Ronald J. Kravit, Senior Managing Director, Tracker Capital Management LLC, and Chair, Advisory Board, Zell/Lurie Real Estate Center at the Wharton School, welcomed members and guests to the Fall 2021 Zell/Lurie Members’ Meeting on October 22.
An overview of the panels and programming and updates about the Center were given by Joe Gyourko, Nancy A. Nasher and David J. Haemisegger Director, Zell/LurieReal Estate Center at the Wharton School. He predicted that this will be the last meeting held via Zoom and announced that the spring meeting (scheduled for April 22, 2022) will be held in person in the Comcast Center, in Center City, Philadelphia.
The day’s first panel, Residential Real Estate: Are Where and How We Live Going to Change?, was moderated by Asuka Nakahara, Associate Director, Zell/Lurie Real Estate Center at the Wharton School.
The panel was composed of Olivia John, Founder and CEO, Osso Capital; Gadi Kaufmann, Chairman, RCLCO; David L. Steinbach, Global Chief Investment Officer and Co-Head, Investment Management, Hines; and Doug Yearley, Chairman & Chief Executive Officer, Toll Brothers
Nakahara opened the session by outlining their topic: Many pre-pandemic trends were expanded during the crisis, but how did the last two years really impact the residential market?
His first question was directed to Doug Yearley: “Did Covid accelerate pre-existing trends in the residential space as it has appeared to have done in other sectors? What might have changed for good?” he asked.
“Covid did accelerate a decade of pent-up demand,” Yearley answered. “And frankly, the industry was confused about why it hadn’t come out sooner.”
He explained that six million fewer homes were built from 2010-2020 than during each of the prior five decades. Even though many think that 2012 was a strong year for residential building, it really wasn’t. As the country entered March of 2020, some of the pent-up demand was coming out, he said. “But then stocks fell, and we all went into survival mode. By late May, we saw signs of significant demand, primarily at the entry level. Many renters realized they could own a home for the same monthly payment.”
Pent-up demand, low interest rates, twenty- and thirty-somethings becoming homeowners and people moving to where they wanted to live, rather than being tethered to a place by a job, all contributed to the booming housing market, although he said things are settling down and back into seasonal trends.
Yearley predicted that people would continue to migrate from California to the middle of the country and from the northeast to the southeast. He also said that the prediction that house design would change dramatically is overstated. “There will be more flexibility in design as more people work from home, but the open floorplan is here to stay.”
Olivia John agreed with Yearley’s prediction about migration continuing, however, she said that the “huge blip in out-of-state migration” in 2020 is just slightly above the trend line today. The same goes for intra-state movement. “It’s different than what you see in the news,” she said. “Not everyone is leaving New York City.”
Gadi Kaufmann agreed with the other panelists. “Covid allowed us to borrow from the future,” he said. “The new normal will look a lot like the old normal and migration to the areas where the jobs are concentrated will come back. Covid will end up benefiting office and residential spaces, enhancing demand, and reshaping the way those spaces will get built out.”
Another trend he identified is the resurgence in the demand for second homes, which he said fell from 2015-2020. He said Covid helped people realize the value of owning a place where there is more space and fewer people and maybe more fun, and suggested this trend would last for at least five years.
David L. Steinbach identified two trends he noticed pre-Covid: the idea that product types were converging; that lines between office, residential and retail were blurring and pulled together into mixed use. “Then, during Covid, those lines became more blurred. What is the office? For many, it’s their home. What is retail? My grocery store became last-mile logistics as most of the shoppers were actually hired pickers.”
He added that an interesting angle exists for technology to help bridge the home and office seamlessly for many people.
“We will all be thinking more holistically when making decisions on how to approach design, building and more,” added Steinbach. “Even when it comes to city planning … take the idea of the 15-minute city, where people can truly live and work [in a condensed area]. People haven’t wanted the commute times, and this has just accelerated the feeling.”
