Julie Whelan v3: Sentiment Shift, Location, Vibrancy | Work 20XX Ep31

English Transcript
Julie Whelan v3: Sentiment Shift, Location, Vibrancy | Work 20XX podcast with Jeff Frick Ep31
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Cold Open:
So, you ready to go?
I am.
Okay, cool. So I will count us down.
Three. Two. One.

Jeff Frick:
Hey, welcome back everybody. Jeff Frick here, coming to you from the home studio for another episode of Work 20XX. It's late summer, Labor Day is just around the corner, so it's our annual check-in with Julie Whelan from CBRE to get their update on the Occupier Sentiment Survey. So welcoming in through the magic of the internet all the way from Boston, she's Julie Whelan, the Global Head of Occupier Thought Leadership from CBRE. Julie, great to see you.

Julie Whelan:
Thanks for having me, Jeff. It's a great tradition to be here with you every year.

Jeff Frick:
It is. I went and I checked before we got on today. We got on in June. And you know, June in 2022 was a little bit of a scary situation, kind of coming out of Covid, which is hard to imagine that whole thing even happened. 2023 we talked a lot about kind of what's going to make buildings and neighborhoods sustainable. So what's kind of the theme for 2024, the America's Occupier Sentiment Survey, which everybody can get online? 31 pages of charts and graphs and data and some great analysis. So what’s the big change or the theme for 2024?

Julie Whelan:
Well, for the first time writing this survey, I feel like since the pandemic, we are actually writing it in a more normal voice. It feels like we're in a more normal market, in a more normal environment, much more stable. And I'd say that that was just a huge sentiment shift. And then what was interesting was as we were analyzing the data and it was coming in, we were also getting a hold of Q2, real numbers of what was happening in the office market. And it actually helped us to understand that we feel that we're at a real inflection point in the market. And the reason that I feel that way is because the sentiment in this survey really showed that there's a shift in occupier behavior right now. The past four years, it has been all about downsizing, all about contracting, all about letting go of space that you didn't need in the face of the structural change of hybrid work. And now we are at a point where I think a lot of that has been done. There's a lot more understanding of what office utilization is today and is going to be, and therefore occupiers are sitting back and saying maybe we shouldn't get rid of space anymore, and maybe in some cases we should even start to expand. And so that was a marked shift in sentiment this year that, by the way, we see coming through in the numbers. Q2 was the first quarter in quite a while that we saw positive net absorption in the national office market.

Jeff Frick:
Wow. So a couple things jumped out to me. One, you said, or in the survey says, 64% of the people say we're in a steady state, which again, to what, you know, reinforcing what you just said, that was not the case. You know, trying to come out of Covid and figure out what we were doing. And it jives with Nick Bloom's research over at Stanford and work-from-home policies, which he likes to say ‘it's flat as a pancake’ and has been now for over a year in terms of you know, how many days a week people are working, there still seems to be this little fight. Last time we talked, you said they gave up on Friday. Fridays are gone, but there still seems to be a little fight on that third day of the week where employers are looking for people to come in three days a week, people are coming in closer to two. So we still have this little, a bit of a battle for that last, that last little bit. But what's interesting too, before we talked about return to office mandates and I probably, I promise I won't use that word even though I just did. But your point was, there's a difference between a policy and there's a difference between enforcement. And we're still seeing this huge gap between what people want and what’s stated in the form of a policy, and then what they're actually tracking and what they're punishing or taking action against.

Julie Whelan:
Yeah. So there's a lot there. But let's start with the whole return to office. I agree, we don't want to say that anymore. And I think that was also a shift that we started to see last year. But it's certainly a very clear one this year that we don't talk about that anymore. And part of that reason is because I think for most cases, we are at steady state. Even if that steady state isn’t exactly what the leadership in that organization wants. And I think the reason they are just sort of overlooking maybe some of what is not happening that they want to happen is because there really isn't a huge chasm between what employees are doing and what leaders want. If employees were coming in one day a week and employers wanted four days a week, then yes, we would still be talking about this return to office. But I would argue we're somewhere around half a day to a day between the difference of what employers want and what employees are doing. So in many cases, organizations are just saying we're largely at a steady state. We might try to push a little bit more, but it's not going to make a real difference in our portfolio. That being said, there is still about a third that are trying to push harder, but what we are very clear about saying right now is that the easy work has been done. Most organizations have set a policy. Many are even tracking that policy. If the policy is not being followed, we believe that there actually has to be much more of a deeper diagnostic done in that organization that helps them understand what is that barrier that is stopping people from coming in more. Is it a culture thing? Is it the KPI thing? Is it a location of the office thing? But in order to understand that, you have to talk to your people. You have to survey your people. You have to really understand what is driving their behavior in order to unlock different behavior.

