After flocking downtown to woo millennials, offices might be moving back to the suburbs

“Is office space going the way of retail in five years? That’s what investors are really trying to understand,” said James Farrar, CEO of real estate investment trust City Office REIT.

It was 2016 when General Electric announced it was moving its global headquarters to a smaller space along the central Boston waterfront, away from the quiet suburbs of Fairfield, Connecticut.

Then McDonald’s in 2018 opened its glitzy, new worldwide headquarters in Chicago’s vibrant Loop neighborhood, moving out of a suburban office park in Oak Brook, Illinois – joining Kraft Heinz, Walgreens and other Fortune 500 businesses in a seismic shift of corporate office space to downtown.

And with each of these moves, there were perks: Millennial talent was more plentiful in these bustling districts such as the Loop in Chicago, where the nightlife and bar scene were also strong. Some companies, including GE, found tax breaks from municipalities when they positioned their offices downtown. And reliable public transit systems could seamlessly transport workers back and forth each week.

But that was before the coronavirus pandemic hit.

For weeks now, companies across the country have been adjusting to entire workforces working remotely. Many of these offices are sitting empty, if only to be frequented by janitorial staff and a skeleton crew of essential workers. Zoom video calls are replacing what would typically have been meetings in conference rooms filled with colleagues breaking bread. Recently, Jack Dorsey’s Twitter and Square tech companies both said employees can work from home “forever.” Google and Facebook, meantime, have told employees they can work from home until the end of this year. Many others are expected to follow suit.

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Workplaces will not be the same again when employees return from coronavirus lockdowns

Workplace dynamics will likely be transformed by the time everyone returns to the office again after coronavirus lockdown measures are lifted or eased, experts told CNBC.

“The office will not go away, but the need of the office space may reduce,” said Carol Wong, director and head of workplace delivery for Asia Pacific at global commercial real estate firm Cushman & Wakefield. “People will always need physical space and they always want to meet face to face.”

Still, worries over hygiene will continue to top concerns as employees return to the workplace, and companies will need to take new measures to minimize the number of hand contact surfaces. Some of these steps include the introduction of infrared temperature checks as well as the use of facial recognition for identity verification, Wong added.

Wong is currently working with clients in China to bring employees back to the office. She said about 10,000 companies and nearly a million workers have returned to the office so far. The country, where the earliest cases of coronavirus were reported, has been closely watched as the world looks for clues on what easing of lockdown measures would look like, and how the reopening of economies could be.

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Offices That Scan for Sick Workers: NC Architects Envision the Future Workplace after COVID-19

How might the pandemic change the features of the modern office building?

From antimicrobial surfaces to technology that can scan the room for workers that may be sick, the workplaces of the post-pandemic world will feature a greater focus on employee health and wellness, Triangle architects predict.

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Amazon Just Bought Lord & Taylor Building from WeWork. Did It Overpay?

The e-commerce giant paid more than the building’s previous sales price. It may still have been a good deal, capital markets experts say.

At a time when most investors are nervous to embark on new deals, Amazon has charged ahead with plans to expand its footprint in the Big Apple. The e-commerce giant acquired the iconic Lord & Taylor flagship building in Midtown Manhattan from troubled co-working operator WeWork for $978 million, according to New York City Department of Finance records.

While at least a temporary recession is now all but a certainty, this deal was in the works long before COVID-19 became an immediate threat to the U.S., notes Eric Anton, associate broker in the New York office of brokerage firm Marcus & Millichap.

WeWork acquired the building for its headquarters in 2019 and announced a lavish, $438 million renovation project to reposition it to office space. But a failed attempt to go public followed, and the company never moved into the building.

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How Is the New Focus on Impact Investing Playing Out in the Office Sector?

Impact investing is increasingly popular among institutional investors and private equity funds. What does it mean for office owners?

While impact investing has become trendy among institutional and large private equity investors, it also “makes good business sense,” according to Eric Enloe, managing director in charge of capital markets valuation nationally with real estate services firm JLL.

Technology and Fortune 500 companies, which are generating growth in office occupancies nationwide, require environmentally-friendly office spaces, and so are driving this investor trend, Enloe notes. And from an office owner’s perspective, sustainability can be a major financial incentive, as it lowers operating costs and increases the probability of tenant renewal at lease expiration.

“All big investors are environmentally-conscious,” Enloe says. As a result, he notes that the line between impact investing and standard investment practices is blurring. “There’s no such thing as ‘non-impact’ investing. It’s critical to attracting and retaining tenants.”

