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by Gabriela Airaldi ’21 and Maureen Devenny ’21
|Moderator|| David Sherman ’82, Metropolitan Real Estate,
Columbia Business School
|Panelists||Melissa Burch, Lendlease Development|
|Mark Portner ’99, Shorenstein|
|Gagandeep Singh, American Express|
The current global pandemic is impacting cities in various ways, both predictable and unpredictable. The Future of Cities Panel at the Columbia Business School’s Real Estate Symposium explored whether urbanization will continue, or small cities will level up. David Sherman ’82, Co-Director of the Paul Milstein Center for Real Estate, moderated the engaging and thought-provoking panel.
The panelists began with a discussion of where employers are choosing to locate pre–COVID-19, and where they will locate after the pandemic. Gagandeep Singh, Head of Global Real Estate and Workplace Experience for American Express, manages office space for 65,000 employees. He remarked that American Express’s business location decisions rest on two factors: where their customers are, and where talent markets are. The company’s strategy has not changed with COVID-19 in mind: talent and customers are in the same places they were before COVID-19. Mark Portner ’99, Managing Director of Shorenstein, a national office owner/operator with 25 million square feet spread across 18 cities, added that in general large tech companies are continuing to grow. Mark noted that tenants of all sizes are looking to locate in markets where people are happy with the local government, weather, or quality of life. Some companies, like Facebook, are doubling down on New York; others, like Blackstone, are making incremental moves to other markets. Melissa Burch, Executive General Manager of Lendlease, suggested that New York may recover faster than other cities because of its economic diversity. The city worked after 9/11 to diversify its economic base away from finance; now, the presence of healthcare, universities, and life sciences industries gives the city a competitive advantage in this time.
After a thorough discussion of where companies want to locate, the panel then discussed where employees want to work. Singh spoke about American Express’ flexible workplace model “BlueWork”. Over the past 10 years, the company has offered greater flexibility to their employees by optimizing the office footprint to better reflect work styles and team structure, with seats based on actual employee attendance rather than population. This arrangement has been successful with no decline in productivity or customer service. Singh pointed out that some employees’ functions cannot be performed outside of the office due to privacy reasons. He credits American Express’s flexible work model for helping the company’s reaction to COVID-19. Burch shared that Lendlease’s office has no assigned seats. Rather, the office is organized by type of work, with areas for focused work or collaboration. Just as retail is now omnichannel, with in-person and online shopping opportunities, so too will the workplace become omnichannel. Perhaps the new work week will consist of 1 to 2 days of focused work at home, with in-office days intended for collaboration. This division allows culture and community to be housed in the physical office and offer employees different environments where they will be successful working. Portner agreed that standardization, densification, and benching are happening even in conservative work environments like law firms. It remains to be seen whether companies will have more or less office space, but they will use space differently in the future. Portner observed that any changes will be on a long cycle because of offices’ long lease terms. Singh added that in general, American Express will be looking for better services; more fresh air circulation, updated HVAC systems, and efficient and safe vertical transportation.
The conversation then turned to whether the panelists have observed a change in tenant fit-outs over the last several months. Burch said that Lendlease has noticed a change in the last 5 to 7 years. Tenants are seeking common spaces, collaborative spaces, and nimble spaces within the workplace. Offices are not going away but are being replaced with a variety of working environments. In new development projects, companies are more aware of the health of work environments, including access to light and air.
The panel then discussed the implicit assumption that cities will recover and compared the expected recovery times for gateway cities to faster-growing Sun Belt cities. Assuming that widespread vaccinations occur in the next six to twelve months, Portner asserted that Sun Belt markets will return to normal more quickly because their residents use cars rather than public transportation. In contrast, some gateway city residents may be reluctant to use public transit. In addition, Sun Belt cities have simpler ecosystems; less complexity means that they will recover faster. On the other hand, cities like New York or San Francisco will take longer. Burch took a different perspective, suggesting that there could be a new normal. New York’s vibrancy comes from people who visit the city, not just those who live and work there. The vaccine will be a wind in the sail of bringing vibrancy and economic life back to the city. Lendlease is continuing to develop new projects and expects that by delivery in 5 years the NYC market will have returned. Portner agreed that investors’ views depend on their investment horizon. In the next one to three years, there will be easier places to make money than New York or San Francisco.
The conversation then turned to the role of government in supporting the real estate industry. Burch asserted that the next New York City mayor will play a huge role in shaping the city’s priorities. Burch pointed out the role that the Citizens’ Budget Commission will play in enhancing the competitiveness of New York’s people, talent, and companies. The city needs to “get it right” across multiple attributes: public safety, health safety (including perceptions), education, sanitation, and challenges around affordability. Portner echoed those sentiments. Shorenstein tries to avoid working in places that do not have capable governments or where there is uncertainty. The Sun Belt tends to have more developer-friendly governments.
The final topic was the fate of unsuccessful buildings. Portner observed that the losers in the COVID-19 market will be older stock, whose floorplates and columns don’t convert easily to flexible, healthy office environments. In addition, those buildings tend not to be vacant, so conversion will be deferred to the future as it is difficult to make changes in occupied areas. If owners can successfully convert to new formats, they will stay competitive. Winners will be those who can reposition or develop products that offer new formats that follow the change in use of space in the market. Offices in the future will be different from today. Burch agreed with Portner’s point about older stock. She elaborated that older buildings tend to have bad vertical transportation. In the new normal, people won’t be as willing to handle intense close interactions like cramming into an elevator. Credit companies will want a better environment for workers. For new companies, entry-level office space will be in lower-class product. The average building age in Manhattan is 68 years old.
The panel offered a multifaceted and in-depth discussion from the tenant and developer perspective. Collectively, the panelists laid out a future of reduced demand for old stock and more demand for new buildings that put employee health front and center. The changing nature of work will create fascinating investment opportunities and challenge cities to manage space.
Maureen Devenny ’21 is second-year MBA student at Columbia Business School focused on real estate and finance. She serves as a Vice President with the Real Estate Association. Prior to Columbia, Maureen was the Deputy Director of Operations at Bryant Park Corporation and 34th Street Partnership, two Business Improvement Districts in New York City. She managed 45 square blocks of Midtown Manhattan and worked closely with developers and government agencies on development and public realm improvement projects within the Penn Station area. This summer and fall, Maureen interned at Local Initiatives Support Corporation. Maureen earned a BA in both political science and Spanish from the University of Pennsylvania.
Gabriela Airaldi ’21 is a first-year MBA student at Columbia Business School focused on real estate and private equity. Prior to Columbia, Gabriela worked at TC Latin America Partners (“TC”), a private equity fund focused on real estate investments in Latin America. There, she managed tax, legal, technical and financial aspects of real estate transactions related to residential and retail developments, and income generating assets in Peru. Prior to TC, Gabriela worked in investment banking, at the International Finance Corporation (private arm of the World Bank Group), and Credicorp Capital (regional investment bank in Peru). Gabriela earned a BA in economics in Universidad del Pacífico in Peru.