for data centers and logistics facilities is particularly robust at the moment, with the conoravirus forcing a pivot towards not only remote work but also digital commerce.

“Retail sales are now back to their pre COVID levels,” he said. “And not all of that is going through stores. that’s going through our industrial and logistics sectors. That’s very hot at the moment and looks likely to continue.”

Other non-traditional real estate asset classes aren’t likely to flourish in the same way.

Not every alternative benefits from COVID-19. Student housing, seniors’ housing…that kind of communal living has been a little called into question,” Barkham said. “But I think in that case, we need to remember that there will be a world after COVID-19 and the long term demographics points heavily towards more seniors’ housing and also more student housing.”

Looking at the big picture, Barkham believes that—in spite of the U.S.’s struggles in responding to the coronavirus crisis—the economy will bounce back in 2021.

“I can understand the lack of confidence that the flare up in the virus, particularly in the United States, has not been well handled. It dealt a big blow to confidence and that might delay the recovery,” he said. “We’re not, as I have said, I think, too far away from a generally available vaccine. It may not be a cure all, but therapeutics are coming. And so I think the outlook for 2021 is much better than people expect.”

https://www.globest.com/2020/08/13/cbre-economist-sees-favorable-signs-for-office-sector-wider-economy

NYC Schools Reopening, Need To Lease Space To De-Densify

New York City schools are allowed to reopen in the new school year, and now the hunt is on for extra space so the students can be sufficiently spread out.

Gov. Andrew Cuomo officially greenlighted statewide school reopenings last week, and New York City Mayor Bill de Blasio said Monday more than 74% of students are planning to return to the classroom in the fall. A total of 85% of teachers will go back to in-person teaching, per a survey.

The pressure is now on for schools to take extra space as schools work to adopt social distancing practices to keep the virus at bay, local news publication The City reports. De Blasio and Schools Chancellor Richard Carranza said last month the search was on to find external spots for schools.

The Real Estate Board of New York put out a note to its members last week, saying the School Construction Authority was looking for space that could be ready next month. The spaces need to be at least 650 SF, with bathrooms and entrances.

Meanwhile, the office of Manhattan Borough President Gale Brewer put out a call for space in a newsletter. Childcare facilities are also being sought, and Brewer’s staff have already collated a list of possible options, including public space that is privately owned and offices and hotels that aren’t being used.

Jing Fong restaurant in Chinatown is one possible option identified, as is the St. John the Divine in the cathedral in Morningside Heights and the Schomburg Center for Research in Black Culture in Harlem.

The New York City Department of Education has said in a facilities plan that any new facility “considered for leasing will be reviewed with [the Department of Buildings/Office of Fire Prevention and Control] for a preliminary evaluation” and that “no firm decision has been made.”

The reopening of schools has proved one of the most vexing issues across the country, with public health experts, politicians, educators and parents all grappling with how to keep communities safe without further jeopardizing students’ learning. If children don’t go back to school, it will also cause problems for owners’ plans to reopen buildings, as many workers will need to stay home and provide care.

https://www.bisnow.com/new-york/news/economy/nyc-schools-are-reopening-and-they-need-to-lease-space-in-order-to-de-densify-105531

Blackstone Building Its Next Empire: Studio Space For Streaming

When Harry, Albert, Sam and Jack Warner, Polish émigrés who arrived in Los Angeles via Canada and the Midwest, bought a vacant farm on Sunset Boulevard, the history of entertainment changed forever.

At the Warner brothers’ eponymous studio, the first-ever talking picture, Al Jolson’s The Jazz Singer, was made, and cinema as we know it today was born.

A century later, the modern iteration of that studio is part of a similarly momentous change to the way we make and consume the stories we tell about our world — one that could have a big impact on real estate, as well as film and television.

When Blackstone buys into a sector, it does it in a big way, and its investments often presage wider shifts in society and real estate — just think of the way it bought into industrial and logistics after the financial crisis as the wave of e-commerce broke around the world.

Its newest investment theme is film studios, and while the world is unlikely to ever need as many studio soundstages as it does distribution centers, the real estate giant has grand ambitions in the sector.

“Our business comes down to identifying themes we believe in, and then finding ways to invest in those themes,” Blackstone Head of Real Estate in the Americas Nadeem Meghji told Bisnow in an interview. “Content creation is a megatrend, and there has been explosive growth in both the demand for content and the spend among traditional media companies and the big film studios.”