Nakahara then explained that during the planning for the panel, four topics were on the agenda:
Steinbach began the discussion by claiming that ESG practices (Environmental, Social & Governance) will be the biggest trend in the next ten years. “How we interact with ESG and bring forth the post-carbon economy is the single biggest business opportunity we have in front of us,” he said, adding that Europe and many parts of Asia are ahead of the United States holistically.
Kaufmann focused on geography, predicting that ultimately, jobs and housing will need to be closer together; that the trend toward migration from coastal areas to inland and north to south will continue, but stressed that there are many markets that don’t seem desirable but thrive because they offer something unique. “Markets that will continue to do better on balance include those with low taxes, those that offer STEM and ed/med jobs, and are coupled with low taxes and entertainment/sports facilities,” he said.
John also focused her remarks on geography and added that Osso Capital invests “in outliers” and are “less bullish on some of the popular places,” choosing to invest in areas where construction has not already picked up.
Yearley agreed with the other panelists about the likelihood that geographical trends would continue and discussed Toll’s investments in markets that weren’t previously in their plans. “We’re in Greenville, Charleston, Myrtle Beach, San Antonio and many other markets that weren’t on our map, but people want to live there. Phoenix is our hottest market right now, and there are plenty of smaller markets that provide opportunity,” he added.
He then discussed the trend toward single-family rentals as the biggest market disruptor right now. “Builders at a lower price point are being outbid by single-family rental developers,” he said. More people want to rent a home versus renting an apartment or buying a home, he added.
Kaufmann confirmed Yearley’s statements about the build-to-rent business. “It’s a big part of this business and demand is very deep, with as many as 10 million units for purpose-built/single-family rental units, competing with home and apartment builders as well as individuals who want to rent their home. These renters are more singles and couples, mostly childless, and a large percentage have pets. There is enormous demand.”
Nakahara asked the panelists if there was anything they wanted to discuss that hadn’t been touched upon.
Steinbach reinforced the importance of ESG, saying the carbon issue is a blind spot in the market as to how things are being priced. He and John agreed that affordability of living, especially in the cities, is a critical issue. John quoted a national apartment rent growth rate of 12%, which is “very high.”
Kaufmann agreed with those remarks and added a prediction around the residential business model: Consolidation will continue and there will be “fewer and larger companies serving the businesses,” he said. “They will be more end-to-end oriented than they are now and will create relationships with customers at the beginning [of the process] and try to keep that customer for life.”
Two other topics that need to be recognized are supply chain and labor, Yearley added.
“The supply chain will get worked out, but we have a labor crisis facing our business. Trade schools are gone, and big builders are working with community colleges to bring that back. We have lost sight of the value and importance of the trades. This will be solved through immigration and an appreciation of the trades and putting more money into education.”
The second panel was titled The Future of Work and was moderated byJoe Gyourko. Panelists were Peter Cappelli, George W. Taylor Professor, Professor of Management, and Director, Center for Human Resources, the Wharton School; Karen Dougherty Buchholz, Executive Vice President, Administration, Comcast Corporation; Robin Klehr Avia, Regional Managing Principal, Gensler; and Mary Ann Tighe, CEO, NY Tri-State Region, CBRE.
Joe Gyourko opened the session by talking about past trends around the work-from-home experience. “Call it work-from-home or telecommuting. This is not new. We’ve seen it before in a different context,” he said. “What do we know from our past experience and what has research shown both from the employers’ and employees’ perspectives?”
Peter Cappelli discussed the “smog crisis” of the late 1970s and the surge toward telecommuting during the dot-com boom in Silicon Valley — basically the same as working remotely today. “The difference was that during the pandemic, everyone was home. Going forward some can be home, others will be in the office,” he said. “In the past, promotion rates and compensation lagged, and engagement was lower; it was difficult for people to demonstrate their commitment to the organization.”
