Sep 8, 2022
Sheila Botting is Principal and President, Americas Professional Services at Avison Young that is an Umbrella for the Different Groups of Consulting, Valuation and Project Management.
In this episode we talked about:
Transcription:
Jesse (0s): Welcome to the working capital real estate podcast. My name's Jessica galley. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you're looking at your first investment or raising your first fund, join me and let's build that portfolio one square foot at a time. Ladies and gentlemen, my name's Jesse Regal, and you're listening to working capital the real estate podcast. My special returning guest today is Sheila botting. Sheila is the principal and president America's professional services at Avis and young.
That is the umbrella for the different groups of consulting valuation and project management. Sheila has a, has had a number of different roles in the commercial real estate space spanning from her roles in executive management at Deloitte Kushman and Wakefield and Royal LaPage. Sheila, how you doing today?
Sheila (54s): I'm great. Jessie, how are you doing?
Jesse (57s): Doing fantastic. So the conversation today, I thought it was topical because I think the last time we spoke was the beginning of 2021. And so much has changed in the office and commercial real estate market in general. And I thought it would be great to have you back on to discuss those aspects and have the, and how they have changed. And I know that you have, you know, made these type of discussions and, and presentations with various outlets, wall street, journal, Harvard business review. So I thought you could do the same for us here.
Sheila (1m 29s): Oh, terrific. Thanks so much. So it's all about return to office. You can tell my back background. I have returned to the office today and, you know, two to three days a week, along with everybody else across north America around the globe. And I think that for, for all of us, it's sorting through how do we deal with return to office? What does it look like? What are the key pieces? How do we make it work for our businesses for us personally? How do we embrace this so that it's, you know, dynamic for people and way forward, what we've learned from all of this is it's all changed.
It's not going back, whatever back was, we're not in the nine to five work environment that we once were. Now, it's all about flexibility. It's about building our ecosystem. It's about navigating what it is that we need to do and how we do it. It's understanding, you know, different roles that people have and making sure that they've got the right tools, technology and physical spaces in order to deliver. I thought what I would do today in talking is, is I know you know about this, but to share with all of your audience, something called the vitality index that Avis and young uses across north America.
In fact, the globe, what we do is we measure cell phone data usage in downtown for 26 north American city. So what I thought I'd do is first level set on where are we today? You know, in September, 2022, where have we come from from March, 2020? And what does that return office look like? So I'm gonna share my screen with you. So Jesse Avis and young has something called the vitality index. And what we do is we measure the return to downtown.
So I'm showing this on the screen, really what we're doing from March 2nd, 2020 through to this most recent examples, August 29th, 2022, we measure return to downtown. So we've got mobility data from, you know, various locations, typically eight to 12 locations downtown in the major north American cities, in fact, 26 north American cities. And we see where it is relative to before the pandemic. So you can see on the list, we've got the greens, our Canada, the blues are the United States.
So at the top of our list in Canada, Edmonton, which is in Northern Alberta is down 43.8% from before the pandemic started in March 2nd, 2020. That means that the foot traffic in downtown Edmonton is still down 44% on one end of the spectrum. And that's the best city in north America going all the way to the other extreme. Again, another Canadian city, Ottawa is down 80% from when the pandemic started.
So you think about some of the larger us cities, you know, Boston is down 43.8%. New York is still down 50% Austin down, 52% Chicago down almost 56% east bay, Oakland down 56, San Francisco down 57 and half percent Calgary down 58, Montreal down 59. And, and so on across the board, you know, Washington down almost 63%.
So when you start looking at the data, you realize that as much as people talk about return to office, we have not returned to office, you know, knock your socks off. If somebody says, things are going back to normal. What this is largely saying is that our entire world is not returned. The chart on the right here really shows what that looks like across the board. And it shows that in fact, we have not returned to normal and it looks like in my opinion, it's not returning to whatever we define as normal, anytime soon, at the same time, we can also look at various industry sectors.
