The New Normal in Commercial Real Estate With Nick Axford & Kirsten Beck

Will get started. This is James Nelson, your host and head of the Tri State Investment Sales Group and principal at Avison Young. So want to thank you all for joining and it's really been our pleasure to be a source of information for you all during this challenging time. So I hope you all continue to stay safe and for family and friends are doing well. And we are now thrilled to have with us today Nick Axford, who is our global director of research and Kirsten Beck, who is our head of project management for our New York office. So in the last few weeks we started to get a lot more information on what the return to the workplace is going to look like. And so wanted to share with you two reports which we have made available for you all and we've, we've posted them both on the chat page. So we are going to ask you as you have questions, please put them in the Q and A field so we can ask them once we go over the presentation. But in the meantime you'll have those links to the reports. So the first report is evaluating the new normal for commercial real estate and that was Nick spearheaded that with our research group. Then Kirsten helped with the returning to the workplace documents. So Nick, thank you for joining us from across the pond. So it's great to hear that. Sounds like you all are having a lot of the same thoughts we are having here in the US as far as getting things open back up. Perfect. And Kirsten, thank you again for all you're doing for our group. But also I know we'll be able to speak a little bit from personal experience because you are also heading up our relocation. Avison Young is in the midst of a move later this year. So we have a lot of thoughts about what the new workplace is going to look like and really appreciate all your help facilitating that.

Happy to be here.

Perfect. So Nick, why don't you kick it off? And I guess the first question is how is it possible to even plan for the future when there are so much uncertainties? I mean even take travel for example, what is that going to look like when we don't know how people are necessarily going to get to work? There's talk about when could a vaccine take place. And so again, how is it possible to plan when there are so much uncertainty at there?

I think sort of carefully, calmly and logically is probably the advice. And I think just thinking in practical terms, I think that there are going to be sort of two distinct phases to getting back to normal. The first is going to be living with the threat of a renewed Covid outbreak. So until such time as there is either a cure, a vaccine or a much more effective treatment, or something that radically alters our view of the level of risk out there, then we're always going to be living on the basis that we've got to do everything we can to reduce the risk of transmission and infection. And right now I think that frankly, that's the bit that people ought to be focusing on because it's still too early to tell. We just don't know what the full economic fallout is going to be. We don't know what the full real estate and the investment fallout is going to be. And we don't know how long we're in this current situation. We're seeing already newspaper headlines that there are a number of groups that think that they are within shouting distance of a vaccine. And were that to be the case, I think that then things are different. So I think that probably people ought to be working on the assumption at the moment that once the current level of infections dies down, some of the restrictions can be relaxed and therefore we can start looking at getting back to normal. But it's back to normal, which won't be at all normal because we're going to have to do a lot of very unusual things whilst the threat of COVID is out there hanging over us.

Perfect. And that being said, would you advise against making any radical changes and maybe to be more specific to the workplace, I know there's a lot of guidelines out there and is, should, should companies, should landlords be thinking about permanent fixes moving forward, making radical changes or, you know, more of a wait and see an approach or somewhere in the middle?

Yeah, I mean, I think, you know, crudely, when we think about what happens later on, I think we have to assume that at some point we will get to a vaccine and therefore there will be a opposed the immediate crisis phase. And at that point it's a question of to what extent is the experience that we've gone through with COVID going to fundamentally change what becomes normal? And in thinking about what the different options are there, I think that there are three categories and this is what we talk about in evaluating the new normal. The first is structural changes that were already underway and that we think have been accelerated or accentuated by Covid. So, for example, flexible working, the impact of technology and remote working people assessing supply chains and supply chain risk, a focus on wellness at work, all of those things were happening anyway. We were seeing them all over the place and they're being accelerated at the moment. So I think we'd be pretty confident that those are going to persist. There's then a category of things that I think will change because we've learned some stuff going through this. So again, you know, remote working, flexible working, the importance of business continuity planning and scenario planning around different risks, even if they seem as though they're that thing you're being made to do. But we know it's never really going to happen. Well, it has this time, so maybe they'll be taken slightly differently and thinking about business travel and the experience of what we're doing at the moment. Zoom. I'm not saying that no one's going to go back to business travel, but I think people are going to think twice about getting on a plane and crisscrossing the US or traveling down to Washington from New York for an hour and a half meeting, when actually probably the cost benefit, particularly as people get back to thinking about their carbon footprint, which I seem to recall was quite important to us all in February before this blow up. You know, those sorts of things, you know those as well. I think they're going to endure. The third category are the bigger picture stuff, the people that are looking further ahead as if somehow, even once we get a vaccine now, we're always going to be living with the threat of a virus. This is all, this is just going to be happening again and again and again. And you know what? It might, but right now we don't know. And if you think back, I use the parallel of 9 11, there are a lot of things that have changed because of 9 11. You know, security at airports. Young kids don't get to do what I did, which is go and sit next to the pilot when you're on a plane anymore, you know, that's gone. More security in office buildings. Okay, you know, maybe that that's happened. But if you remember back to 9 11, people will say, well, no one's going to. No one's going to occupy an iconic building anymore and no one's going to want to occupy the top floor of towers because it's too dangerous. Well, that turned out not to be the case. And so that's a long answer to your question of saying, yeah, if there's stuff that people are saying that runs contrary to recent experience, contrary to human nature, contrary to a lot of the things that we've been seeing. And as yet, there isn't really any experience for any evidence for them. Be careful about making expensive. Bet the bank. Big change. Structural solutions to a Problem that might be gone in six months time.