Gyourko stressed Capelli’s point, that in the past two years, everyone was in it together, and then asked him, “Would you expect a different outcome in terms of employee satisfaction or a different reaction from managers because they were also working from home?”
“On the plus side, it worked remarkably well, in part because we were all in it together, but it’s hard to imagine that this continues forever,” Capelli replied. He stressed that the number of employees who want to remain fully remote is small, with some surveys showing only 10%, but it does vary across the country. Executives seem more interested in bringing people back to the office than employees, who don’t really have a choice. “Companies look at their benefits and what benefits them in a hybrid model? In fully remote, they can cut the office footprint, saving money.”
Gyourkoasked Karen Dougherty Buchholz how Comcast Corporation decided to bring employees back to the office, which started in late October. She echoed Capelli’s comments about how working remotely worked when everyone was doing it; it has been proven that people can work from wherever they are.
“One thing we know is that people don’t like change and it’s stressful, but they have always wanted some form of flexibility,” she said. “The culture and collaboration of the workplace is not gotten by being remote all the time, but by being together.” She then discussed how the company established the mandates by which it now functions, admitting that the process can be “clumsy and take a little while. There will be more flexibility, but people will want to come in for what matters.”
Robin Klehr Avia was asked to discuss the return-to-work issue from a spatial and architectural point of view. “Wharton has offered people the 3/2 option — three days in and two days home,” said Gyourko. “How do you see hybrid working out and how will space be used and structured?”
“First, of all, I agree that people don’t like change,” she began. “The idea of embracing hybrid seems counter-productive for companies that are hoping to return to business as usual. There is an opportunity to transition and slowly come back to a new reality that we still need to define. What’s missing from remote work is what everyone has mentioned: collaboration, culture, immersive experiences.”
She discussed the need for fluid design that allows for flexible work and offices that reflect various employee work styles. “We see companies that are utilizing spaces as alternate, adaptable work environments,” said Avia. “There is a focus on wellness spaces, including health clinics, yoga studios, workout rooms, meditation areas, etc. There are fewer workstations overall and amenity seats are being used for working. You can go to the office café and use your laptop, for example.
She stressed that not all offices will lose square footage. The post-Covid focus will be on the employee experience, whereas before Covid, it was on efficiency and density. “Employers know they have to do something for their employees to get them back.”
Buchholz explained how Comcast is one of those employers. “We believe in putting big dollars into the employee experience. Our goal is to attract and retain the best talent from around the world, and the [work] environment matters.” The Philadelphia Comcast campus has instituted a mandated that no one, including various vendors, can enter its campus unless they have been fully vaccinated. To get to that point, Comcast ran vaccination clinics and educational programs and changed some vendor contracts. “We have tried to be an empathetic partner in making the transition happen.”
She added that although the company has tried to be consistent across its worldwide office spaces, they have had to adhere to local regulations; in Europe, it’s illegal to ask people if they’ve been vaccinated.
Gyourko then spoke with Mary Ann Tighe. “You have a lot of different tenants. Do you think work will be transformed at all? Will it be one-size-fits-all?”
While Tighe stressed that her experience has been similar to what the other panelists have stated, she believes the bottom line is that people are looking for answers that just don’t exist yet. “We’ve trained our entire global workforce into a new habit that we have to change, which includes everything such as how to we greet one another? How do we dress?” she began. She also said that in many cases, employees have gotten “the notion that they control the decisions of their companies.” She suggested that companies should be open and talk with their employees about their issues — of commuting, family situations and others.
Answers are elusive because we are all still in the pandemic in a way. She cited past experience with flexible workplaces and balancing personal and professional lives. The key is to make people “want” to come to the office. “Give them a purpose to come in and make the office a magnet,” she said.
She also discussed the differences in location and company sizes: larger organizations acknowledge that answers are still in the future, but many smaller groups that went fully remote may decide to go to co-working or agile office environments. “We are seeing smaller built and leased spaces,” she said. “It makes perfect sense. Why not stay totally flexible?”
