New York, November 24, 2020: An exclusive virtual conference on the ‘Future of Commercial Estate’ was held on Thursday, 12 November, by Respada, an invitation-only niche platform providing private market opportunities to the ultra-affluent. The summit convened prominent real estate developers, funds, and REITS internationally such as Ada Wong, CEO of Champion REIT, Romel Cañete, Vice Chairman at International Capital Markets, Timothy H. Savage, Professor at NYU’s Shack Institute of Real Estate and Erez Cohen, Author of Real Estate Titans. The expert panelists reflected on four key areas - the impact of Covid-19 on capital markets, shifting workplace models and leasing trends, portfolio adjustments for family offices and innovation in commercial real estate.

The summit opened with a discussion about global trends in liquidity, leasing, and lending. Speaking about the surprising lack of impact of Covid-19 on the real estate market in Hong Kong, Wong shared that the market is abundant with liquidity and the loan pricing remains changed. “Even though the geopolitical situation in Hong Kong is cloudy, banking and investor support in terms of real estate are still strong and solid,” she said. From Cañete’s perspective, “New York has not been the darling of investors recently, due to both Covid-19 and more importantly the quality of life. There is a shifting behaviour chase of New Yorkers to live outside the city. This has changed the dynamics of the investment community”. Cañete further added, “Selling has also increased, both as a defensive strategy to shore up cash and be proactive while anticipating uncertainty, and to shore up dry powder for future acquisitions or buying potential”.

In the discourse about how asset pricing and cap rates have performed, Savage reminded investors that “The COVID crisis is not a financial crisis. Rather, it is a natural disaster that has impacted human capital without necessarily impacting physical capital.” Savage added “There is considerable liquidity in the market and transaction volume is down by 40% in the US, by 22% in Europe and by 32% in Asia pacific. However, even as transaction volume has declined, cap rates have not changed, and this is due to declining long-term interest rates”. Conversely, Cohen noted “In Latin America, we have REITS that show cap rates have gone up significantly”.

Moving forward to the topic of shifting workplace models, Wong explained that while the work-from-home model evoked favourable responses in the West, in Hong Kong, however, it is largely considered an inconvenience. The main reason being small living spaces with an average apartment measuring 500 to 600 square feet with four or more residents. As a result, Wong predicts that work-from-home models will not be permanent in Hong Kong. However, she also added “In the long run, while the core office spaces will remain, the future of non-core offices is a question mark”. Further, in terms of transforming office spaces, Cañete credited Michael Bloomberg for being the forerunner for prioritising functionality of workspaces. “Bloomberg set the paradigm which tech companies later followed, where the focus was more on amenities - nice kitchen, lounge room and rooftop deck, in lieu of large offices,” he said. Moreover, Cañete highlighted an intriguing observation where “Recently, big tenants have passed on the renewal offer or have opted for 2 to 5-year renewals which are very atypical for New York where it is common to see 10-year renewals for properties costing over USD 100000”. He added that it will be interesting to observe “whether the whole debate about socially-distanced spaces is simply a post-Covid reaction or a complete behaviour change”. Additionally, Cohen pointed out that “Even in the pre-Covid era, downtowns worldwide were thriving. In many cities especially in Asia, this will continue to be the case”. Further, he added that “In Latin America and the US, research says that there is a lot of movement away from the cities”.

Location remains the mantra of commercial real estate.

In the final segment of the conference, panelists shared their perspectives on how to optimize real estate-heavy portfolios of family offices. Savage urged family offices to recognise that the risk-return profile of commercial real estate is better than both equity and bonds in terms of lesser risk and higher returns. He further added “Location remains the mantra of commercial real estate”. Cohen contended that while location is important, timing is equally paramount. Illustrating his learnings from Steven Schwarzman, CEO of the Blackstone Group and David Rubenstein, Co-Founder of The Carlyle Group, Cohen said, “The three most important factors in any investment are the timing of the acquisition, the senior management team in charge of that investment and the timing of the exit”. Cohen cautioned family offices to “not pursue what everyone is pursuing such as industrial investments”. “Investing in retail, hotels and office buildings at 40% below replacement cost in good locations could be interesting alternatives,” he said.

The summit concluded with an audience interaction, where Timothy Trela, MD of The Peakstone Group and a Respada expert member, questioned if a paradigm change can be expected where the government can play the role of an ally “to help us get to the other side of COVID”. Savage responded “As an academic, it falls on people like me to talk to politicians and to show them high-quality empirical evidence about the adverse implications of rent control. In places like New York it is a development issue at a local level, the rents are high because we lack sufficient supply”. Finally, Andrew Young, Chief Innovation Officer of Sino Group and also a Respada expert member, advocated the need to keep investing in technology for property management beyond COVID. Wong agreed “It is very important to invest in the buildings to remain competitive. Going forward, clean and safe environments and good air quality would be some of the key concerns of tenants, so investing in technology is a must.”