So across this bit, if you were to look at say the technology industry, perhaps, you know, faring worse off than finance or some of the other sectors, so absolutely fascinating when you start peeling away the layers of the onion. So I wanted to start with this whole perspective in terms of what does return look like, who is returning, how does it all play out? And the message across the board is right across north America. The 26 cities that we're looking at at best were down, you know, over 43% from before the pandemic.
Yep. So then next natural question is what does that mean for employees and occupiers? The people that, you know, lease space in various markets, that's one whole bundle. Another whole bundle would be the investors and asset managers. What do we do to get people to come downtown? And a third part would be all of the businesses and the governments that are looking at, you know, the downtown business association that thrive on return.
And so, because of course the vibrancy of our downtowns are very core to the fabric of our north American economy. What does that look like? So we can, you know, dive into each one of those segments to understand how to unpack it and what are the various components so that we can think about the future and think about how do we manage our businesses? How do we manage our assets and how do we manage our downtowns
Jesse (6m 59s): When it comes to the vitality index, Sheila, in terms of the, the actual use of the, the cell phone data. I know that, you know, working with Avis and young, we talk about this a lot, but for those that, that kind of wanna understand the cellphone data in a downtown area, it's kind of used as a, as a proxy for a full office building. Is that, do I have that right in terms of how that, how that data is used or, or what it's used to represent?
Sheila (7m 26s): Yeah. So what we'll do is we'll, we'll tag, you know, geo spaces in downtown's various cities, eight to 12 different locations, and we'll, we'll measure the pings on the cell phone data in those locations. So pick a, you know, a downtown financial core office building or a downtown transit hub. In some cases, our clients have us look at hotels and, or even life sciences buildings out in the suburbs. So we can really geofence any type of location for this particular application.
It's been the downtowns of these north American cities that we update, you know, once every two weeks at the beginning, we were doing it every week saying everybody thought, year one, Hey, we're going back. We're going back. Well, it's not happening anytime soon. And so what the data shows us, is it not yet returned to downtown? Yeah. So what does that mean? So from the occupy perspective, you know, the company or the government organization or the business, that's thinking about their space, they think how much space do I need if it's sitting there empty, pick your north American city, because even before the pandemic space was 50% of the time.
So before the pandemic, when we did utilization studies, you know, bums and seats analysis across north American cities, the average seat was 50% of the time. And so that didn't, if you were in some remote location in the middle of the nowhere or downtown New York or Toronto, the same thing would be held true. And that's because the way we work has changed, we're no longer processing paper from the left to the right of our desk. Rather we're engaging, collaborating, doing things in many different ways. And so, because of that, even before the pandemic, people were rethinking how they would devise their workspace.
The pandemic has simply accelerated that overall trend and is forcing us to consider what is the role of the office? What is it we want to be? Are we going create row and farms? Are we going to create a downtown campus for a downtown lab or in a downtown engagement experience, a hospitality experience for our people. And that's really what the pivot is toward is creating these immersive experiences for our people, so that when they do get together, it's easy for them to collaborate, to engage and to solve problems together.
It's not about processing paper off to the right of your desk. Although you could say it's about being on zoom teams, but nonetheless, it's not about, you know, the old ways of working. And so the value proposition that companies are making for their people is where the pivot is. So on one side of the spectrum, we're saying we can get rid of a chunk of our individual workspaces because it becomes about collaboration and teaming. People like me. I can, you know, do most of my heads down work when I'm sitting quietly on my own, away from everybody, as opposed out, you know, bullpen kind of environment.
So you recalibrate how you work. You still get people choice. So, you know, if you, if you need to go to a bullpen or you need to go to the officer, so places to go, but the rotation is toward collaborative spaces. And so with that pivot on space, suddenly you need less space. So first generation in these types of evolutions typically involve anywhere from a 20 to 30% reduction space. Assuming you've got the same employee population, second generation could be as much as 50% reduction in space.