Perfect. With that in mind and definitely I think you bring up a good point on business travel. But the whole viability of working from home and how that's going to change occupiers strategies. So I've heard both sides of this argument that many say, look, a lot of these companies have found that they're very efficient and that they're going to be reducing square footage because they're going to have more workers who are going to be continue to work from home. The other side of the equation is well, if we need more space to socially distance in the workplace that might offset. So I mean net net. What's your prediction on the need for office space as we look to the future?

My, my belief, and it is only a belief because as I've just said, we don't know my belief is that actually we will get some kind of vaccination program and immunization within the foreseeable future. And personally I don't think that fear of getting any infection from someone is going to be a dominant mode of thinking in the way in which we run our offices and run our businesses. It's possible. But just bear in mind that if we've got to the point where every desk has to be 2 meters apart, that has some pretty big implications for Yankee Stadium and for the bar at Times Square, you know, at Union Station and going out on a Friday night with all your friends and everything. There's no reason why an office would need to be more socially distant than anything else. So I think once we get past this immediate threat, and then I don't personally think that we are going to be socially distancing and things in the office any more necessarily than we were before. I do think that this experience will dramatically impact the way in which people think about the workplace. I think even those of us who are quite enjoying not having to commute and enjoying some aspects of working from home. I have a newfound healthy respect for the value of a workplace and my interaction with my colleagues and good flexible working space in an office. Just what it can contribute to productivity, collaboration. We're lucky we've got good flexible space already. And I think that, you know, more organizations are going to be looking to transform their offices into interaction hubs that form a crucial part of people's working practices. But it's going to look, it's going to office space is going to look different and flexible working in all sorts of forms is likely to play a more important part for many more people. And many more organizations going forward.

Perfect. And I'm definitely in that camp as well. And you know, even thinking before this all happened and looking at last year, New York had record office leasing activity. I believe it was over almost 48 million square feet throughout the city. And you have a lot of these technology companies that wanted to locate in New York because we had the talent. And, you know, whether it's Google or Facebook, I'm sure that they had the technology or the ability to have their workers working remote, but they knew that the synergy that took place in the workplace, and certainly that's why they've been huge occupiers of space and looking to expand in our city. So I think that certainly makes a great case for it. So for those of you just joining us, please, as you have questions, please put them in the Q and A panel portion. We will get to them after we cover our presentation here. Also, take a look at the chat function. We have two articles that we put forth. One is our white paper on the new normal for commercial real estate and returning to the Workplace. So with that, Kirsten, let's look at our own backyard here in New York. And Governor Cuomo has come out with this four phase plan. When I asked you this morning if you'd seen the update, you said you were tracking this hourly. So appreciate that. But what is Governor Cuomo's plan to reopen New York? How are we coming along with that? And maybe specifically what does that mean for construction and then for the real estate business?

Sure. Well, I am mildly obsessed. Right before we jumped on this call, I recorded New York one for the next hour and a half to make sure I didn't miss today's briefing because there's almost always something related to construction mentioned. And just trying to keep up with it all. As you mentioned, I have myriad responsibilities that this affects both with my clients and then with our own AY office and then the construction of our new AY office. So it affects me and us in a lot of ways. And everyone keeps asking the same question, of course, when are we going to reopen? When are we going back to the office? And so there are many levels of protocol that we have to reach. We have some Avis and young corporate policies and procedures and protocols, but it's all predicated on the governor's plan. So it's a four phase plan, but more importantly, there are seven protocols that any county. And he counts New York City specifically as its own. I guess he's calling them regions. They're typically counties he's counting New York City as its own region, which makes sense. So regardless of the New York pause order expiring on May 15th, first you have to. The city itself has to meet all seven of these protocols, which will have its own challenges. And that's what I'm tracking daily. And I appreciate them posting it, so I don't have to do all the math myself. Currently, New York city only meets three of the seven protocols. The likelihood that we'll meet all seven by Monday, May 18th is unlikely. And then once we meet the seven protocols, we can start phase one. Phase one is manufacturing and construction, and those of us on the phone, I'm sure very excited to get back to work in the construction industry. Then there's a two week, I guess, kind of evaluation, as long as we continue to maintain those seven protocols over those two weeks. Then phase two opens up, which includes real estate and financial institutions and other things. And then again another two weeks. And then phase three, which I believe includes some public spaces and restaurants and things. And then ultimately there's a phase four. But at any point in there, if one of our protocols drops, we move back to the beginning. So it's going to have to be anyone's return to the office or return to the workplace plan is going to have to be extremely flexible. And now that a lot of us, you know, have become accustomed to working from home, there may be people that simply decide, you know, the stress of, I'm going to work this week, but I'm not going to work next week, I'm coming in. You know, they may just say, I'll work from home until, you know, we heard earlier this morning, an unnamed law firm has decided that they're not coming back to their office until there's a vaccine. Which it was crazy for me to hear, but as we know, that could be 12, 18, 24 months. So companies are making some very drastic decisions. And then one of the other things, and I don't know if we're planning to touch on this later, but most, if not all of us are in multi tenant buildings. So whatever we want to do is also then predicated on what the building is doing and what protocol protocols the building is putting in place and how those mesh with what we're planning. We could be planning to bring everyone in our office back, but if the building is limiting capacity because of elevators and other social distancing issues, then we can't dictate that.