Blackstone is backing up its belief in the theme of content creation, and the real estate that supports it, by buying a 49% stake in Hudson Pacific’s Hollywood Media Portfolio, also known as Sunset Studios, a 2.2M SF collection of Los Angeles studio facilities and office buildings valued at $1.65B. The joint venture was agreed between Hudson Pacific and Blackstone Property Partners, the investor’s core-plus vehicle, in June.

The deal includes Sunset Bronson, Sunset Gower and Sunset Las Palmas Studios, which collectively comprise 35 soundstages totalling 1.2M SF of production and support space in Hollywood. It also includes 966K SF of office properties that Hudson Pacific has developed on or adjacent to the lots, specifically 6040 Sunset, ICON, CUE, EPIC and the soon-to-be-completed Harlow.

Netflix is the portfolio’s largest tenant, leasing more than 700K SF, in addition to signing long-term deals for stages and production space, with some leases as long as 10 years.

The Sunset studios portfolio is marinated in film and TV history. But being anchored by tenants like Netflix puts the portfolio at the forefront of the changing way in which film and television is made, and the way its business model works.

Owning successful commercial real estate has historically been about creating places people want to come to when they leave their home, but owning film studio property allows owners to capitalize on the fact that we are increasingly content — or required — to stay at home to have fun.

One of the studios in the joint venture, Sunset Las Palmas, was set up in 1919 as Hollywood Studios, and the early stars and directors who put Hollywood on the map, like Charlie Chaplin, Harold Lloyd and Douglas Fairbanks, filmed there. Sunset Bronson, then Warner Bros. Studio, is where The Jazz Singer was filmed and recorded, the fact that words and pictures were married for the first time giving a huge boost to the pastime of going to the cinema. As time went on, from the 1950s to the early 2000s, the studios in the portfolio were the location for TV shows like I Love Lucy and The Golden Girls, which exemplified the media business model of TV shows made to be shown at a specific time and funded by advertising.

Today, Sunset Bronson is home to Netflix, a technology and production company that makes some of the most renowned films and TV shows of the era, and is at the leading edge of persuading us all to stay at home and consume content whenever we feel like it, on any device with a screen.

According to MoffettNathanson, the 10 largest companies in the content creation business spent around $80B in 2019, a figure that has nearly tripled over the last three years. Disney was top of the league at nearly $19B, with Netflix’s spend topping $9B.

Once upon a time, those companies would have rented space on a soundstage on an ad hoc basis if they didn’t own their own studios. Today, the fact that companies like Netflix or Amazon are simultaneously creating multiple films and series that comprise many seasons as a way of driving subscription revenue, means they can’t leave it to chance. That change in the distribution method and business model of TV and film has created an opportunity in the world of real estate.

“LA remains the capital of film and television production,” Meghji said. “You have rising demand and limited supply. You have an increasing number of recurring series being created that are filmed on soundstages and not on location. As soon as one show is finished, they are straight on to filming the next one, and companies need to be able to secure that space.”

As a result, in a real estate world where, in almost every sector, leases are getting shorter, in this one, they are getting longer. Previous reports about Netflix taking space at Sunset Bronson said the company had signed 10-year leases.

“Leases are getting longer, which is absolutely the trend we are seeing,” Meghji said. “There are a limited number of these soundstages, and that makes them increasingly valuable.”

The Harlow office building at Sunset las Palmas is the latest to be completed by Hudson Pacific. The growth of the sector is exemplified by the financials of the Sunset Studios portfolio since Hudson Pacific bought it in 2007. Since 2010, when Hudson Pacific became publicly listed, the portfolio has grown from 972M SF to 2.2M SF, with land that can support another 1.1M SF of development, according to a presentation to Hudson Pacific investors.

Meghji said that room for further expansion was a key attraction for Blackstone in the deal. Net operating income has risen from $18.6M to an estimated $68M in 2020. About $38M of that will come from the studio space, the rest from the offices, with Meghji pointing out that the two are highly interdependent: Production companies use the office space for post-production and marketing and other uses associated with the filming itself. The portfolio is 93% occupied. Blackstone paid what amounts to a 5% cap rate for its share of the venture, the investor presentation showed.

When asked why Blackstone took a stake in the venture through its core-plus vehicle, rather than one of its opportunity funds, Meghji said it used the vehicle that is a long-term holder of assets. And in terms of backing its conviction, Blackstone and Hudson Pacific have appetite to do more in the space.