We've had clients reducing their space by 50% through this whole pandemic. And they're saying, you know, we're, we're quite fine. Having people work from home 1, 2, 3 days a week, that's, that's quite fine for us. And so the question comes, how do you entice your people come back to the office because in the war for talent, it's all about providing people flexibility to make choices with how and where they want work, but equally create an incredible environment that they want come back downtown. And they engage with their colleagues and employees to, you know, get their projects and work completed.
So that's literally what the entire market is looking for today. At least the folks that we're dealing with cross all sectors.
Jesse (11m 43s): Jill, I, I have a question on the, so on the work that you were doing, you, you mentioned the utilization studies you've done in the past. And as we know, this predated the pandemic, a lot of companies, they, they operate at, you know, 50, 60, 70% depending on their, on the industry, the company and location, but the, the, excuse me, the studies that you did, where you had companies actually go and reduce space, is that type of reduction, the same, the philosophy, the same as it would be now for reducing space based on low utilization, as opposed to reducing space based on, you know, what we've learned of how we can work differently in the last 12 months, or they are, they separate kind of exercises.
Sheila (12m 27s): I would say all of the above, literally it's a bit of everything. So I think before the pandemic, there were those early adopters, you know, I would suggest that it started originally out of Australia with many of the banks there that went to hot desking, unassigned sitting models. And then, you know, the accounting, big consulting firms went to that model. As many of their people were out in clients, offices. And now it's moved on to financial institutions and public sector organizations, GSA out of Washington embraced government of Canada has embraced this city of Toronto province of Ontario.
So this is literally wide swept across the markets. And that started before the pandemic, all of that was before the pandemic. And now what I see happening is that simply accelerating across all sectors. Now the real question is how much, or how little and what is the right fit. So what might be the right fit for example, law firm, which is very paper intensive to a consulting firm or a financial institution, very different solutions, depending on the industry sector.
And more importantly, the, the type of work that the individual employee and our teams would do. So that's really what we're navigating right now, making sure that the specific solutions for that client group and that industry sector, you know, absolutely apply.
Jesse (13m 48s): Got it. So that was the, so with the workplace workplace, we've talked about the occupy piece here and there a couple other components.
Sheila (13m 58s): So you know, the other components on the occupy, it's about the war for talent. It's about making the right kind of space for your people and, and what resonates across the different generations. And so it's not one size fits all by any, by any stretch of the imagination. You know, you, you really have to think about the different populations, whether it's the veterans, the boomers, millennials, gen X, gen Z, what, what does that entire group need?
So that's a generational distinction. Then you have the whole style of working. So if I'm, for example, if I'm a loud boisterous person, I need to be around. A lot of people I'll have one way that I like to work. Versus if I'm a quiet individual that needs to have walls around me to work, that's a completely different style. And so there's a whole neuroscience attached to understanding those different work styles and then designing appropriate workspaces. And so I think that particular topic has been hyper influenced through the, if I'm working office like that, right?
I like that. Versus if I'm a Garys, outgoing person, you stick me in a quiet place at home, I'm going outta my mind. And so trying to understand those differences become everything. So that's one whole science that's evolving relative to different work stuff. So in some organizations picking engineering firm or law firm where you have many different types of personnel that has one evolution versus our firm, which is brokerage where everybody's a lot more gregarious. So again, very different fits in the marketplace, understanding that, and then quantifying the other big question in the design lies around assigned seating versus unassigned seating.
So if you have population that's hybrid and you're saying, oh, we should have them into work two, three, maybe four days a week. And oh, by the way, while they're in, they're collaborating with others, they're going out to Starbucks, they're meeting in different sessions, then you don't necessarily need to sign seating for those people, right. They can move around based on their schedules for the day. So if I come in in the morning, I need to do some emails versus collaborate with colleagues on projects versus, you know, go to meetings to talk about various topics.