Jeff Frick:  
Right. Another thing that jumps out of the survey is the difference between big companies and little companies. And I think in the survey you define big companies as 10,000 employees or over and little companies as a thousand employees or less. And actually in the big companies, they're still, they're still looking at downsizing, potentially. They're still making the adjustments at a higher rate on the downside. Where like 80%, I think, of the small companies are anticipating growing their demand. And it feels like that’s more of a reflection of just growing the business than necessarily changing the policies. But a real split between BigCo’s and LittleCo’s.

Julie Whelan:
Yeah. You made me chuckle when you said that. Because I used to read a storybook to my kids called *Fred and Ted*, and one of them was big and one of them was small. I don't know which it was. Let's call them Fred and Ted. So yes, I will say that there is absolutely a divide between what the large organizations are doing and what the smaller ones are doing. But let's not forget that that wasn’t a lot different before the pandemic. What we saw even before the pandemic, in between the sort of financial crisis and the pandemic, was that the largest organizations, especially financial services companies, were doing everything that they could to really make sure that their portfolio was efficient. I wouldn't even say that they were so worried about it being effective, because at that point there was just a status quo of people coming in, but it was very much about efficiency. But during that time, the tech companies were growing, so they were able to kind of negate what was happening with the financial services companies. And there was still therefore decreasing vacancy and increasing occupancy in buildings. Now, today, that downsizing remains true, but it remains true, I'd say more so, probably around the tech companies that had gathered a lot of space and are now adjusting to a new way of work. But in many instances, the tech companies had let go of a lot of their space. Now they're starting to think that they do want more of an office presence, and therefore they're going the other direction. And tech companies themselves are actually taking a larger share of leasing than we have seen in the last four years. Then you have the financial services companies that, yes, in some cases they're downsizing, depending on how big their portfolio is and how fast they've been able to acclimate to a new normal. But in many cases, they were already so small and efficient that now that they want people back more than the average company, they actually are realizing they have to provide more of an employee experience. So maybe need better space or bigger space. So what we're seeing is definitely a push and pull right now. And there isn't so much of a pull away from space as there was. So that has moderated, and we are seeing more of a push towards more space. Now smaller companies also that maybe got rid of their space altogether before the pandemic and or during the pandemic and just went home are now expanding because the economic cycle is still pretty strong. They're actually telling us that they need more space. And so as a result, now you do have these two ends of the spectrum that are ending somewhere in the middle. Now, we're not saying that that means that vacancy is all of a sudden going to start to decrease, because we actually do expect that vacancy will continue to increase over the next year or so. But we are much closer to the end of this down cycle, we think, than we are from the beginning of it.

Jeff Frick:  
Yeah. Well, let's talk about efficiency versus effectiveness and those are two great words we’ll keep away from productivity. That one's a little bit harder to measure, but one of the key findings, I think number two, said that 73% believe that workplaces are effective, but only 46% are measuring whether it's effective. And those that measure it are actually not thinking that it's as effective as it can be. Also, another data point was kind of the ratio of people to seats, to chairs in the building. And that's changing. You know, people are going to more shared spaces, and it's not this 1:1 relationship. So it still seems there’s this like there’s a lag of kind of these traditional measures of efficiency. And we're really not moving as quickly as one might hope in effectiveness. Phil Kirschner from McKinsey has this great line. Rather than writing a book about the building, write a book about how the building gets a chapter in the success story of the company. And it's a real different way to think about the effectiveness, the effectiveness of the space around a particular, you know, activity or objective or goal. So then you can invest and make it better for that, that thing. How do you see, you know, kind of this slow shift in measuring effectiveness and workplace productivity and HR measures versus, you know, butts in seats and, and efficiency and how many cubes are spaced, are taken?

Julie Whelan:
Yes. Well, you know, real estate professionals were, are not sociologists, right? So they don't really always understand people. And that's not the speak that they've had to speak in. They have always really focused on efficiency of portfolios which was measured by square feet per seat, square feet per person. How often people were coming in. So by far and large, that is how workplace effectiveness is measured. And that’s how most organizations are measuring it that are measuring space right now. However, effectiveness means something very different than people being in seats, because what we know is that even before the pandemic, people were not engaged. They were not always happy at work, and they were not, therefore, always effective at work. But when you think about the word effectiveness, even when we're having our annual reviews or our mid-year reviews or our monthly one-on-ones with our managers, how do they know that we're being effective? Effective against what? Well, there's goals that we have. There are clear goals that tell us if we're, and we have KPIs against if we're achieving those goals. I think the big piece of the office that's missing right now is that that goal in the past has been just get people in, and now that goal is shifting. But we don't have a new goal. That's very clear about the why we have to be in the office. So the policies are stated and that gives us the number of days we're supposed to be in. And therefore if we can measure against that, then we're saying we're being effective. However, the real goal is interpersonal connections and getting people to work together and driving the culture of organizations. And until we can really begin to measure around that, then we're really not going to know if our workplaces are effective. There are some in this survey that did tell us that they are measuring based on employee engagement or attrition and retention, and even a few that say that they're measuring our productivity. But I would argue that those are probably companies where it's very clear-cut on how to measure for productivity. Many knowledge workers. That's a very, very difficult nut to crack.