Perfect. And Kirsten, not to quiz you on this, but the other four parts of the Plans, what else? Because everyone's, you know, we want to know how soon this is going to be with the return to the workplace. So what's the other four criteria? What's the metric? And are we.

Oh, sure.

Are we close? Yeah.

So the seven metrics are there has to be a three day running average of decline in hospitalizations. There has to be a decline in hospital deaths. There has to be a decline. Well, it's actually not just a decline. There has to be under 2 per hundred thousand residents of new hospitalizations. 30% of all hospital beds have to be available. 30% of all ICU beds have to be available. We have to be testing 30 per 1,000 residents and contact tracing 30 per 100,000 residents. Currently, New York City does have the 14 day decline in hospitalizations. It does have the 14 day decline in Hospital deaths. And we are apparently testing 30 per 1,000 residents, which I'm surprised, but I'm happy to hear we're close on a couple of the other metrics or protocols. The one that we're really far away from is under two new hospitalizations per 100,000 residents. We're currently at 5.4. So we're quite a ways away from hitting that metric again. Totally my opinion. I don't think we're going to make it by May 18th, which is 11 days from now.

Well, it definitely seems like we're headed in the right direction though, so thank you for covering that. So talk about. And I know you've spent a lot of time on returning to the workplace and what that layout is going to look like for Avis and Young and what that means as far as office protocol. Maybe you could talk a little bit about that.

For Avis and Young specifically or just in general?

Just in general. I mean, it may be the way to frame this because we both listened into that presentation that I believe. Ted, is it Moody's architecture firm? Yeah. And he showed a floor plan on what a. You know, if you want to do the social distancing, which means alternating benching, you know, everyone who has a private office can continue to use that. But the takeaway was there about. There was about 43% less density used in the space.

And there have been a lot of studies, actually, you can imagine I'm listening in on a lot of webinars and other presentations. And there was an interesting one the other day where they did a simulation of particular floor plan. Let's just say it had 100 people in it. And they did a simulation of it at 20%, 40%, 60% and 80% occupancy. And even at the 20% occupancy, and again, this was a simulation, but in the 20% occupancy they still did not maintain consistent social distancing. I talked about it with my team this morning. Of course, it's the simulation and there's no human intervention where if I'm coming down the hallway and I see you coming towards me, I might step aside and wait until you go by. Obviously in the simulation that doesn't happen. But yeah, we're definitely looking at reduced density in offices just by nature of having to maintain social distance. Not to mention that there are people that just are not going to come back to the office. But I know we have this ongoing conversation is if 30% of your employees now, quote, unquote, permanently work from home because they been deemed that they can adequately do their jobs that way, is that going to reduce real estate requirements? But in the short term, at least I don't think so because the people that are in the office, you need to space out more. So you are going to maintain that social distancing. And a lot of. I think you saw me nodding to a lot of the things Nick was saying. You know, the social changes that we Adapted to after 9, 11 that are, you know, normal now. We're used to it. I think some of these things will hang on and people, you know, we've been packing people in pretty tight over the last 10, 15 years. You know, when we were designing our own office kind of, well, we had a couple of very interesting survey points. We needed a big ice machine. That's very important. But also everyone begged us, please do not put us at benching. And you know, they really. People don't really like being packed in together like that. So I think we're going to pull back a little. Some people are talking about tall cubicles coming back. I don't see that happening. I don't think it's necessary. But, you know, there will be at least some more protection between individuals, I think.

Perfect.

I know there's an interesting point. Kirsten around, sort of. Particularly because a lot of flexible working requires shared use of, of sort of not just airspace, but it, you know, you sit down at a flex desk, someone else was sitting breathing into for the whole of yesterday. Do you think that that's, that's potentially likely to change that even if you go back to flexible working?