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How America’s Second-Tier Cities Can Catch the Superstars: Noah Smith

The Internet may be making it easier for residents of second-tier cities to enjoy big city lifestyles.

(Bloomberg Opinion)—For the past three decades, one of the central stories in the U.S. economy has been the rise of superstar cities. As the country has shifted from manufacturing to services, high-value knowledge industries such as technology, finance and pharmaceuticals have become more important.

These industries tend to cluster because skilled workers, entrepreneurs, big companies and funding sources all want to be in the same area. As a result, these industries have concentrated in cities such as San Francisco, Los Angeles and New York, which have had enormous economic booms and skyrocketing rents while many other areas of the country are left to wither.

So how can the places that missed out ever compete with a San Francisco or a New York? Some had hoped that remote work would ride to the rescue. Thanks to the internet, engineers or traders or project managers might be able to live in Akron, Ohio, while working for a company based on one of the coasts. But while technology is allowing more Americans to work outside of the office, so far this hasn’t been enough to overcome the need to be close to where the action is. Even as online communication improved by leaps and bounds, superstar cities just kept getting more dominant.

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Medical Office Buildings Draw Stronger Interest From Institutional Investors in U.S.

According to a new report from CBRE, strong fundamentals have increasingly made U.S. medical office real estate a favorite of institutional investors, keeping investment volumes at high levels and capitalization rates low this year in relation to conventional offices.

CBRE’s report cites several factors behind the continued popularity of medical office, including a steady vacancy rate at 10.3 percent despite a 10-year high in construction completions in the second quarter, a sustained increase in average asking rents since 2013, and strong demand for health-care services due to an aging population and other demographic trends.

As a result, transaction volume for medical office buildings stands 50 percent higher this year than before the recession, though it has receded from its early-2018 peak. Foreign investors, domestic institutions and real estate investment trusts are steadily getting more active the medical office market. Cap rates – a measure of a property’s income as a percentage of its price – for medical offices have pulled even with those of conventional offices after years of registering higher.

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Some WeWork Landlords May Be Left Holding the Bag if WeWork Decides to Exit Their Buildings

The company was in the habit of structuring some leases through LLC entities that featured no long-term guarantees.

Troubled co-working operator WeWork has structured some leases under LLCs that are not guaranteed by its holding company, which will leave those landlords holding the bag for the free rent and TIs they provided to help get the spaces up and running. The landlords will also be left with vacant spaces, which may be backfilled with former WeWork tenants or another co-working operator at a lower price.
“WeWork (founders) attempted a paradigm shift in the tenant-landlord relationship,” says David R. Pascale, Jr., senior vice president with Los Angeles-based real estate advisory and brokerage firm George Smith Partners. “I believe they overreached.”
WeWork’s unprofitability and its derailed IPO reflect management’s failure to focus on the profitability of the core real estate business, Pascale notes.

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Australian Pension Fund Eyes U.S. Offices, Apartments

QSuper, the second-largest pension fund in Australia, wants to invest in U.S. office and apartment buildings.

(Bloomberg)—Australia’s second-largest pension fund is betting on U.S. real estate while avoiding overpriced infrastructure assets as it chases returns in the face of a fragile global economy.

QSuper wants to buy more office buildings and apartment developments in the U.S. after purchasing Chase Tower in Texas in August, Chief Investment Officer Charles Woodhouse said in an interview. The A$110 billion ($76 billion) fund a large chunk of its assets in cash, giving it more firepower than many other funds to write big checks when it sees opportunities, he said.

“We’ve got several other transactions in the U.S. that we’re looking at very closely right now,” Woodhouse said, without elaborating. “The more of these opportunities that we can find in the unlisted asset classes that generate these high single-digit, low double-digit returns, the better.”

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Flexible Office Space Operators Focus on Add-On Services to Develop New Revenue Streams

Going forward, the success of co-working operators may rely partly on their ability to generate new revenue sources.

Looking for ways to create a better tenant experience and boost their bottom lines, flexible office operators are generating new revenue streams by offering additional on-site services and establishing new business lines.

LiquidSpace, a digital marketplace—a sort of an Airbnb of flexible office space that partners with co-working operators, serviced office operators, office landlords, and office tenants with sublet space, provides flexible office options to its clients. The company has also partnered with Steelcase to provide turn-key design and fit-out of tenant spaces within traditional lease structures.

“We’re the one platform where tenants can reach the entire flexible office market,” says Mark Gilbreath, LiquidSpace founder and CEO, noting that his company simplifies the discovery and transaction process.

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