“This is a fragmented market with myriad owners,” Meghji said. “Our studio platform is significant, but it is still only 35 soundstages out of more than 500 in North America. We think there is an opportunity to consolidate and build scale, and that was part of the thinking behind the JV. We will be focusing on a handful of markets, but there is definitely an opportunity to expand the platform.”

In its investor presentation, Hudson Pacific highlighted Vancouver, New York and London as potential markets for expansion. London is a market where another real estate investor, private equity firm Aermont, has invested in the sector and done very well. It bought the Pinewood network of studios to the west of London in 2016 for £365M, but a recent £600M refinancing valued the business at £1.15B. The value of the business was again significantly buoyed by Disney and Netflix signing long leases on studio space.

Meghji said his current favorite TV show is Medici, the Netflix series about the 15th century Florentine dynasty that dominated Renaissance finance and funded the creation of some of the period’s great art. An apt choice as Blackstone builds a new empire.

https://www.bisnow.com/national/news/commercial-real-estate/blackstone-sees-chance-to-consolidate-the-growing-world-of-studio-space-105439

The New Economics of Office Space

Traditionally corporate real estate costs represent nine to 12 percent of a total company cost base. But as concepts like work from home and spoke and hub gaining traction as COVID-19 lingers, Joe Brady, CEO Americas for The Instant Group, a workspace innovation firm, sees an opportunity for some firms to bring those costs down to five or six percent.

Brady sees they can do this by relying on spokes where people can come together to fill personal contact voids without commuting to the main office hub, which are in central business districts and will have spaces, such as boardrooms and huddle rooms, dedicated to “engagement and collaboration.”

“With this idea of the hub and spoke, if you’re reducing expensive real estate in the prime core business districts, the urban cores, and you’re moving out to first string suburban, you’re going to see some, some cost savings,” Brady says.

Brady thinks a lot of this cost savings will come from better utilization of space.

As companies look to distribute their workforce into more locations, Brady predicts that they’ll also need to reengineer space. For instance, he sees a movement towards “resimercial” design with touches that include soft seating, couches and comfortable chairs.

“You can hunker down and talk,” Brady says. “They’ll have some screens and white walls and things of that nature. So I think we’re going to see more meeting rooms and creative collaboration in hub offices.”

Before COVID-19, Brady says office densities were moving toward 100 square feet and under. “I think we’re going to see that bounce back,” he says. “So companies will likely reduce their space, but not as much as we think in the downtown areas. That space will just be converted around collaboration and whatnot.”

These reconfigurations aren’t cheap though. Brady says companies can either restack in place and fund the renovations themselves. If they’re toward the tail end of their base lease, landlords can expect requests for a tenant improvement allowance with their landlord. Otherwise, they may relocate and start a new lease and negotiate a tenant improvement allowance with their new landlord.

The tenant improvement allowance allows companies forego putting a majority of their own capital into a renovation project. They can then reinvest that back into their core business function.

The flexible workspace areas that will most likely be home to these “spokes” can also offer some benefits for landlords

Companies will also see some benefits from a higher speed to occupancy out of these flexible workspaces.

“They can move much more quickly,” Brady says. “Oftentimes when you’re thinking about relocating an office, it could take six, nine, or 12 months. Oftentimes can deliver space in four to six months. So if you think about that increased speed occupancy, you’re not paying double rent elsewhere while you’re building out the space. So there’s some efficiencies that are, that are realized.”

https://www.globest.com/2020/08/10/the-new-economics-of-office-space/

Hire More Cops to Reduce Crime

The death of George Floyd while in the custody of Minneapolis police has ignited calls to defund police forces across the country. While reforms targeted at punishing and removing bad cops, such as elimination of qualified immunity in civil cases and weakening of police union protections, may be overdue, cutting police budgets will reduce the size of police forces and pose a clear public safety risk.

Despite some statistically naïve analyses that confuse correlation with causation, social-science literature provides overwhelming evidence that bolstering police forces reduces crime. Hiring more police officers allows departments to engage in community policing and proactive police strategies, such as concentrating more police officers in areas where crime is high—programs that a report from the National Academy of Sciences notes have been shown in high-quality experimental research to reduce crime.

As a general matter, looking at the correlation between the number of police, or the size of police budgets, in a locality and respective crime rates is not an illuminating comparison. Cities with lots of crime tend to hire a lot of police officers. Likewise, hiring more police becomes likely when policymakers believe that crime is trending upward. Just looking at the overall correlation between police budgets and crime, then, does not help us assess the causal effect of police on crime.