“It’s becoming obvious that this is not the Covid crisis, it’s the Covid era, especially if you’re in management,” Gyourko commented.
Tighe added that in terms of buildings of scale, especially in major cities, this isn’t the disruption that everyone feared. “People have experienced growth — financial services and tech companies, you would expect, but in unexpected places too,” she said. ESG and DEI have produced “bonanzas” for law firms and corporate marketing companies for example.
“To add to what Mary Ann said, there is a war-for-talent issue,” said Avia. “The number of new hires who have been brought in virtually is huge, and even they are asking to come back to the office.” Across all sectors and in all geographic locations, corporations of all sizes are doing surveys and round tables, getting employee input. “The answers won’t dictate the company’s future because employees understand that companies want solutions to work for everyone,” she said, “But there are, and will continue to be, a lot of moving parts and evolution as companies align the needs of their workers with their strategic goals.” She suggested that organizations should engage employees in the transition and work with them as they transition back.
The group discussed changes in office space and compensation: People will not be sitting in one place all day. “It used to be about how many people you could fit into a space,” said Avia. “Now it’s about innovation, collaboration and communication.”
Not everyone works in the same way and the key is to find what works for employees and “addressing their needs helps with retention,” said Buchholz.
Tighe reminded the group that pay isn’t everything and employees will leverage the ability to work remotely or in a hybrid fashion to get the compensation they need. “This is already part of the compensation structure,” she said.
Gyourko closed the session by talking about Amazon, which has bought a lot of real estate in New York City simultaneously with telling employees they can continue to work remotely. “They believe they can create the environment that will get people to want to come back to work in the office,” he said. “This will be one of the great management challenges of the era, and the answer is, you just can’t threaten them. It just won’t work. Management needs to be strategic and creative.”
The third panel of the day was titled The Rise of Analytics and Its Impact on Business and was moderated by Ben Keys, Rowan Family Foundation Professor, and Professor of Real Estate, the Wharton School.
Panelistswere Eric Bradlow, Chairperson, Wharton Marketing Department; K.P. Chao Professor; Professor of Marketing, Statistics, Education and Economics; and Faculty Director, Wharton Customer Analytics Initiative, University of Pennsylvania; Kathy Koontz, Analytic Platform Strategy, AWS; L.D. Salmanson, CEO, Cherre; and Barkha Saxena, Chief Data Officer, Poshmark.
“Today we will discuss incorporating modern data and analytics tools, which are stronger and more pervasive than ever before to introduce mindsets and problem solving that is more analytical. We have brought together a group on the cutting edge,” said Ben Keys, as he introduced the panel.
“What are some of the first steps you see in getting traction in analytics for firms that haven’t gotten started doing this yet?” Keys asked Kathy Koontz.
“Ninety-two percent of those organizations that have not begun to analyze their data give their ‘culture’ as the biggest impediment to embracing analytics as part of their business strategy. “Get someone to make a different decision based on data/analytics you have provided them,” she began, relating her comment back to the previous panel’s discussion.
Some organizations begin by gaining the data before knowing how they will use it, an approach she discourages. She suggests that a company should get a clear picture of how it can improve its performance first and remember that it “wants to build a product that people can use so they can make a better decision and get it into their hands fast.”
Waiting until a perfect data product is in place can waste valuable time; “don’t let great be the enemy of good,” she added. “Get something out and observe how it’s being used.”
Keys continued by addressing Eric Bradlow. “How would you put different pieces together as part of an overall analytics strategy?”
Bradlow agreed with Koontz’s comments and stressed these two points: 1) everyone in a company must get behind the value of analytics and that culture must be developed; 2) always talk about the business problem before talking about the analytics. He also mentioned his YouTube video, “The Data You Wish You Had is Never Coming,” so analyze the data you have.
