U.S. real estate in economic dips: looking back and forward

Industry experts discuss how real estate amid the pandemic compares with the market during the 2008 recession

The real estate impacts wrought by the coronavirus pandemic are real and confronting us all right now. But we’ve seen economic downturns before, and there are valuable lessons we can learn from the past. 

I sat down with industry experts from WeWork—Vanessa Gandhi, a fellow director on the real estate advisory team; John Lewis, vice president of enterprise sales; and Matt Osborn, West Coast head of asset sales—to discuss the similarities and differences between the real estate market during the 2008 recession and now. We specifically talked about real estate supply and demand, flexible leasing, and globalization during these times.

Rents will drop 

The 2008 recession was a matter of unchecked lending practices. Investors faced liquidity challenges, and financial institutions were underregulated and over-leveraging assets. Rents dropped 30 percent, confidence and trust in our financial institutions fell, and the U.S. housing market collapsed

Today, investors don’t have the same liquidity challenges they had 12 years ago, and financial institutions are highly regulated, creating a more stable economy. 

As a public health crisis, COVID-19 has sparked a different breed of economic recession. And in its wake, we’re facing entirely new levels of unpredictability and uncertainty.  

Real estate experts, brokers, and landlords all find ourselves asking big questions such as: Will office space become obsolete? Will demand skyrocket because of de-densification? Will this dynamic market even out in the next few months or will it take years? Will things ever be the same?

We can’t be certain about the occupancy trends that will emerge from the current crisis. But based on surges in sublease space, rent declines, and productivity rates, we can make some high-level estimations.

Beginning in March, companies large and small all over the U.S. mandated work-from-home orders. Without a definitive date for a safe return to the office, some companies, such as Google and Facebook, are allowing their employees to work remotely through the end of the year, while others are choosing not to renew their building leases at all. 

This has led to a surge in open space. “Building vacancy is expected to hit 15 percent in traditionally high-performance markets,” Gandhi said. This boost in supply—and lack of demand—is driving rent prices down. “We’re expecting rents to drop around 10 percent,” she says. 

Real estate footprints will spread out

Ultimately, businesses will need to base their office space decisions on their company culture and employees’ job satisfaction. If a business thrives from collaboration and face-to-face interactions, providing a safe and healthy space will be worth its weight. 

“There’s also a looming question of employee productivity,” Lewis added. “For most of our users, anecdotally, office space expense accounts for somewhere in the vicinity of 10 percent of a company’s operational expenditure. If data from this work-from-home period reveals that people get more—or less—done from home than in a traditional office setting, companies will start to reconsider the value of the office.” 

For companies that want to maintain a physical presence for their employees, new regulations to de-densify will actually require more space. As we heard in a recent CNBC interview with WeWork CEO Sandeep Mathrani, many companies are adopting a hub-and-spoke model to address this challenge. Satellite offices, touchdown locations, or regional headquarters are possible solutions for those looking to spread out their workforce and reduce the risk of infection from commuting on public transport. 

WeWork 101 N 1st Ave in Phoenix.

As physical footprints may decrease for some companies, they’ll increase for others who need to comply with distance standards. This dynamic will help offset imbalances in the market.

Whether your clients are looking to reduce their square footage or expand their global real estate footprint, WeWork is uniquely positioned to match their needs. With over 828 locations around the world, we have the supply to match whatever their demand is in the future. 

Flexibility is the future

In 2008, flexibility was not the name of the game. Lenders held the power—so landlords couldn’t offer flexible commercial terms to attract and retain tenants.

Today, landlords across the board have more freedom to offer flexible lease terms, typically a good thing for both landlords and tenants. But with more companies opting to work remotely, landlords will have to fill that unused space—fast—or suffer a steep financial burden. 

Some landlords may choose to put the onus on their lessors to find sublessees if they’re not using the space. “Today, we’re seeing more lessors becoming landlords, creating a boom in the sublease market,” Osborn said. “This will have major implications on leasing flexibility, or rather, inflexibility.” 

With traditional subleases, tenants have zero power over the term length, termination options, and renewal options, and are subject to credit checks and lengthy approval processes. 

Furthermore, tenants are often forced to take space as is—giving up the freedom to manipulate layouts, design, or the quality of the space. This has consequences in our current health environment, in which companies may need to significantly modify the physical space to adhere to distancing standards, or improve the cleaning standards to ensure a safer workplace. 

“WeWork has a large enough portfolio to offer tenants optionality,” Osborn said. “For example, members can use a suburban sublease to have employees slowly transition from home to the workplace and see how it works. And if it doesn’t, they can easily flex out or try another option.” 

WeWork also negotiates directly with tenants—no lengthy landlord sublease approval needed—to build out fast, flexible deal structures and ideal space layouts. Whether your clients need a short-term lease, swing space, the option to expand in place, or the ability to spill into multiple office spaces, WeWork can craft creative deal structures that align with your clients’ needs. Additionally, we have a strong team of experts prepared to help members address the current challenges in a post-COVID-19 workplace, whereas sublease tenants are often left to handle issues on their own. 

Spreading out in a world that is more globalized

The 2008 recession hit the U.S. real estate market hardest, sending smaller shockwaves globally. But over the past decade, the world’s economies have become more intertwined. This means that recessions have an increasingly larger global impact. 

Many WeWork members have offices around the world, partner with global manufacturers, or employ support representatives in different countries. And with new professional distancing standards and de-densification regulations, companies may need to expand their footprint even further—potentially into unfamiliar markets. 

Your clients may be looking to you to help manage their global real estate needs in the wake of COVID-19. Thanks to WeWork’s presence in 38 countries, we can help facilitate a consistent and reliable experience. No need to manage multiple negotiations with multiple parties in different markets—we can get your clients up and running anywhere, anytime. 

Learn more about our commitment to brokers at wework.com/brokers, or email brokers@wework.com to connect with us today.

Cody Kushner is a director on WeWork’s real estate advisory team. He spent over a decade in commercial real estate, managing acquisitions, asset management functions, deal structures, fundraising, and dispositions throughout the United States for investment management firms located in San Francisco, Austin, and New York City.

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