I don't need my assigned seat through the entire day. And that's where the 50% vacancy occurred before the pandemic. So again, that's whole other iteration about the unassigned seating in order to be successful, you need tremendous change management programs. So you could argue the entire world is going through the largest change management program right now, because think about you, you're sitting in your remote office right now, and you're saying quite happy here. You know, I do this and, and give up assigned, sitting downtown and only come downtown.
When I need to, like any day of the week, I have flexibility. I can go my vacation property to work on Fridays if whatever the may be. So that flexibility becomes really crucial in the work for other key components come, you know, I've talked about design, very flexible design, flexible use of space, hot desking, and assigned seating amenities are huge, both within the physical space, over rotation, on hospitality, food, coffee, the quality of coffee in your space becomes everything.
Putting apples out for wellness for the property owners, making sure that you've got an abundance of services and amenities for the employees. So, so that it helps their occupy and the work for talent. And then of course, ESG environmental, social, and governance considerations, making sure that those are all addressed, whether it's well certified or least certified, those become other key anchors for the space.
Jesse (17m 51s): So, so when you talk, when you move on to the, that piece there, where you have investors or asset managers, I mean, it's the, the other side of the, of the same coin. How are you, you know, what is the recommendation or what do you see changing in that side of, of our world and, and what they're thinking about that might be different than the, the occupy side.
Sheila (18m 13s): So it's about taking a sterile office building, right? Think about the old prestigious, even think of, you know, suits the, the great TV show, right? And you think about these wonderful, beautiful marble, you know, marble sterile office buildings. So then you say, how do you take that and inject a hospitality or a hotel like personality, that space, of course, we can do that in the day of the week, throw a coffee shop in the lobby, animate with retail, create events, pizza days, and suddenly you take your lobbies and your big open spaces and you activate them.
So that they're really intriguing for people to be in whether they're inside the lobby walls or outside in the green spaces around the office building. So that's one massive opportunity. So you're managing the asset, but you're also activating the asset at the same time. Some other opportunities lie around, you know, bicycle storage in the base, in the basement, putting incredible retail in whether it's a coffee store, whether it's a fitness center, whether it's a daycare and many other retail amenities in this space, also thinking about, you know, common stairwells right now based building stairwells that are concrete, you know, not terribly nice in many buildings.
Well, what would happen if you painted them, animated them and did some exercise kinda routine running up and down staircases. So it's about taking core asset and doing really cool things with it to make people, you know, want to be there. It's about surprise and delight. And again, so it's, it's turning your asset on its heels to, to operate more like a hotel or, or a hospitality opportunity.
Jesse (19m 52s): Now this, this plays into other roles in real estate transit being one of them. What we've seen with tenants that we've worked with is that really good inviting office space that's well located, has fared not surprisingly much better than, than other asset class on different transit roads that might not be in the path of progression or just connectivity. What are you seeing on the transit front? Is, is that a theme that's, that's persisting through, through the pandemic and, and to now?
Sheila (20m 22s): Oh, absolutely. So it's funny Northwestern university asked me to be involved in workplace because everybody's, so it's specifically on the transportation front, because everybody is so excited about how workplace is influencing the return to downtown transit. Are we using subways and commuter trains? What does that look like? You know, before the pandemic, there were gazillions of, of dollars put into infrastructure investment. Now, suddenly if people aren't using them to the same extent, so you could probably take the vitality index and apply that to a trans situation.
So there's a, a very real example. One of the interesting trends that we found through the vitality index in New York, we actually monitored it on hour by hour basis. And we found that it was less busy during the office Workday, more busy on nights and weekends. So everybody was using transit to go to the theater, to go to restaurants, downtown or weekend events. So the tourism component is alive and well is what we're learning.
It's the office part that is really the challenge. And so on the transit front, I think that's just a sense of, of time and return and population growth. And I think it will take a while for it to return. If you're looking at the vitality index is one of the indicators.
