Q&A with Jessica Wichser, Head Private Real Estate Asset Management
The pandemic has been a massive global experiment in remote working and the shift to virtual communication has been more successful than many business leaders anticipated. Indeed, many now expect flexible working to become the norm. But what does this mean for the management of office space? Jessica Wichser explains how Partners Group has continued to create value in the office sector through the crisis and how the pandemic may shape the office of the future.
How has the pandemic affected real estate asset management so far?
Like others in the industry, we started out the year with annual business plans in place for each of our assets but quickly had to pivot from them, with our focus first on the safety of the tenants in our buildings. Beyond that, we started working to preserve liquidity on behalf of our clients, which has meant talking to tenants to work out payment plans as well as keeping lenders informed of any issues that may arise. We’ve also put some long-term capital expenditure plans on hold as we looked to reevaluate how best to use our capital over the coming years. Finally, we are, for now, being more cautious on potential asset sales because we recognize that the current market does not make it an optimal time to sell and generate the returns our investors expect.
"Our private equity colleagues helped increase our understanding of the challenges faced by portfolio companies across different sectors, which helped us work constructively with our tenants."
What have been the key challenges through the crisis and how have you managed them?
The most immediate challenge was how to keep our office buildings open while ensuring the health and safety of tenants, and so we worked closely with property managers to implement appropriate measures. Since we are investors seeking value-add returns, our business plans typically involve an element of lease-up and so we’ve also had to work to continue leasing our buildings in this difficult environment.
While we inevitably had some prospects fall through as some corporate decision-makers put expansion and relocation plans on hold, we were able to execute several major new leases over the past few months. In terms of rent collection, we have benefited from a strong, creditworthy tenant base and so we have maintained high rent collection rates of over 95% in our global office portfolio. But we are more cautious of how occupancy will play out over time as leases expire, since some tenants may renew only for the short-term or vacate altogether.
Partners Group's platform and approach has also helped us through the crisis. We work closely with our local operators in addition to our in-house architecture and engineering experts, which allows us to keep on top of regulatory changes and emerging technology solutions. As a global firm, we were able to draw upon our experience with the early spread of the pandemic in Asia when we set out to develop guidelines for addressing tenant rent relief requests and reopening buildings in other regions. In addition, as a multi-asset class platform, we've benefited from the insights of our private equity practice. For example, our private equity colleagues helped increase our understanding of the challenges faced by portfolio companies across different sectors, which helped us work constructively with our tenants who had trouble paying rent. We are also keeping a close watch on trends accelerating in the consumer sector as a result of the pandemic.
Insights into the emergence of "buy online, pick up in store" models, direct-to-consumer businesses, and local "dark" stores, where online orders can be packed for pick up or delivery, are all contributing to our thinking on how real estate will be used in the future.
How do you see the crisis playing out across various cities and office markets?
We've obviously seen physical occupancy drop in all office markets, but especially in dense gateway cities that rely on mass transit, like New York and London. These locations also tend to have higher occupancy costs, so we see employers in these markets encouraging remote work on a more permanent basis to realize cost savings, even as workers feel safer returning to the office. Higher occupancy costs were already driving companies to relocate to lower cost locations before the pandemic – an observation which has underpinned our investment strategy. As a result, our portfolio has very limited exposure to gateway cities, which has boosted our rent collection figures and minimized the number of tenants seeking rent relief.
To what extent have there been value creation opportunities through all this?
There have definitely been opportunities to create, rather than just defend, value. For example, we've been working with our tenants impacted by the crisis to restructure leases and arrive at win-win solutions, such as deferring rent payments in exchange for lease extensions or removing onerous lease clauses. We've also taken the opportunity to differentiate ourselves as owners of assets and demonstrate our partnership approach with our tenants, which we believe will lead to increased tenant retention and renewals. Importantly, we’ve continued to sign new leases through the crisis, especially in instances where we had started discussions prior to the pandemic.
Also, by pausing our larger capital projects, we’ve been able to give more thought to what offices will need in a post-COVID environment. We’ve taken time to analyze the design and functionality of our assets, with a particular focus on environmental impact and tenant wellbeing. For example, in some of our buildings, we’ve already invested in installing contact-free entry systems and restroom fixtures, as well as enhanced ventilation systems and real-time monitoring of air quality. We expect such measures to provide benefits beyond the crisis by creating more efficient buildings and healthier working environments, both of which are important in attracting and retaining tenants.
"The biggest lesson I’ve learned through this has been the importance of good relationships to carry an investment through challenging times, be it with tenants, lenders, operators, or leasing agents."
What lessons have you learned?
The biggest lesson I’ve learned through this has been the importance of good relationships to carry an investment through challenging times, be it with tenants, lenders, operators, or leasing agents.
It’s also true that strong relationships have been important within our own real estate team of investment and asset management professionals– within a week, we went from working physically together but on separate work streams, to working separately from our homes but in close coordination. Team members pitched in to help each other out on assets impacted by the crisis and we worked together on portfolio-wide analysis.
How do you think the pandemic will shape the future use of office space?
In the short run, we've clearly seen demand for office space decrease as people work from home and employers delay leasing decisions in this uncertain environment. But since our hold periods are typically five years or longer, we're more concerned with the lasting effects of the pandemic beyond the shutdown and its economic fallout.
There is a lot of debate surrounding demand for office space in the long term – will it decrease as more people work from home or increase if employers allocate more space per employee? It is hard for the real estate community to predict this demand, as decision-makers are still assessing who can work remotely, how much space they need, and where this space should be located.
Rather than speculate on this, we're focused on how we can be best positioned to capture the degree of demand that will persist. In order to do that, we're converging on few key themes which are interrelated – flexibility, wellness, and experience.
The pandemic has shown us that working from home is at least a part-time viable alternative to working in an office five days a week for many knowledge workers. And so we expect employees to want more flexibility in where they work, and for employers to give them a choice between working from home, from a suburban satellite office or coworking space, or from an urban headquarters. At the same time, in order to right-size and manage peak demand, we believe employers will seek optionality from landlords, favoring buildings with flexible office space solutions.
Given this new ability of employees to choose where they work, it’s now more important than ever to offer employees an office space where they have confidence that the risk – whether from COVID or any other threat to wellness – is outweighed by the benefits they gain by being there.
We’re working to mitigate the risk side of the equation through enhanced cleaning operations and capital expenditure targeted to limit the spread of pathogens. We must be at the forefront of providing tenants with a safe working environment, particularly with regards to air quality.
Yet while working from home generally has worked well over the short term, many employees and employers are also finding that in-person collaboration is vitally important to productivity and innovation. As a result, the trend of creating space that gives employees the experience of working in teams and sharing ideas – which was in place before the pandemic – has now accelerated.
Ultimately, for us as a real estate asset manager, our ability to partner with key stakeholders to understand their needs and to be agile enough to meet them will be essential to our success.