He summarized his approach toward the value of analytics into three buckets: Data architecture and expiration (someone has to build the data warehouse and make it accessible so managers who need to make the decisions can query the data), predictive analytics (looking forward, not backwards, to determine your needs), and business use and optimization (taking the data and making it something operational).
“How did you get the ball rolling at Poshmark and what were the qualities of the culture that allowed your efforts to succeed?” Keys asked Barkha Saxena.
Saxena began by talking about the fact that she needed to build the system there from scratch, which she feels is easier than changing an existing process. One of her first questions was, “What data layers do we need to build and in what order?” She also emphasized what other panelists had said, “The entire organization needs to be a data-driven one.”
Saxena said it’s wise to utilize expertise from the people who are performing the tasks needed to design the data strategy. She stressed the need to be clear on the endpoint and used the analogy of building a Lego castle; no matter how grand the end product, you always must begin with the first building block, then the next and so on, ensuring they are put together in the correct order to achieve the desired goal.
Keys then turned to L.D. Salmanson who understands this space for the world of real estate — he sees the data providers and the latest data as well as the firms that are tapping into that data. “How are real estate firms seeing the opportunities that are there now that weren’t before?” Keys asked.
Salmanson explained that the firms he works with often don’t have a data analysis plan, or they may think they do, but after questioning them, he learns that they do not. Salmanson agreed with Koontz, saying that his clients need to know the problem they want to solve first before providing the data analytic solution. He explained how Cherre helps its clients: “We are only in one vertical, which is real estate, which allows us to remain effective.”
“Bias for action is one of the themes that we are hearing,” Keys said. In real estate, what are the pros and cons of being an early adopter versus those who are taking the ‘wait and see’ strategy?”
Koontz said that one must determine their own path for their own company. “And then let your analytic strategy inform your broader business strategy,” she said, and suggested that each company’s knowledge of its own data is the best way to optimize the commercial value of that data. “If we pursue this experiment and don’t get the expected results, what is the cost?” Being innovative includes considering the investment versus the potential benefits.
Bradlow agreed with Koontz and added that there are methods to predict the hypothetical. “Imagine adopting a new technology … it’s called out-of-sample validation or back-casting. If you have three years of information, use two years to forecast the third to see if you can get accurate predictions. Choose different policies based on the built model, test on previous data, and see how well they perform.”
Keys said that real estate firms often wonder if this is something to do in-house or if they should outsource the analysis.Saxena said the answer will depend on the age of the organization and what stage it is in. In her case, she used external help to get started, and then brought the analysis in-house. “To turn the data into insights, it’s good to work closely with those who will use the data, which is often better done in-house. Your goal is to get to the answers in the fastest way you can.”
The next two years will be all about infrastructure and consolidation and the next five will be about talent shortage, and in ten years, we will look at real estate in much the same way we regard other asset classes, said Salmanson, in closing the session.
The final panel session of the day was titled, Wharton on the Economy and Real Estate, with panelists Joe Gyourko; Peter Linneman, Sussman Professor Emeritus of Real Estate, The Wharton School; and Jeremy Siegel, Russell E. Palmer Professor of Finance, The Wharton School. It was moderated by Ben Keys.
Keys opened the session by saying that we’ve been through a lot in the last couple of years, but “it still feels as if we have a long way to go. Jeremy, where do you think we are at the moment, and what do you see as the promising trends and biggest concerns?” he asked Jeremy Siegel.
Siegel talked about his predictions from a year last year, saying he believes he did pretty well; returning capital would flow into finance markets and then get into inflation in 2021. Although it’s delayed, he feels serious inflation is “coming on,” and predicts a cumulative rise in the consumer price index over a three-year period of 20-25%. “The Fed is going to have to act more aggressively; they are behind the curve. Long-run is fine, and we will get it under control, but dealing with inflation is never an easy task.”
Joe Gyourko agrees that there will be a “decent amount of inflation” in the next year or two. “We’re going to see higher inflation for a while because components that have bigger weights on the index have more room to run.”