Yeah, one of the things that I've, Yeah, one of the things that we've seen and you know, I'VE been a proponent of this forever. I don't know why people need desk. All my contacts are in my cell phone. I use my cell phone all the time. My desk phone forwards to my cell phone. So I think we'll see a move away from physical phones, number one. And what I have seen in certain presentations is, you know, and I've been to your UK office, which is. Which is lovely, by the way, and I had a great visit. But you're right, you sat down at a desk that someone else sat at yesterday. You bring your own laptop, but the monitors are there and everything. I think what will happen is you'll also then wind up having your own keyboard and mouse. So you'll put them in your, you know, your drawer. I happen to know how the office is laid out there. So you'll have your drawer. You'll throw your, you know, I have it here, my wireless mouse and keyboard, and I'll just throw them in the drawer. At the end of the day, take my laptop home so you'll have less shared devices. And the desks themselves, since they're not dedicated, no one leaves anything on them. So it's easy to clean. We're implementing. We have dedicated seats in the New York office, but we are implementing, when we go back, a clean desk policy that at the end of the day or whenever you leave the office, you clear your desk, put everything in a drawer so that we can come through and clean in the evenings. So I see those kind of behavioral changes. Definitely.

Kirsten, I need to implement something like that at my house for my kids after dinner with the dishes because I'm getting tired of doing them all myself. But, you know, Nick, when we.

That's why you have kids. So they'll do the dishes.

I don't. So, Nick, when we. I mean, these are great points about how the office is going to look, but when we surveyed our office, the biggest concern was not once you're in the office, but actually how to get to the office. So, you know, in New York, I guess we're still waiting for guidance on, you know, how are the trains going to run? You know, we know they took the first step In, I think, 100 years where now the subway is closed down in the evening for cleaning, which prompted a lot of jokes, meaning was it never cleaned before. But, yes, there's gonna be limitations there. And our mayor has gone as far to say that he might be looking to close 100 miles of streets to allow for additional pedestrian traffic, bikes. But for those of us, you know, who live outside the city. Figuring out how to get to work is probably at the top of the list. So how do you think transportation changes? You know, how can cities try to be more flexible and think of alternative ways to get to the office?

Yeah, I think I'd again refer back to what I said earlier that I think that there's that the short term bit and then the longer term bit. And the hard fact is that we end up in a situation longer term where everybody has to live with a 2 meter, you know, 6 foot bubble around them. Places like New York and London are not built to do that. And in fact we live and our social lives and our work lives, the whole concept of the office is not designed around that. And if we are permanently in that situation, almost all bets are off. I think that we're going to end up having to rethink all sorts of things. But let's just park that and talk about how we get through what we think is going to be an interim phase for the moment. And there I do think it's a really important point. I mean obviously in suburban markets where people are used to driving in their own car, having a surface car park and walking to the entrance of the building and potentially if it's low rise, then only one or two flights of stairs to walk up, you can see things getting back to something that look much more normal much more quickly. And it may well be that those people who live outside a New York or a London and where they're part of a big company that has branch offices that are more like that, we could well see people diverting where they work within the organization to take advantage of that or, or looking to divert to use serviced office type providers in provincial towns as a sort of halfway house. Rather than getting into the office, you can get into something that is an office away from home. Because the truth is, and I do this, I have an hour commute every day into the centre of London from outside. And frankly, why on earth am I going to be worried about having 6 foot of space around me in the office with people that I know, where I know the environment's been cleaned, when the only way I can get there at the moment is to be crammed in on a commuter train for 45 minutes of that hour journey. It just, you know, and there is no way that we provide the infrastructure for most people who coming into London to do it in business class international airline luxury with a great big amount of space around them. It just, it just can't work. I think we will see a big increase in people walking in and around the city. I think we will see a big increase in cycling. I think we will see a big increase in motorbikes and moped sales. Watch that share prices, because I think parking, even if you drive into the city, what are you going to do with the car? There are enough car parking spaces. And one of the big dividends that we got out of this Covid crisis is the air quality in our cities has gone exponentially. And I'd like to think we'll try not to give that gain back. So I can absolutely see potentially, you know, life adjusting for in the interim to more walking pace, more walking around the city, cycling cycle couriers coming back with people driving rickshaws up and down Wall street with two people sitting in the back of. If you take away the New York taxis, why not? Probably quicker than it would have been if you bring back all the taxes. So there'll be those solutions coming in. But in terms of getting people from the suburbs into the center of New York and London, and I think.

To your analogy before about 9 11, and obviously this is very, very different, but it's having some of the same downstream impacts. After 9 11, it was the same thing. Nobody wants to work in the city. So a lot of companies opened satellite offices in Long island and in New Jersey so that their employees who worked in those areas could still go to work, but would go to work in those places that they would drive to. Those of us who live in the city itself or in the immediate five boroughs, a lot of us don't even have cars, so we couldn't drive to work if we wanted to. So if we're fortunate enough to be able to walk or take a bike, we will. But the people who live in the outer boroughs, in Queens and the Bronx or far uptown or far downtown, you know, they're still going to need to use mass transit somehow. And to your point, Nick, you know, coming into the office is the least. I think the office space itself is kind of the least of anyone's worries. It's how to get there.

