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The Silver Lining: Impact & Opportunity in the Midst of a Pandemic

Will Work-from-Home Wither the Commercial Real Estate Market? It Depends, Says Expert

Downtown Houston skyline

For the latest installment of our “Silver Linings” series, TAG founder and Managing Director Jane Howze interviewed Jeff Hollinden, a Senior Managing Director in the Houston office of Jones Lang LaSalle (JLL) Capital Markets, Americas. JLL is a financial and professional services firm specializing in commercial real estate services and investment management. With more than 300 international locations, JLL manages real estate needs for companies and investors in more than 80 countries. Hollinden is responsible for office and portfolio sales on behalf of private and institutional clients in the southwestern U.S.

What did the commercial real estate business look like at the beginning of this year?

Jeff Hollinden

Our capital markets group was very solid at the beginning of 2020. There was a lot of liquidity in the market, and a lot of investors with capital to make loans and buy buildings. In fact, there was a bit of a backlog of potential investors for all property types. The market was active, robust and, overall, very healthy. Houston was a little slower because of five years of low oil prices, but globally, there was plenty of capital, with many eager buyers and sellers, and willing borrowers and lenders. I would describe the commercial real estate business as very solid at the start of 2020, as it was the previous year.

As the pandemic began, did commercial real estate experience a gradual slowdown or an abrupt halt?

We began noticing a slowdown across all property types in mid-March. Then, suddenly, stores and restaurants were forced to close. Within a week, it seems, every investor hit the pause button. Owners of strip centers, retail centers and malls saw their tenants struggling to pay. So many people were losing jobs and questioning how they would pay their apartment rent. At that point, everyone became uncertain about buying or selling, as investors did not know how to value property in these unique circumstances. And lenders didn't know what interest rate to charge, so borrowers couldn’t effectively evaluate purchases. There were no data points. No one was doing anything—no one wanted to be a first mover and buy a building that could potentially be much cheaper in six months. There was no price discovery for a while.

What is the situation now?

Things have improved dramatically over the last several weeks, beginning in mid-May. I see less anxiety in the capital markets, and sales are resuming. It is slower than it was, but we are gradually working our way back from a complete pause. Lenders are starting to make loans again. Almost all tenants are going to pay their rents. Apartments, for the most part, are going to be okay. There is still some pain ahead, but there is less uncertainty.

If you could forecast 90 days out, what do you think we will see?

I think that things will be even better 90 days out, but I don't think we're going to see a really, really healthy environment in commercial real estate investments until people feel more secure. It could easily be the end of 2020 before we see some real positive movement. I don't think 90 days is enough time.

No one was doing anything—no one wanted to be a first mover...

Our national economy is likely going to be shaped by this for a generation in terms of the cost and the burden. It's a long, slow road back. Early in the pandemic, there was little certainty or reason for optimism. I think we are currently entering a phase of slow and steady improvement and that is producing some optimism. Yes, I think things will keep getting marginally better, but it's going to take a while to work through this and to determine the long-term impact.

Is there a silver lining?

If you have the foresight to buy a really good building at a time when markets are illiquid and someone needs to sell, yes. There are always opportunities to pick up good buildings at attractive pricing at a time when no one is buying. But there aren't that many sellers, so buyers have to be very careful. Almost every investor we're talking to says that when the time is right, they’ll be ready to buy, but they don't yet know when that will happen.

Do you think people are waiting for a vaccine? Are they waiting to make sure there are no setbacks?

I think both of those factors are relevant, plus people are waiting to see things like jobless numbers and the impact on the overall economy. People have to get back to work so that they can spend money, lease office space, shop in a retail space, go out to eat, and such. Our economy will have to re-start before people feel good about making these decisions.

How are ongoing work-from-home policies going to affect the occupancy of buildings going forward?

I believe that's still in flux. Also, it is a function of individual companies and their employees. There's no question that over the last five or 10 years, we've been moving toward higher density office space, more collaborative workspaces and simply fitting more people into less space. Density was already up; now employers must contend with workers who no longer want to work in close proximity to others.

Employers are looking for ways to spread out the work environment, take some workspace out of commission, rotate workdays or weeks, and many other kinds of accommodations. Some employers will downsize because of the economy; others may need more space in order to help workers spread out. Some employers have heard that their employees love working from home. Others say that their employees are ready to get back into the office—they miss interacting and collaborating with co-workers. There are certainly real benefits you don't get when all employees work from home.

So much depends on the job and the company. Employees in more clerical positions can probably perform their functions anywhere; it is less clear with respect to teams requiring personal interaction among colleagues. The jury is still out on this issue.

Your firm is one of the giants in this business. Do you expect any of your competitors to be out of business in a year?

I don't think so. Some might have to downsize; in fact, every company may downsize—who knows? Everyone has to take a serious look at their business and get rid of weak performers, which is always prudent. But I don't think anyone is going to go belly up. I really don't.

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Jane Howze

Jane S. Howze, J.D.

Managing Director