Gyourko and Siegel talked about the Fed’s reasoning behind waiting to act and talked about the ramifications of this hesitation. Peter Linneman added his opinion: “I look at the components that are making the consumer price index go up and are not monetary in their nature. Used cars, oil prices and hotels, for example. What we’ve seen so far is real, isolated and not Fed-created.”
“The real dislocations that Peter is talking about won’t end anytime soon and we will see significant price increases that can be explained by real supply side dislocations … and will last for at least another a year — well into 2022,” added Gyourko.
Linneman talked about a study he did in 1990 about what kept people from owning homes: it was not income; it was down payment. He said that the 2010-2020 home-buyers didn’t save, they spent, so there was a shortage of down-payment capacity. What boosted demand was, “my lifestyle got changed for me” and suddenly people were saving and saved a lot.
“Also, If you do the math on people over 70 who died much earlier due to Covid, huge bequests were made, and thousands of people got inheritances and suddenly down payments were there. That’s where you got the huge increase in single family.
Keys asked the panel to discuss the impact of the supply chain issue on inflation. “What are some of the limitations and why are we seeing such delays?” he asked Joe Gyourko.
Gyourko replied that “supply chains are fragile because they are long and complicated — but then we shut down the economy.” Demand shifted from services to goods, and everyone bought a lot of goods. “It just takes a while to get this back together.”
Linneman added that across the board, advice was given to hoard cash and reduce capacity. “Capacity got reduced everywhere. Add in elasticity of demand, meaning, if there’s a shortfall of a few pieces of something, people will shift to other things. If there is a decrease in items with low elasticity of demand and a bit of capacity shortfall…you can’t turn that economy back on overnight.”
Between March and July of 2020, the money supply went up more than in the full year that followed the great financial crisis. “The fiscal stimulus in this pandemic is nine times than what we had during the entire financial crisis,” said Siegel.
Linneman talked about assets: “There’s a notion that in the battle between greed and fear, that greed has won.” He said he doesn’t agree with this, because we have record highs of reserve cash at banks and in holdings by both individuals and corporations. Siegel agreed with his thought that the stock market pricing is about right at this time, and that property prices will probably go up. “When there is excess money, it’s first felt by assets, then filters into consumer,” Siegel said. They agreed that although there may be ups and downs, increased prices, across the board, will not go back down.
Keys asked Linneman to discuss the variability across real estate sectors. He said that “good retail” is back; people believe that the internet isn’t everything. Multi-family is strong; decent demographics and decent supply. Industrial is quite strong, driven by the growing e-commerce side. Senior housing has an issue; people aren’t thrilled to put their relatives into facilities where vaccination rates are low. Hotel has come back, although the Delta variant has slowed it. Office is simple: it’s either massively over-priced or massively underpriced, and has been carried by the fact that, for the most part, people are still paying their rent.
They discussed the low rate of employees returning to work and how many more have returned to work in Texas, for example, than in New York City.
Gyourko commented on Linneman’s remarks, saying that there will be a large drop in lower-quality office, that Covid will shift people up the quality spectrum. “There is a flight to quality and it’s a lot like retail. I think we will see a bifurcation in quality, and a real business in repurposing it.”
Linneman thinks there will be fewer business failures in the next year, that every one that was going to fail in late 2020 through 2023, has already failed. He believes that the same can be said about the migration out of cities, and Keys added that the same can be said about the labor force.
The men closed out the conversation with a discussion about where and how to find good yields in investments. Gyourko predicted a long-term move to alternatives and believes that more cash will flow into those, including real estate. Linneman agreed and added that anything that can generate cash flow and generate a spread becomes more attractive.
Linneman closed the session: “What we learned over the last 18-20 months is that it’s impossible to run an economy. We decided as a society that we were going to run it, such as canceling all elective surgeries for months, and we learned that you cannot. Too much damage occurs.”