James, go ahead. I mean, I think that there's a lot of emphasis on sort of, you know, using the current infrastructure and dealing with the current level of threat. But once the level of infection goes down, two other. It is perfectly possible we will see an explosion of innovation in that will dramatically change the risk of being in close contact with other people. One of them is testing. If we could get to a point where there were readily available cheap testing kits that were made, it just became part of your routine. As you make your coffee, you do your test every morning and therefore everybody tests regularly. We've got contact tracing apps, which means if you suddenly find that you have got something quickly, anybody who's potentially at risk and self isolate, that reduces the risk of there being a whole brain who have got infections and don't know about it. Second is ppe. It's perfectly possible that we will see in masks and breathing apparatus and so on that may be uncomfortable. It'll mean that people don't get on it unless they really want to, but that allow us to continue to function more normally, albeit in a very abnormal way. And then you could see, for example, more distancing in the office where you're not wearing all this huge PPE where you have to mount about on a train. You've got something a bit more.

Perfect. And that was actually my next question for Kirsten. And you know the Wall Street Journal article that came out on this very topic that you're speaking about, Nick, they were talking about thermal cameras. Now at Rock center, the social distancing app that RXR is piloting right now, one ad company is even gathering medical records now and thinking about separating the workforce. I don't know the legality of that, but even registering in advance for meetings, whether that means health waivers or There was even one company fever fee v E R that has an app where you can do a temperature scan from your home. I guess you take a picture and a timestamp and then you have clearance to go to work. So again, we're not doctors and you know, I've heard the other side of that where, you know, does a fever even, you know, if someone doesn't have a fever, could they still be carrying Covid? But Kirsten, what kind of technology do you think will be implemented in the office and then also just behavioral changes to really mitigate this?

Well, first of all, one of the requirements of New York State to go back to work is that you're performing some type of screening with your employees, which I think a number of us who are watching this all carefully didn't realize at first was a requirement. So we're from an AY perspective we're dealing with that and how we plan to do that. So there are a number of ways. We did have an interesting call talking about that yesterday and apparently there is an EEOC ruling that allows employers to take their employees temperatures because, you know, there are obviously a lot of HIPAA regulations and a lot of privacy Regulations around how much, you know, you can force your employees to tell you or require them to tell you to come into the office. But apparently we can legally take people's temperatures. I think, you know, we're really just starting to talk about that because I think a lot of us thought that maybe the building would do something like, to your point, RXR is planning to have the thermal scanning at 75 Rock. We understand that not to be legal, but, you know, I'm sure you can always find a lawyer to argue the opposite side. So there's a lot of research that needs to be done there. But we were already planning on tracking any visitors so that if we found a positive case in the office, we would be able to provide the contact tracking, which is as important almost as the testing. If you do find out you're sick, the next most important thing is figuring out all the people you've come in contact with. We are going to require people to wear, at least for the first 60 days, to wear masks in the office. When you're sitting at your own personal workspace, you can take it off if you want. I think most people are just going to wind up leaving it on. It's easier. You don't have to remember to put it back on. If you get up to run to the restroom, which is another big challenge in the offices of how we're going to manage restroom occupancy. You know, other than that, it's really the clean desk policy, the maintaining social distancing. I think most offices are planning a lot of the same things. We'll have one way in and one way out. We'll have one way traffic around the office. We are removing a lot of chairs from conference rooms to limit the number of people that are in them and moving, you know, we're taking guest chairs out of private offices. So, you know, there's. There won't be a lot of. Unfortunately, what's going to happen is for the short term, I think there won't be a lot of collaboration. So going to the office will be just really a way to not be working in your second bedroom or on your dining room table like I am. So, you know, it's going to take away a lot, a lot of that. But, you know, we'll all adapt just like we did to this. And this, you know, rug got pulled out from under us almost overnight, you know, so. And we all adapted very quickly and we've been functioning. So I think likewise with this, it will be the new. I think Scott Rechler is has coined the new abnormal. And just like all the airport changes and other changes that we've all been through in the last 20 years, we'll adjust to them accordingly.

Perfect. Nick, did you have a question or thought on that?

Yeah, it was just as Kirsten said that, you know the comment, a lot of collaboration we're already talking about, you know, internally zooming within the office because you don't want to then sit in a conference room. But that then begs the question, okay, so why.

Exactly.

You kind of answered it as well by saying, I mean, you know, looking at the three of us with the backgrounds, I'm making some assumptions that we're finding it reasonably comfortable to find some space in our home. I suspect there may be some people on this call who are in high rise apartment blocks in Manhattan, potentially with two young kids running around in less space than we've got, who will be getting back to the office at the first opportunity. And I think again, that suggests that thinking about how to make the office function in the way that it did before, but under the new rules perhaps isn't the right way of thinking about it at the moment. It's actually about providing a more effective working environment for those people for whom working at home just doesn't work and it isn't an option and they have to be able to get in somewhere else to do what they're doing for various reasons. But it's not the same as what we've been trying to achieve with a flexible, multi environment, collaborative, information sharing office space because that aspect of office life is not going to come back for the time being.

