Market Insights from Green Street Industry Leaders
A Bearish Outlook
David Rosenberg, Chief Economist and Strategist - Gluskin Sheff, took the lunchtime stage to share his bearish outlook on the economy. He observes many indicators of a looming U.S. recession, a view that is backed by the New York Fed’s recession odds at an eleven-year high. Mr. Rosenberg candidly ballparks the arrival of a recession for the fourth quarter of 2019. Implications are bearish for stocks and bullish for government bonds, as a new secular low for Treasury yields was suggested. Long-term fundamental deflationary challenges include demographics, over-indebtedness, and technological change. Presumably, REITs would be a relative “winner” if Mr. Rosenberg’s vision pans out.
The Future of the Workplace
Danny Ismail, Green Street’s lead office analyst, was joined by two big names in the space, Craig Robinson, WeWork’s Global Head of Powered by We, and Jamie Hodari, CEO of Industrious, to discuss their views of flex office.
Defining Flex Office
Panelists set the stage by defining key attributes of flex office: 1) a shared set of amenities designed by utilizing data on how space is used; and 2) the availability of space to flex into. Companies no longer need to pay today for space to accommodate people who won’t join the firm for several years. This concept, as well as the network effect of the flex office providers’ concentration across geographies, are viewed as major barriers to entry.
Flex Space: Friend or Foe?
Throughout the discussion, it was agreed that the flex space movement is seen as an outsourcing industry that encourages tenants and landlords to hand off what they’ve long done in exchange for a more fulfilling and productive work environment. This is a concept that has proven to work well. Flex office providers and traditional landlords agree that some office tenants love the shorter leases available with flex space. Several large landlords view flex office companies as a solution to bridge the gap between the landlord and end-user. These landlords are proactively integrating themselves in the flex office movement through leasing, partnerships, and investments.
A Changing Landlord Relationship
As flex office space has taken off, there has been a noticeable shift in the relationships with landlords from leases to management agreements. The future of the management contract appears similar to the hotel industry, where the flex office provider collects a management fee and shares with the landlord the marginal profit beyond where the rent otherwise would be. This could be a better structure for both the landlord and flex office provider as it may prove better in a recession, a key risk for the flex office business.
Getting into the Thick of Densification
The office sector’s new normal is closer working quarters for employees. Densification, or increased utilization of office space, was discussed by several panelists. From Green Street’s perspective, one of the biggest headwinds for office operating fundamentals this cycle has been densification (see Headwinds in Office Real Estate: A Sector in Transition). Brian Kingston, Managing Partner and CEO of Brookfield Property Group and Brookfield Property Partners, views densification as in the 6th or 7th inning. Other panelists conversely view densification as in its early innings and believe it will continue if workers have quiet spaces to which they can retreat. Green Street sees densification creating a meaningful drag on office fundamentals with markets needing more employment growth to compensate for increased utilization.
Market Takeaways: California and Brexit
California absorbed stage time due to the growing awareness regarding the November 2020 ballot initiative to repeal the Prop 13 property tax protection of non-residential assets. Green Street pegs the probability of passage as a coin flip, but the public market appears to ascribe far lower odds. The audience got a preview of the debate ahead when the suggestion was made that the repeal would mean it is simply a matter of time before the tax is eliminated for residential too. However, Green Street doesn’t buy the “slippery slope” theory.
The United Kingdom also entered the spotlight. The consensus view of speakers was that Brexit will ultimately prove to be a non-event, resulting in few opportunities to make compelling property investments. It was suggested that with interest rates back to zero in Europe, decent returns are available without much growth. This foots with Green Street’s Global Property Allocator, a monthly scorecard comparing the relative attractiveness of 21 property sectors in Europe, the UK and the U.S.
As Green Street’s Industry Leaders Conference came to a close, attendees left with much to contemplate across macro, sector, and market-level themes. Those with a diminished confidence in the outlook for the economy are encouraged to consult Green Street’s work on the economic sensitivity of property sectors and markets. Sector-focused discussions gave attendees much to ponder around portfolio positioning in an uncertain economic environment. Finally, the event reinforced the need to monitor secular shifts, which create opportunities and threats for property investors.
- Interview: Office Cap-Ex Load Among Highest in its Property Universe
- Special Report Download: Non-Core Sectors Dominate, There are More than Four Flavors
- Blog: Policy Decisions Impact Property Markets
- Report [Client Access Required]: Conference Insights – Conversations with Industry Leaders
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