Studies that rely on quasi-experiments to examine unanticipated increases to policing levels provide stronger tests of police effectiveness. These studies follow the logic of a randomized experiment used in medicine to evaluate the effect of a new treatment by comparing subjects given the treatment with those given a placebo or control condition. Through these quasi-experiments, criminologists and economists have come to a basic consensus that more cops lead to less crime.

For example, police coverage in Washington, D.C. surged during warnings about terrorist attacks. Increasing police by 10 percent, according to a study we conducted, leads to a better than 3 percent reduction in property crimes and assaults. Other authors examining terrorist-induced policing increases in London found comparable results.

We examined the difference in policing between the areas of West Philadelphia with extra University of Pennsylvania (Penn) police patrols and the surrounding neighborhoods that don’t receive these extra police services. Penn employs more than twice the number of police in its surrounding neighborhoods compared with the rest of West Philadelphia. We found that property crimes and aggravated assaults increase by more than 50 percent outside the Penn patrol zone, despite the two areas being otherwise indistinguishable. A study conducted on the extra police provided by the University of Chicago found comparable results.

Scores of other studies using research designs like these generate similar results. For example, a recent study found that increasing police in the French Quarter of New Orleans led to significant reductions in robberies, burglaries, and theft, even after accounting for some of the crime being displaced to nearby areas. On a national level, the evidence suggests that when the federal government provided funding from the 1994 Crime Act and the 2009 Recovery Act for jurisdictions to hire more police officers, the cities that received these funds had significantly larger reductions in crime than those that didn’t get funds. Each additional police officer hired from the Recovery Act prevented four violent crimes and 15 property crimes, on average. When dollar amounts are assigned to these crime reductions and compared with the salary and benefit costs of hiring new police officers, hiring more police is well worth the expense. A study by our Penn colleague Aaron Chalfin and Columbia professor Justin McCrary estimated the return to a dollar of spending on police at more than $1.50, leading them to conclude that most cities in the U.S. are actually under-policed—on the economic premise that any public benefit that generates more value than it costs is under-provisioned and could stand at least incremental expansion.

Just because police are worth hiring in order to reduce crime doesn’t negate the need for institutional reforms. Recent work shows that about 3 percent of police officers in Florida had previously been fired by other police agencies in the state. Less than 5 percent of Chicago cops account for most the city’s police misconduct cases and civilian complaints.

The current system does little to weed out bad cops, even when it’s easy to identify who they are. Making it easier to fire corrupt, violent, or negligent officers and ensuring that they don’t get reassigned to other police jobs should be the first order of business in any restructuring of police forces in the United States.

Jonathan Klick is a professor at Penn Law whose work focuses on identifying the causal effects of laws and regulations on individual behavior—including the effect of police on crime—using cutting-edge econometric tools. John MacDonald is a professor of criminology and sociology at the University of Pennsylvania. His work in criminology has involved the study of crime and violence, race and ethnic disparities in criminal justice, and the effect of public-policy responses on crime.

https://www.city-journal.org/bolstering-police-forces-reduces-crime

Blank-Check Real Estate Companies ‘Literally Exploding Right Now’

Special purpose acquisition companies, known as SPACs, have been all the rage in the financial world this year. Now, they are starting to become en vogue in commercial real estate.

“Today, three SPACs went public,” former hedge fund portfolio manager Neil Danics, who tracks SPACs for the website he founded, SPACAnalytics, said Wednesday. “They’re literally exploding right now.”

There were 59 SPAC IPOs in 2019, which raised a combined $13.6B. So far this year, according to Danic’s data, there have been 60.

A SPAC is a shell company that is set up to go public, even though it doesn’t have any operations. Money poured into these “blank check companies” by shareholders is used to acquire another company, thus taking it public in a reverse merger. After the acquisition, the company is usually listed on one of the major stock exchanges.

Just in the last few weeks, a SPAC called PropTech Acquisition Corp., acquired Porch, an online real estate and home improvement marketplace, for $523M after the SPAC raised $172.5M in a November IPO.

An offshoot of Miami-based Lionheart Capital filed paperwork with the Securities and Exchange Commission specifying that it intends to raise $200M to acquire a proptech company.

Benchmark Real Estate Group is likewise looking to raise up to $200M for a SPAC called Property Solutions Acquisition Corp. that would target property technology or real estate service firms.