Perfect. So I've got a couple more questions and then from me, and if you have questions, please put them in the Q and A and want to definitely leave time for it. But Nick, kind of shifting to really for our investors out there thinking about where the opportunities are going to lie. And if you kind of look at the spectrum of the asset classes, I think we could all agree that hotels are probably hit the hardest. And then you've got retailers could certainly say that multifamily people still need a roof over their head. Although kind of where that falls in the. Is it suburban versus city? I know that there's questions there, but you know, even industrial and medical, I mean they seem like the clear industries that are going to emerge out of this. But that being said, if everyone's chasing after those opportunities, is that going to be priced in? I mean, I was speaking to one client who said he's going to be bringing out an Industrial property at a sub 4 cap. So just thinking that that's what everyone's going to be looking for. So what are your thoughts about the asset classes that are going to fare best here and where the opportunity might be?

Well, interestingly I think you might actually be spot on there, that from what we can see at the moment, the asset classes that are going to fare best in the short term are not likely to be where the opportunities are going to be. Because as you say, you know, logistics, a combination of the rise in online retail and the reshoring of various types of activity, you know, those are pretty obvious plays. There are some players in those sectors already. Again, think about what I said earlier about structural changes. Retail, you know, last mile logistics is, was already, you know, hot. It's going to get hotter. Yeah, you're right. I think medical facilities, I think aged care, I think a number of those areas, you know, both private and public sector, public sector infrastructure, potentially another area of lots of different types, another area that there will be opportunities. But one of my favorite clients who I did a lot of work with, who are a large, well known fund, who are, shall we say, well known for trying to take a countercyclical type of view, I'd pop in and see them every couple of months and I'd say, right, you know, so what's going on? And I tell them the places that I liked and the areas of the market that I liked and they're like yeah, yeah, yeah, yeah, yeah, what do you hate? Because that's where they want to be. And you know, there are a lot of people out there who I think are making assumptions about the way the world's going to be. And I think that there is probably more money to be made countercyclically in terms of countercyclical thinking. Nobody wants to go near hotels, nobody wants to go near retail, nobody wants to go near city center offices because they're all going to be impacted. And short term that may well be the case. But people who know those sectors and can see longer term value. I have a sneaking suspicion that in terms of the time cycles, the time scales that we operate in, in real estate in a comparatively short space of time, we would have gone back closer to quite a lot of normal things than people are currently fearing. So you have to be bold, you have to be knowledgeable. But a good, well placed hotel, business hotel, a good well placed recreational hotel, or some retail that has got some good fundamentals but is really suffering because of the transitional phase at the moment that could get tipped over the edge. Going to be some bargains out there and it'll take a lot of knowledge and not a fair amount of confidence. But I suspect that's where the most interesting opportunities could lie is going against the flow of negativity in some places at the moment.

Yeah, and I know we also get a lot of questions and I'm already seeing some of them on the distress and when will we see that? And you know, we do a lot of work with special servicers out of our asset resolution group and they said they're just being flooded right now with default notices. But that being said, most lenders are giving forbearance, whether it's three months, six months of time. And the question then is, do these tenants come back? And if not, if they can't service the debt, that's when you're going to start seeing the loan sales or eventually the banks taking back properties. But we think that's not going to happen until later this year or next year. Retail is certainly something that we're watching closely because at least in New York, we were already having some challenges with vacancies and a lot of that happened to do with a lot of new space that was also built.

In some ways, James, we're still almost waiting for some of that distress to come out of 2008 everybody was talking about and most of it for various reasons didn't arrive. And I think that forbearance we could see more distress coming through. But our experience of the previous cycle was that the world is currently awash with investment capital, looking for long term, secure investments. And yeah, the margins, there'll be some losses, but if people are forced to liquidate vaguely good quality real estate, I suspect there'll be a decent amount of money looking to step in and I suspect that will put a floor undervalued, certainly at the better quality end of the market. And then again, there may be less distress coming through than people might currently expect.

Perfect. Kirsten, I know we've been talking a lot about how the office landscape is going to change, but I'm curious, how would you apply some of this to retail? What's retail going to look like in the future? I don't know if you have any thoughts on residential as well and how, you know, especially for new developments, what developers might be thinking about?

Yeah, I think, well, first of all, on the residential side, you know, again, here in New York, you know, a lot of the larger residential buildings, you know, have the same challenges as commercial buildings other than how to use Shared restrooms. So, you know, looking at improvements in elevators, increased security. You know, I live In a large 34 story building in Manhattan, so, you know, I can speak only from my own experience really here. You know, they are still allowing us to have personal visitors if we have friends or family or whoever. You know, they're not limiting people coming in the building from that aspect. But, you know, if I order dinner in, I know it no longer comes to my door. It gets delivered to the delivery entrance, and then I have to go down and get it. So they're trying to limit the number of people, you know, wandering in the building. There's quite a bit more cleaning, obviously, happening just throughout there. We are asked to wear masks anytime we're in the public areas, the laundry rooms, the corridors, the mail room, et cetera. So we're practicing a lot of the same things in the building that we would be, you know, if we were at the office. And then as far as retail is concerned, I think the biggest issue there, other than, you know, online retailing, which has been taking a hit at brick and mortar for a long time, is really the density. And, you know, when I have to, you know, run out to Duane Reade to pick something up, I have to allow time to wait in line to go into the store. They make us wait six feet apart outside until someone comes out. So there's one person in, one person out. I believe they're capping capacity right now at like 10 people at a time. So the good news is there's no line when you get to the register, you wait in line first. Same thing. I have a Trader Joe's and a Whole Foods in my neighborhood. So those lines start early and they go on for blocks. So I don't really have an answer, but I think it's curious how long will that go on? And as we get more comfortable with wearing masks and things like that in public, will it be less of a concern? You know, can everyone still get in Trader Joe's and get in line back to back to back for 15 minutes? If everybody has a mask on, is that enough to make people comfortable? Maybe very busy stores like that will move to some kind of reservation process, you know, policy that, you know, you, you know, you can log on and pick a time frame that you want to come so that people aren't waiting outside. You know, a lot of it is remains to be seen. You know, people still like to go to the store for certain things. And frankly, right now in New York, you wait two weeks for at least Two weeks for a slot for a fresh direct delivery. And most people set an alarm if they're not already up and they release new time slots at midnight. So I have friends who have literally either stayed up all night or have set an alarm to get up at 11:50 so that they could get their time slot. So, you know, it's crazy.