Jesse (21m 46s): So on the, on the office, and, you know, we were talking a little bit before the show here and in industrial multi-res, you know, real estate, you always say is a very local thing, but you could almost make some pretty sweeping claims of how well multi-family industrial has done over the last two years. Office has been that question, mark. And I was speaking to the CIO of, of crowd street, Ian for Mely last week. And we were talking about this. He called it the tenant inducement complex in that we've gotten so large in the amounts of tenant allowance, tenants, inducements for build outs.
And it seems like we're ripping down stuff that we just put in five years ago, where there's this discussion of somehow commoditizing office space in the way that we haven't seen it in the office sector. So that it's more of a plug and play. It's not, you know, every three years or five years that you're ripping out hundreds of thousands of dollars worth of, of build out. What's, what's your take on that? I'd love to get your thoughts.
Sheila (22m 47s): So, yes, of course, because before the pandemic, people were creating cube farms or creating rows and rows and rows of, or warehouses of workers, and that's not what we need, we didn't need it, then we certainly don't need it now. And so now, you know, if you were to, you know, if you watch any of the, the, you know, shows on WeWork and that whole story, but that's the animated environment that everybody wants. So yes, you can create that. And so we have course have a whole flu office practice that thinks about that space, where as a tenant, I can go lease that kind of space.
And I don't have to worry about the leasehold improvements. I can just move into it. Right? And so if you're a, you know, a mid-sized tenant that becomes a really viable solution for you, because you can scale up or scale down based on whatever your requirements are, and you don't need to worry about building space out and all the rest of it. If you're a larger, whether it's a bank or a law firm or a consulting firm, that is your brand, right? Your brand is your space. And so you wanna put your colors and image and reputation around all of that. So again, it depends on what you need, but the movement toward engaged creative spaces absolutely is here to stay.
Jesse (24m 2s): So
Sheila (24m 2s): Gone are the cubes.
Jesse (24m 4s): It's funny, you mentioned WeWork, cuz it was in that discussion. Speaking about Adam, Adam, Newman's new venture with flow. And I think it was 350 million raise for that. And trying to take that to a multi-family, you know, do that the same thing close to the same thing that was done for rework, but for, for residential or multi residential. So for this whole, you know, aspect of workplace strategy coming back to work is, you know, when are we going back to quotations normal? It seems like those, those are just, you know, terms that people have thrown around that when we're really looking at office and the future of, of workplace, it it's that it's not gonna be an either or it sounds like it's going to be a hybrid pun, pun, no pun intended there, but we would love to get your thoughts if you had your crystal ball out here.
And we talk about these timeframes, cuz you made a great point where we're checking the vitality index every week because okay, next week the pandemic's over next week gets over. But if looking kind of soberly at what you're seeing in the marketplace, in terms of workplace environment, return to office, you know, what, what do you tell people or clients when they're asking you, you know, what is your forecast for the next year, two years or or longer if it's, if that is what you think it's going to take.
Sheila (25m 20s): So if today two and half years into the pandemic, we're down 50 to 55 on average, across north America. And oh, by the way, that's up from the 70 to 75% average has taken two and half years in another two and half years, we'll be at the 30 to 40% range on average. It will take a while for people to fully acclimatize, to returning to downtown. I've learned that I can actually get more work done in my home office.
You and I can have this call very effective at it. And so when I come downtown, it's a whole other way of working. And so for the individual, it's about balancing all of those things up. And so when you have millions of individuals making those choices, I think it's gonna take a while to, to return. So then the next question becomes well, is the office dead? You know that, that's the obvious question everybody's asking. And the answer to that is absolutely not. We're social people.
