Commercial Real Estate Faces a Long Road Back to ‘Normal’ Even as Workers Ease Back Into Office Life

The days of eerily empty offices and airplanes may be behind us, but as commercial real estate bounces back from the pandemic, everything from the way we work to the way we shop and travel is in the middle of a major readjustment, said expert panelists on the second day of Mansion Global’s Luxury Real Estate Conference on Wednesday.

“What we’ve seen in New York in particular is that the return to office progression has been very gradual,” said Peter Miscovich, managing director, strategy and innovation at JLL Work Dynamics. “As of Oct. 8, we’ve just surpassed 20% occupancy. The Delta [Covid-19 variant] surge really delayed what was anticipated to be a major return after Labor Day.”

And while some luxury retail has roared back as consumers get out of the house and flex their spending power, businesses that rely on foot traffic from office workers in traditional commercial corridors continue to suffer.

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“On some parts of Madison Avenue, retail rents are down 50% from their 2015 peak,” said Jonathan Litt, founder and CIO of Land & Buildings Investment Management. “It’s a ghost town because offices have not reopened, and international travel has not come back to the city. Until we see what office use is going to look like, and see international travel come back, it’s going to be a rough go.”

Suffice it to say that while many signs are trending positive, commercial real estate has emerged from the pandemic with a far less rosy picture than what’s transpired in the realm of residential. Below, more insights from Wednesday’s panel discussions about the ongoing evolution of commercial real estate:

A discussion with consultants and experts about returning to the office as the coronavirus persists. They’ll discuss office culture and health protocols, socially distanced work set-ups and hybrid (remote and in-person) working arrangements. They will also discuss near term and long-term scenarios for in-person working.

Click to view or join live discussions at the 2021 Luxury Real Estate Conference

Offices Might Change, but They Won’t Disappear

Their return may be slower than originally anticipated, but little by little, workers are making their way back to offices.

“Yesterday at One Bryant Park we reached 40% occupancy, from a low of 5% when the pandemic started,” said Douglas Durst, chairman of the Durst Organization. “We’re seeing occupancy coming back quite strong, and expecting normalcy by the end of the year.”

Market observers predicting the death of the office, Durst added, “Don’t know what they’re talking about.”

From an investment perspective, “I think the trends are positive,” said Tammy K. Jones, founder and CEO of Basis Investment Group. “We have 35% [office] occupancy right now, and I’ve seen studies forecasting that by the first quarter of 2022 we’ll be back to normalcy. I think that remains to be seen, but while the office has been disrupted, the office is not dead.”

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But even as some workers come back, one trend line is abundantly clear: Hybrid working is here to stay.

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“When we studied innovative companies in 2016, we found that innovative workers spent about 3.5 days a week or less in the office,” said Annie Bergeron, principal and design director at Gensler Toronto. “So the data was already pointing to this four or five years ago.”

In the U.K., “it’s fair to say we’re in the ‘new normal,’ and we’re seeing people coming in every other day or 50% of the time, as a generalization,” said Neil McLocklin, partner, strategic consulting EMEA at Knight Frank. “I’m not really aware of companies forcing people back to the office, but there’s been incentives.”

While some workers are eager to return to offices, others are distinctly less so, and in a fiercely competitive labor market, many companies are deploying remote- or hybrid-work flexibility as a means of appealing to prospective talent.

“Here in New York, the talent wars are very pronounced,” Mr. Miscovich said. “Tech clients in particular are looking with an agnostic locational strategy in order to engage that talent. Hybridization will occur, new technologies, new ways of working.”

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And as in the world of residential, cleanliness and health-forward amenities will be crucial for office buildings that hope to succeed.

“There’s a flight to quality,” Mr. Durst said. “Quality in the sense that it’s a healthy environment and well maintained.”

Mr. Durst added: “From what we’ve seen, people want to be in offices, to be able to communicate in person. Even if you’re only there two or three days a week, you still need a place to have an office.”

To Stay Ahead of Airbnb, Hotels Put the Focus on Experiences

The ambivalence about the return-to-office is nowhere to be found in the travel and leisure sector, where consumers have enthusiastically embraced post-vaccine travel.

“We’re seeing restaurants and leisure travel off the charts,” said Ian Schrager, founder for the Ian Schrager Company. “Corporate travel hasn’t come back, but it will. We’re suffering from some supply line issues and labor issues, but other than that, I’m very optimistic about the hotel business, particularly in international gateway cities around the world.”

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However, in the face of ongoing disruption from companies like Airbnb, hotels have to stay ahead of the curve to create unique experiences, Mr. Schrager said. 

“Airbnb is a threat to the hotel world, and the industry has been in denial about it since the very inception,” Mr. Schrager said. “We have to out innovate them, be more creative, do things they can do. They can’t create the original experiences hotels can create.”

Pre-pandemic, a trend toward more experiential boutique hotels was already well underway. 

“Focus on the experience. More leisure, boutique, glamping, container hotels where people have their own private space,” said Davonne Reaves, CEO of The Vonne Group. “It’s a different type of hotel.”

Part of the experiential hotel experience will include a focus on so-called ‘bleisure’ travel—a blend of business and leisure—and creating unique experiences for remote and traveling workers.

“Hotels have to wrap their brains around the idea that they’re creating [a situation] where you can have a unique business experience, then stay a little bit longer and have a unique leisure experience as well,” Ms. Reaves said. “We’re seeing brands creating shared spaces and working spaces, and they have to do that to bring back group business travel again.”

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An Uneven Recovery for Retail

Traditional retail was suffering before the pandemic, and may well be the sector of commercial real estate to see the shakiest recovery moving forward.

“Retail is a big question mark as to what’s going to happen,” Mr. Durst said. “Rents have been coming down, we’re seeing some new businesses start up in places that were vacated. What the demand is for those retail tenants and businesses, we’ll have to see over the next six months to a year.”

Still, the picture isn’t entirely negative. Shoppers have returned to stores in person, previously online-only companies are carving out brick and mortar space, and some luxury retailers are seeing stronger activity than ever, Mr. Litt said.

“If you look at foot traffic at malls and shopping centers, it’s almost back to pre-pandemic,” Mr. Litt said. “Ecommerce is expanding, and there are going to be losers in that equation, but it’s fascinating how much people have gone back to stores. I’m not backing up the truck to buy retail real estate, but it’s much healthier than we thought it was going to be.”

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