Commercial Real Estate Industry: COVID Impact and Recovery
Updated: Jul 18, 2020
The session features leading commercial real estate owners to discuss observations on the state of the industry post-COVID and best practices for re-opening & recovery. Featuring Lachlan MacQuarrie, Head of Platform Service, Oxford Properties Group, and Bob Six, Chief Operating Officer, Zeller Realty Group. Moderator: Wen Sang, CEO, Smarking.
0:29: Panelist Introduction
4:59: Portfolio distribution and property types of Oxford Properties Group and Zeller Realty Group
8:21: State of the industry, a view from parking data
13:04: The impact of COVID on commercial real estate
23:16: Best practices and challenges for re-opening
39:22: How technology plays a role in re-opening
50:33: Parking's role in recovery
54:36: Looking ahead at recovery
Oxford Properties Group and Zeller Realty Portfolio distribution and property types
Lachlan M, Oxford Properties:
Oxford is the real estate investment arm of Omers pension fund, which is inter municipal Employee Retirement System, it is a $110 billion Canadian asset management fund.
Split approximately half between private investment in these and public assets at the 55 year old entity and has about 500,000 pension numbers.
Oxford has approximately 400 assets around the world, two million customers, what, 100 million sq ft of real estate. Somewhere on 34 development today, and about 40 different partners.
Approximately half of our portfolio is office, quarter is retail, and the rest is hotel, investment and residential
70% of our assets are in North America, 30% European and Asian
Robert Six, Zeller Realty Group:
We are 100% office today. A little bit more of a focus in the CBD (central business district) because of the trends and obviously because of COVID. I think the way companies are going to approach their business, we'll probably be looking to invest more in the suburbs.
North America is, are where we're invested primarily currently in the United States, but we have looked in Canada and in Mexico.
Current state of the industry, a view from parking data
(Shown at 8:21)
Before the pandemic, activity was up almost 20% YOY
Once the pandemic hit, within 1-2 weeks, the entire parking volume decreased by about 79%
Slowly, week-over-week, it's starting to come back, up to about 35% of activity YOY and there are different trends per region
COVID-19's Impact on Commercial Real Estate
Lachlan M: Most of our assets are located in the downtown core, in the business districts and we also saw that dramatic, immediate decline in revenue following the shelter-in-place order.
In our buildings, it quickly went down to 1-5% occupancy rates. From an office perspective, we haven't closed any of our assets, unlike our shopping center portfolio where some locations have had to close.
From a financial perspective, we're in the mid to high 90's in regards to rent relief. Particularly in urban areas where we have retail as an amenity service or in areas tied to public transit, we've worked very hard to support them by deferring rent and taking a situational approach as needed.
We've taken a very structured approach by gathering information, doing a business analysis, and discussing modified deal options. The process varies dramatically in different regions as well.
Robert S: We have exclusively office assets, so the general numbers you shared across the U.S. reflects what we've seen in our portfolio as well. I'll give you a data point on a 1.3 million sq. ft building in Minneapolis: it has 492 spaces with about 25% utilization, 150 suspensions of monthly contracts, and we don't expect to see it move significantly until at least the first of the year.
Daily parkers have gone up since less people are using public transit. For parking, there is a big push now to go completely touchless. Another big thing that has benefitted us, in terms of speeding up touchless, is using license plate recognition.
Interestingly enough, one of the things that has saved us is the contractors. Through this crisis, contractors are considered essential employees, so there have been many short-term deals.
From a financial perspective, early on, our CEO became laser focused on accounts receivable. We are all into data and metrics right now. It hit the shared office users the hardest and they were the first to ask for relief. For retail, we knew that they wouldn't be able to survive if we weren't proactive in supporting them.
Best practices and challenges for re-opening and recovery
Lachlan M: First and foremost, the focus has been on keeping our employees safe. We've engaged our customers, contractors and vendors to enable a safe environment. Which includes putting up barriers, developing signage, creating protocols on operating practices, and establishing rules and regulations. Such as rules on masks, elevator occupancy requirements, and temperature screening- all while working with public health authorities.
For the most part, people are listening to publish health authorities in most of our markets and following the protocols. It is however challenging when a case is discovered in the building, since there is not cure yet, we still have to engage, communicate, and honor our commitment to occupants by maintaining transparency and doing deep cleanings.
Some of the challenges is that the deep cleanings are necessary but they're also expensive, time consuming and stressful. Planning and prioritizing how we respond and react to our rules is certainly challenging. Local laws are changing and not always the same- there aren't straight forward rules to a situation like this.
From an operations perspective, we can fall back on core standards such air filtration to increase fresh air intake but there is still uncertainty on how this virus spreads so our best bet is to rely on public health officials. For communication, we moved from a weekly call with our teams to a daily call with operating and managing team since mid-January.
We've used the strength of the expertise on our team to help guide us. We have a doctor on our staff, regional lawyers to interpret local public health laws, and lean on our management and site teams to establish the best protocols. Clarity and leadership is king for our properties.
Robert S: We're actively involved with BOMA international and have taken cues from them. The 21st of March is when our Governor established the stay-at-home order, and we spent the previous three weeks ensuring we had the bandwidth and necessary equipment to go remote. We followed the lead of the CDC as well and had calls every other day to establish protocols.