Wow. Well, I will say on the residential side and speaking to some of my friends, residential brokers out there, saying that, you know, could this create more demand for townhouses as opposed to, you know, people wanted to be in an apartment building or, you know, for developers, are we going to see kind of in the suburbs, kind of the resurgence of these townhouse communities? So certainly something to think about. I know at least in the suburbs and kind of looking at there's been this influx of renters looking for space out here. So Nick, that kind of begs the question. And I know we did take a look at some of the questions we've already received talking about the future of the suburbs or the city and we talked a little bit about suburban office. But how do you look at that dynamic?

Yeah, it's an interesting one. I mean, I think I've kind of already given my view that for something to. If we get to a point where the future of downtown New York and the heart of the city of London is brought into question because people don't want to be there anymore, then we're in a very strange place and lots going to have to change before we get to that point. But one of the points we make in our document is that looking for one single point answers and one size fits all solutions is not going to work for this. Every single one of us has had a different personal experience and a different corporate experience, even within the same city, let alone the differences as to how this is affecting New York vs. LA vs. San Francisco vs. Chicago and small town locations. So, you know, trying to just generalize about the impacts I think is very dangerous. And even though I think that more will go back to normal than some people might think, doesn't the fact that all of us will have taken things away from this experience and we will reflect on it differently. I've loved the fact that although I miss the office, I've loved the fact that I haven't had a one hour commute in either direction every day. I've enjoyed having more interaction, you know, at home. I'm interacting differently with my teams and people and clients because I'm forced to think about doing it now rather than the routines that we were in, in the office and I jokingly talked about people stuck in apartments with two kids. But it wouldn't surprise me at all if a lot of those people who, who thought that they were metropolitans and loved living in the city realized that actually, you know what, the suburbs have their attractions for a reason when you've got, you know, some life challenges. So I think right the way through this, there will be organizations that question do we need to be in the middle of new. Do we really need to be in the middle of New York anymore? And there will be individuals who will make some of those, some of those choices as well just because they find that there is potentially a different way of doing things out there and they want to experiment. And it's given that it's difficult to see how this will end up at the margin, increasing the number of people who want to cram themselves into Manhattan, on balance, probably yes, you would expect that suburban type residential and office locations could be beneficial. But I don't want that to be taken as inferring there's going to be a wholesale migration out of New York or London to provincial locations or the suburbs, because I don't see that happening.

Yeah. And just to add to that, and we're hearing about this from our Long island office and our Connecticut office and Jersey offices, which is, you know, thinking about companies looking for either new space moving out of the city or contingency space. We're not seeing a mass exodus that there is one bank that has a requirement for 300,000ft out on the island. I mean, you know, maybe they're kind of determining, you know, that that's where their back office would be better suited anyways. But we're not seeing it yet. So. So now let's go ahead and turn to the questions and if you'd like to post them, please put them in the Q and A box. Anna from Fosun asks about investment opportunities and where do we see the debt market, preferred equity pricing of hotels and spread between office and urban and suburban office. So you know, when we talk about where pricing is going to go, I look back to 2007 to 2009 peak to trough and there multifamily actually fared the best. There was only 85 basis points of expansion in the cap rates, whereas office and retail expanded 150 basis points. So as far as that's kind of the pricing there. I mean, as far as for office, I would expect that you'd see some cap rate expansion there. But I mean the real question is where the rent's going to be, Is there going to be a lot more concessions? We're hearing that some of the biggest landlords in the city now are offering essentially one year options where you can come in, strike a 10 year lease, but then you have a one year out and there could be a fair market revaluation. So I think that the big value question is what's going to happen to rents? As far as the debt market, I mean, it seems the conventional lenders are still there, albeit at lower loan to values. I did hear that Goldman was going to be taking out a CMBS offering. So it looks like hopefully some good news there that CMBS will unfreeze. And you know, on hotels, I think, you know, the question is how many of them are even going to stay in business? How many will reopen? How many of them can actually be converted to other uses? Unfortunately, in New York, I think there was already concern that we were over hotel and that we went From, I believe 90,000 to about 140,000 hotel rooms over the last couple years. So we were already kind of dealing with this before. So hopefully that answers that. We have a couple comments here. Lawrence notes that 2008 involved other people's money. So it was different. Currently, where feet meet the street involves people's health. You know, it's different. So, Nick, I don't know if you want to comment about, you know, how is this crisis different than, you know, the last financial crisis? I have some thoughts on it too, but if you want to take a stab at that.

