What’s Next for the Office Sector?
- Jun 16, 2020
The global health crisis has revealed that densification has its limitations. Considering this, office spaces should now focus on providing more private areas to allow for social distancing. Although workspaces need to be reconsidered, it’s not yet clear what the permanent changes will be.
In the interview below, Ariel Bentata, founding & managing partner of investments at Accesso Partners, provides insights into the future of office spaces and unveils the company’s approach to operating office buildings as the economy reopens.
Accesso’s office portfolio encompasses 35 properties located in 21 major U.S. cities. What is your main objective when choosing a market to invest in?
Bentata: Accesso’s strategy involves investing only in the top 20 non-gateway markets throughout the U.S. Examples of these non-gateway markets include Atlanta, Austin, Charlotte, Dallas and Denver, to name a few. Sometimes referred to as “18-hour cities,” these markets have positive economic drivers such as prominent education infrastructures, large airports and diverse employment opportunities. While they don’t necessarily have the same level of accessibility as the coastal cities, these markets enjoy a lower cost of living, sound business environments, a high quality of life and a steady pool of top talent from leading universities across the country.
READ ALSO: CPE’s Coronavirus Coverage
How has the coronavirus outbreak impacted Accesso’s operations?
Bentata: Our properties have remained open throughout the pandemic for those that have needed to access them, so we have operated with amplified cleanliness and safety measures. In addition, we have spent a significant amount of time implementing new health policies and safeguards to reduce the potential spread of COVID-19 and other infectious diseases. We have prepared extensively for the return of our tenants, who are now beginning to come back into the buildings, and keeping them and our team members healthy and safe will continue to be our top priority.
While some tenants have requested rent relief, and we’re in the process of having those conversations with them, the vast majority have complied with their lease obligations and have paid their rent on time. Fortunately, we have been able to continue paying our lenders and vendors as normal.
How does the impact vary across markets?
Bentata: We haven’t found much of a difference. It’s more of an industry or asset class concentration, as opposed to the market where a property is located. For example, one office property where we have a retail center on the first floor has seen the retailers suffering more than the office tenants. Some coworking tenants have also felt more of an impact. It’s more sector-specific than location-based.
What makes the industry more vulnerable or resistant to the crisis?
Bentata: From what we’ve seen, the office market is certainly less vulnerable than the retail and hospitality sectors. That said, we’ve yet to see whether it’s more or less susceptible to the impacts of the pandemic than multifamily. People will always need a place to live, and multifamily assets will therefore always be necessary. Thus far, rent collections in the office and multifamily markets have been relatively on par with each other. The industrial sector has been the one that has felt the least amount of pain, with retail and hospitality being the most affected. At this juncture, office has been in the middle of the pack.
What has the current situation revealed about the office sector?
Bentata: Before COVID-19, the trend in the office market was toward more densification. We were utilizing open floorplans and packing six people per 1,000 square feet, whereas traditionally it was more like three or four people per 1,000 square feet. I think the crisis has brought to light the fact that a densified floorplan, where people sit right next to each other, is not always practical.
People are now questioning whether there should be less densification and whether workers should have more space with private areas, to allow for social distancing. It has also revealed the popularity of remote work, which may result in employers allowing people to work one or two days per week from home.
Another tactic will perhaps involve alternating the people coming into the office on certain days. I think some of these reconfigurations will happen in the short term, but it’s too early to tell if they will be permanent changes. When a vaccine inevitably arrives and people feel more comfortable, we may go back to the pre-COVID-19 densification trends, but for now, questions around common-area amenities and group gatherings are prevalent.
Tell us about your company’s strategy for operating its spaces as the economy reopens. What changes will you implement?
Bentata: As the economy reopens across the country, we’ve increased the frequency with which we clean each building and have encouraged the use of personal protective equipment whenever possible. We’ve limited entry points to our properties to make the flow of foot traffic more streamlined for social distancing, installed hand sanitizer stations, upgraded air filtration systems and instituted the innovative Blue Box HVAC coil-cleaning process across the majority of our portfolio.
We’ve also installed signage to reinforce the need for proper hygiene and social distancing, and have worked to reduce contact with high-touch surfaces by installing touchless access mechanisms wherever possible. Accesso Club, our exclusive amenities program, has been migrated entirely online to enable our tenants to continue to access much of the programming they’d normally attend in our buildings.
How will the COVID-19 crisis alter office spaces in the long term?
Bentata: When the dust settles, there may be a few more people working from home, but for the most part, I think the story is that people don’t want to be in their homes full time. They want at least three or four days in the office. Employers may introduce the possibility of working one or two days from home, but I believe employees generally want to be in a collaborative environment where they can mentor or train each other and communicate as much as possible.
Virtual meetings have made the current situation better, but it’s not the same as in person. Moreover, some companies will de-densify, so they may need more space. This theoretical heightened need for space, combined with the potential increase in remote work, may ultimately balance each other out to result in a similar demand for office space as we saw prior to the pandemic.
What can you tell us about investor sentiment during these challenging times? What types of assets are buyers looking for?
Bentata: Everybody is of course being cautious right now. Similar to past crises, everyone is searching for high-quality assets, but in general, there’s not a lot of distress in the office market. Those looking to sell their properties seem to be holding off and waiting for a better environment in which to do business. I believe that pricing may decrease by approximately 5 percent to 10 percent, but in some cases, I’m not expecting valuations to be much different, if at all.
Many properties will sustain their value and continue to attract meaningful investor interest. Overall, most transactions have halted for the time being. That said, despite the fact that it’s been a slow year so far, investors that don’t have distress and can wait to sell their properties will likely be able to do so profitably when the time is right.
When do you expect the office sector to bounce back and how will the recovery unfold?
Bentata: While there’s obviously still a lot of uncertainty, I think we can now see some early indications of a recovery. The stock market is a leading indicator of investor sentiment, and it’s currently telling us that people feel reasonably good about the world, as we emerge from this crisis. Values, in terms of REITs, have rebounded recently and are similar to where they were at the beginning of the year, excluding retail and hotels.
The country is starting to open up again, and we’re seeing some differences in CMBS practices as well as a lot of capital in the market. Values are marginally lower, but the price of debt is hovering around a historically attractive 4 percent. All of this seems to show that the real estate market may be able to come back formidably over the next few months. Next year, hopefully, there will be plenty of confidence from investors as they start putting their capital back to work.