We're in uncharted waters. There are HIPPA issues and protocols to consider as well. You have to be transparent when a case has been identified on the property so that everyone can take proper precautions and start the CDC-approved cleaning protocols but it was challenging due to conflicted information that was out there.
Our 'organizational rules of engagement' is a living, breathing document and in our regular meetings, we share the latest and greatest. We re-opened the office on June 15th and now work mostly at the office, about 70% of the time. In preparing to come back, we used our rules of engagement and hosted town hall meetings at all of our properties for our tenants. Our tenants really looked to us for guidance so luckily, we were really prepared.
We chose not to be responsible for taking temperatures, we believe it's an imperfect measure to determine someone's infection level. We created an addendum to our employee handbook that has six questions we ask employees to ask everyday, one of them is 'do you have a fever above this amount', 'how is your wellbeing', 'how are you feeling', etc.
If you answer yes to any of these, you are to report to your manager that you will not be in and the reason why, so that we understand the level of engagement we have with the workforce.
Other considerations are how we get people into the elevators. There is an elevator button you can buy that disinfects each time it's been touched, there are wraps for revolving door handles, changing the air more, and all sorts of things like that. The one things that requires more research on our part is the use of UV lights. Then you get into cost, retrofits, and so on.
The role of technology in a safe re-opening
Robert S: We're taking a hard look at how to create a completely touchless experience. One of the things I've been involved with is rolling out building apps.
In the app, we embedded the ability to order food from places in the building- either delivery or contactless pick-up. We also purchased a bunch of keys that you can control from the app for our tenants. The one thing that I think is most profound is the touchless experience.
Lachlan M: At Oxford, we've had a focus on smart technology for quite some time so during this pandemic we didn't really change how we use technology, but we did jump on some pilots to keep services cleaner. And we're launching an app where tenants can adjust lights and temperature from their phones. We've leaned into technology to enable automation such as automatic occupancy detection in the elevators.
Also, tapping into data to understand building occupancy levels at different times. We've also discussed using their access keys to help with regulation intervals in the building. So we're really looking ahead at what technology we can put in place to help regulation once people come back.
What it doesn't help with is, engaging with customers. You have to talk to your tenants to understand how the technology can interact with the way they work. We can control when people come into the building, but the challenge is when someone leaves the building and still allowing for flexibility.
How parking can play a role in recovery
Lachlan M: Parking data can definitely help guide us in forecasting. The numbers are all over the place, so the broad market view helps us understand what we're seeing at our locations.
For operations, help us find opportunities to cut costs, we rely on their expertise when looking at how we deliver services. Divide strategies to help capitalize on revenue for us: who's coming back, how do we get them, and what opportunities are there with the majority of people who are coming back, which is very limited.
Robert S: We're taking a look at other buildings that don't have parking, and we're leveraging those relationships since we know that they have tenants that may no longer want to use public transportation. To explore if we can leverage their tenants with a parking program at our locations.
Any type of 'new normal' will likely be in 2022, so these types of new strategies are really important. We need advice and recommendations from our operators partners on technology. That's how we learned about license plate readers to automate entry/exit for our monthly parkers. We need to understand where the opportunities are, those really make the difference right now.
Looking ahead at recovery
Lachlan M: You're going to see a continued focus on health, safety, and the importance of communication with customers. In terms of advice, keep your employees safe, stabilize your assets, embrace leadership, and prepare to be flexible.
Robert S: I think this is going to create a resurgence in the suburbs as organizations take a look at their space, they're going to want to provide a safer, more communal experience after working from home for so long.
There's going to be an opportunity to develop in the suburbs in the next 18-24 months. Owners that are well capitalized are going to win and win big. Tenants are going to look at their space and and re-evaluate their options. Office users trying to go from 160 sq. ft per person to 120 sq. ft per person is no longer the case. There will be much more office users looking to demand 3 days in-office and 2 days out- we have to provide more flexibility.
John Hammerschlag: Has any of the speakers applied for PPP's? If so, where you able to receive funds where you have third party parking operators under management contracts where you reimburse payroll dollar for dollar?
Robert S: We i.e. Zeller, were able to get PPP funds for both Zeller Realty Corporation and Zeller Management Corporation. Our focus was to keep our own employees employed which was one of the primary goals of PPP. We used legal and accounting advisors for us to effectively navigate the process for our entities. We did not pursue PPP for our parking operations because we saw that as an obligation of that provider to their business and their employees.
I will note that we were advised that we could, in fact, pursue reimbursement for our employees even where the employees were reimbursed by the owner through a 3rd party management contract because, once again, the goal of PPP was to keep employees employed. Please note that those owners have discussed with us the opportunity to share in that PPP should we be able to get it forgiven and we will likely work closely with our owners in that regard.
Please note that these are very complex transactions and I am only providing my anecdotal experience here, not offering advice that should be relied upon. Anyone considering using PPP should seek the advice and counsel of their own legal and accounting advisors. I hope that this advice helps.
Meet our panelists
Wen Sang Robert Six Lachlan MacQuarrie
CEO of Smarking COO of Zeller Realty Group Head of Platform Service,