Yeah, different dimensions. And it kind of depends what you mean. I do agree with that comment that insofar as this, this is still a health issue, then absolutely it's different. And you know, all the talk about, you know, return to work and the policies that are being put in place and when a mayor say people can, you know, what they're going to do, every single individual is going to decide what they're going to do. And this is something that, you know, we've discussed within Avis and Young, but that will set the framework. One of the things we've said is right now, at least as far as this calendar year is concerned, anybody who doesn't feel comfortable coming back to the office for the rest of this calendar year, that's fine by us. So, you know, people's personal choices are going to make a big difference to this. But I think, you know, it is also worth bearing in mind that the majority of the impact that is coming through here, and I don't want in any way want to belittle the very, very real personal impacts that this is having on people. And I say that as someone who we have actually lost a family member to this disease. But in thinking professionally from an economic point of view, the impact here is not specifically related to the disease. It's around mobility and it's around the slowdown in economic activity. And from that point of view, the impact comes through because of the severity of the recession and how long it's going to take to come back from that. It is well known that recessions that have a financial crisis, a liquidity crisis, a credit crunch as part of their genesis tend to be more severe and longer lasting than other types of recessions. This is a very, very unusual one. We have seen a completely unprecedented speed of impact across so many areas of the economy. That makes it different. But that said, I think that the capacity for bouncing back provided we don't get a financial crisis, provided the is what the Fed is all over about how quickly can we get a vaccine? If we get a vaccine that comes quickly, then I think there could still be a quicker bounce back than people would expect. If you're modeling this based on previous historic recessions, I don't think it's V shaped. I don't think we're back to normal by Christmas. But it could be quicker than some people think. Once we get a vaccine, it's all around that. Rebuilding public confidence.

Yeah, I would agree with all that. And the only thing I would add comparing this to how we came back from the 2008, 2000 financial crisis, that was very different with the type of government stimulus where that went straight to the financial institutions to shore up credit. This is almost in this case with the triple P. We're giving the stimulus to the companies and hoping that they use it wisely and fuel the real estate market. So David Tesla, we also thank you for your observation And Kirsten, maybe you want to take a stab at this. But he said people are going to want to return to the office. They are social people. And his other comment was that people also have short memories and you think could a year or two from now, again let's assume kind of a post vaccine world. Does it return to where we are today?

Well, yes, people are social animals, very much so. And I think we're satisfying that need right now through zoom and teams and other meetings. You know, we are seeing people. I'm sure many of you have had zoom happy hours or dinner parties or whatever and people are starting to venture out and seeing other select people. You know, a lot of people are of course quarantined or isolating with their families. But I happen to be single and I have a number of single friends. And because we know each other, because we know who everyone's been in contact with, we have socialized once or twice. We stay outside, we wear masks, we keep our social distance. But you can't, you know, you can't just lock everyone in their apartments. But the other thing that I think is also true is that we're very. Were very adaptable. Excuse me. I went to the grocery store over the weekend and, you know, I went around, I got my things and they have marks on the floor and I stood on my spot and then the next person moved up and I moved up. And I actually thought to myself, wow, we are very easily trained. This came out of nowhere. We have never done anything like this before and now we are falling in line. So I think people are adaptable for the most part. They're smart. They do what they need to do. Most people understand that the masks are to help others, not necessarily for themselves. You always have somebody who says, well, I'm not sick, so I don't need the mask. But I think even when we do go back to the office, of course we'll have social distancing. But I do think people will, you know, maybe they'll gather in areas where they can be spread out, but they're going to want to talk and actually, you know, see one another. And there is definitely something very different seeing someone in person, even from six feet away, than seeing someone on a screen.

People nicer as well. People are being nicer as well. Seriously, everybody's stopping when I'm in my car, even though there's hardly any traffic. I'm in my car and trying to turn left and the person coming the other way slows down and flaps me to let me across. That never happened before, Nick.

I'm sorry that that's still. I can't see that happening in New York, but still. We drive with. That's part of our DNA.

There's a lot less horn honking though, which I'm very grateful for.

Well, Nick, Kirsten, this has been an incredible discussion and thank you all for joining us today. And if you have not seen the two reports that we put put out, check the chat function again so you can get those links. And we're here for you. Any questions you all have about how best to proceed, let us know. Feel free to reach out to me. Kirsten, Nick, and wishing you nothing but the best. And thank you again, everyone, for joining today.

Thanks for having us, James.

All right, take care.

Okay, everyone, be well. Okay, bye, Nick.

Cheers, Kirsten.

Cheers.