Proskauer Senior Counsel Lily Desmond said regulations prohibit SPACs from having discussions with specific target companies in advance of an IPO, so a SPAC initially announces only the sector that it is interested in. Proskauer released a 2020 SPAC IPO Study Wednesday.

“When you buy into a SPAC IPO, a lot of the decision is based on the reputation of the management team,” Desmond said. “You don’t know what they are going to acquire. Knowing how many huge players and how many known names, strong names are in real estate, I could see it being a strong sector [for more SPAC interest].”

Mitchell Nussbaum, vice chair of New York law firm Loeb & Loeb, has helped “hundreds and hundreds” of clients set up SPACs over 20 years, he said. He has seen their popularity wax and wane.

“There were a couple in the ’90s,” Nussbaum said. They spiked in the early 2000s but hit a wall as liquidity dried up with the 2008 financial crisis.

Over the next decade, some notable SPACs went public. Burger King was taken private, then run through a SPAC to go public in 2012. Now-Commerce Department Secretary Wilbur Ross launched a SPAC in 2014 that he used to buy a chemical company, Nexeo.

But in the past few years, they have ramped up because of growing interest from private equity and institutional investors. Danics said that SPACs gained legitimacy and attention when Goldman Sachs waded into the market three or four years ago.

“The appeal of the SPAC from the investor’s point of view is that it’s a win-win,” Danics said. “The investment is always protected. If they don’t like the company being acquired, they can always say ‘No, thank you’ and get their money back.”

SPACs will usually issue units, rather than shares, in their IPO because of their unusual structure. These are usually priced at $10 per unit, which gives investors a common share, plus a fraction of a warrant that entitles the owner to buy additional shares.

Cash raised in a SPAC IPO goes into a trust, where it earns interest until the merger is completed, according to Barron’s. For investors, it is nearly risk-free to buy a SPAC’s shares when they’re trading at a discount to the cash in its trust.

SPACs typically have two years to make an acquisition or else be liquidated. Billionaire hedge fund manager Nelson Peltz in 2010 had to return $900M raised through a SPAC after he couldn’t find worthy acquisitions. But the Proskauer report found that, of SPAC IPOs priced from 2016 through 2019, over half have completed an initial business combination, and only 5% returned funds to investors and wound up operations.

Last year, a SPAC run by venture capitalist Chamath Palihapitiya bought a 49% stake in Virgin Galactic for $800M. A SPAC backed by Apollo Global Management is buying Fisker, an electric car company, for $2.9B. In December, another SPAC acquired digital sports and entertainment company DraftKings in a three-way deal valued at $3.3B. This spring, Starwood Capital founder Barry Sternlicht raised $600M in a SPAC called Jaws Acquisition, though it doesn’t intend to pursue real estate assets. Billionaire hedge fund manager Bill Ackman in July raised $4B through the SPAC called Pershing Square Tontine Holdings, with some speculating he will use it to buy Airbnb.

Proskauer partner Daniel Forman said that while tech is hot, more pure real estate plays could be targeted by SPACs — even REITs could theoretically be acquired. For private companies looking to go public, a traditional IPO route would require them to work on valuation with investment banks, file with the SEC and go on a two-week roadshow.

“There can be so many volatile events in that period,” Forman said. Being acquired by a SPAC still requires thorough scrutiny and disclosures, but can insulate a company from some of that volatility, he said, especially this year with a pandemic and an election. Of course, SPACs have their critics.

“This is just another warning signal we should be cognizant about in an ever-frothier market,” Jeffrey Berman, general partner at real estate-focused venture-capital firm Camber Creek told The Wall Street Journal.

Financial analyst Byrne Hobart, writing in Marker, said SPACs are for those who think the normal IPO process is too slow and want to cash in on the hype.

“The SPAC is the Vegas wedding chapel of liquidity events,” Hobart wrote. “It seems like an urgently good idea at the time, but it doesn’t always turn out that way.”

Danics said that Wall Street by its nature will continue to churn out SPACs if there continues to be investor demand for them.

“With a huge supply of SPACs getting ready to go public, there definitely could be a situation with a lot of supply of SPACs looking for a company to bring public,” he said. “Am I worried? No, because of the inherent safety, I don’t think investors will ever get hurt by them. They might just get bored if the SPAC doesn’t find anything. I prefer boring to losing money.”

https://www.bisnow.com/national/news/commercial-real-estate/spac-real-estate-105465