We want to be with our colleagues. Jesse, I love seeing you in the office. Like that's a really important thing. We need to have that connection. So the office is not dead, but it does have to be redefined. And so these giant towers that we have to have to be reimagined for the future so that they become relevant for the next wave of working because that relevance and the value proposition of the office is incredibly powerful. So you can't throw the baby hope with the bath water, you know, think about it 10 years ago or something like that.
Industrial. Wasn't very exciting now, suddenly it's very exciting. And so this two shall pass and the office assets two shall become very relevant all over again because the downtowns in our north American cities are vibrant centers of creativity and innovation and we need to, you know, preserve and protect that.
Jesse (27m 12s): And when it comes to that, that search for talent, you know, there's been different studies of, you know, whether it's two or three weeks of, of commute time, what that equates to in actual time of the year, in the year in terms of what employers will have to trade or what, what needs to happen between employers and employees, if they do go with a hybrid model. So if you know, like Comcast and apple just announced that I don't know if it was mandated, but that they're gonna go with a three day work week. As of now, what do you see that as the, you know, obviously it's dependent on the employer, the, the specific employers, but how do you see that negotiation taking place where some companies do wanna mandate some form of, of presence in the office, maybe not at a full-time basis, but they want to have something there.
How do, how do you see these discussions or how have you seen these discussions play out?
Sheila (28m 2s): So I think, again, it goes back, it depends on the company. Depends on the culture. Depends, depends, depends. So hybrid is here to stay. So then the questions for each company, how do navigate that hybrid? And so saying you've gotta come back five days a week are never going work. That's never going be in my view viable. I think the, the, the opportunity, same flex work schedules, flexible opportunities. I think that will be the theme overall, not thou shall do this because it's been proven that employees, 85% of employees returning to the workplace want flexible work hours.
And if you don't offer that as an employer, they're voting with their feet and going somewhere else. So that becomes table stakes. So then you say, okay, got hybrid. How am I going manage that? How am I gonna mitigate that? Typically what happens is you'll make some kind of a corporate statement, says we'd love to have people to come back two to four days a week, whatever that is. And then each manager, each team then, you know, provides governance for that team based on the type of work that do and based on theirs and that's plays.
That all means for the real estate.
Jesse (29m 24s): It's, it's always a, a wealth of knowledge. Every time we have a discussion, if there isn't anything else that, that you want to add here, I think we kind of, we could talk for another hour here on this stuff. If there's nothing else I thought we would kind of leave it here with where individuals, whether in the commercial real estate space or just, you know, investors, people that are interested in these topics when it comes to workplace strategy, where do you know what typical resources do you point people to? You know, when we're having this discussion aside from obviously going, going out to and young, we have a number of reports that you can get there.
Sheila (30m 1s): So what I I'm addicted to all of the reports. So I think starting with management consulting firms who deal with human resources, human capital, and look at those broad trends, because what we're speaking about are those are those management consulting, human resources trends that we then try to articulate in transition into the real estate world. So why we start there? So whether it's McKenzie, Deloitte, PWC, BCG, or whoever, they all have really highly valuable commentary regarding those big trends.
The other part of this is looking at the large enterprises, understanding what their policy statements are. We're starting to track all that across north America. So we could share what various financial institutions, you know, life sciences company, professional services firms are doing within their space. So understanding that I think is really important and then making your own decisions. And that's really for unoccupied piece for the investors, never before have you had to be so creative, I'm a huge proponent of workshops.
And by workshops engaging your key stakeholders, whether they're occupiers employees or whoever I'm reimagining the office building, what could it look like? Everybody loves to play monopoly. So let's play monopoly with the office building and figure out what the right fit is for your, for your building. Overall,
Jesse (31m 25s): My returning guest today has been Sheila botting Sheila. Thanks for being part of working capital.
Sheila (31m 31s): Thanks Jesse for the opportunity really love again.
Jesse (31m 44s): Thank you so much for listening to working capital the real estate podcast. I'm your host, Jesse for galley. If you like the episode, head on to iTunes and leave us a five star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.