Jeff Frick:    
Right? Right. And they're using things like retention. And, you know, there's some other HR metrics and engagement that are out there. So shifting gears a little bit about investment, I was really surprised to see in the tech investment category that video conferencing was still at the top of the list, number one at like 82%. But then afterwards you're seeing some of the stuff that's more supportive of hybrid, things like space booking I think was 64%. What was surprisingly low to me is occupancy sensors and some of these things that we've talked about before that will give additional insight beyond badge swipes as to how actual spaces are being used. And, you know, are they overused or are they underutilized. And, you know, if you kind of map that with kind of activity-based spaces and more variance within the spaces within either the company space itself or within the building, a lot of focus there. I mean, video conferencing still, number one, that really surprises me. I mean, we all have phones, kids a lot younger than you and I probably take most of the video conferences on their phones anyway. How do you see kind of this investment in the sensors to get the better data to really know what's going on inside your four walls?

Julie Whelan:
Yeah. Well, so video conferencing is an interesting one. First, we have to realize that there are hundreds of millions of square feet that are occupied. So outfitting all of that with technology to suit this new world of work is going to take some time. And I think that these survey results show us that that time is still unfolding. Additionally, I think that video conferencing is, is increasing in terms of sophistication. And so I think that there's an element of that that will continue to be an ongoing trend within organizations as they look to not only give video conferencing, but the best experience that they can in that video conferencing. So I would not be surprised if that stays at the top of the list for certainly the interim as we're doing these surveys. Occupancy sensors are an interesting one because they actually haven't shot up as much as I thought in terms of organizations using it. And I think that there are a few things that are at play there. First, I think that you have a cost that’s associated with implementing occupancy sensors. And right now, although we are not in a recession and in a relatively stable economic period, there has been a lot of discussion over the last couple of years of what's around the corner. And so I think capital budgets have been really constrained, for organizations to do things like that, that might be seen as nice to haves. Additionally, I think that there are probably privacy requirements also, and concerns around tracking you know, people too closely. And what are you doing with that? So occupancy sensors have not given necessarily or had the increase that I would have expected even a couple of years ago. And I think it's because of those two reasons.

Jeff Frick:    
Yeah. But sitting number two, especially, you know, again after a conversation with Nick Bloom, you know, talked about with the growth of hybrid work, the investment by the investment community into technologies to better support this new world. And we've talked about one of the biggest issues is when you do go to the office and your team's not there. So space booking is number two, above occupancy sensors and below video conferencing. So clearly people are investing to make sure that the probability of, you know, your team members being there and making that a more seamless, dynamic environment than it was, in more of this kind of static, ‘I have my own desk’ that clearly comes through in the results.

Julie Whelan:
It does. And what that tells us, with it being number two, is that it matters, yes, who is coming in and how often they're in and how long they're in. But for a really effective workplace, you actually want to know what type of spaces they're using and how often they're using them. And there's an element of room booking systems that will allow for that. But then also what it allows for is not only the analysis of how your space is being used, but also better allows people to understand where each other are. And that's a really important thing in this environment, is creating an easier way for people to be able to find each other and see each other, and these room booking tools can provide that.

Jeff Frick:  
Yeah. That's great. So one of my favorite business lessons of all time is what I always call the Ma-Bell problem on Mother's Day. And, you know, it's not quite the same as it used to be, back when we had direct lines but it was always the, you know, how does the phone company plan for Mother's Day when everybody calls mom at the same time and just capacity planning versus whatever your steady state or your average is, you talk a lot in the report about, do people have enough space to accommodate the heavy days and when people come in the most? And that combined with, you know, what percentage of your portfolio is now flexible space and how are you, you know, augmenting your fixed with flexible to have a little bit more ability to flex and move. How are you seeing, you know, kind of flexibility, flexible space as a percentage of the portfolio and how people are managing against this? You know, I don't have everybody coming in every day, but there are days that we're going to have a heavy, heavy lift.

Julie Whelan:
So I think that there are a couple things at play. First, I think that that's why we're seeing a moderation in downsizing right now. That's one of the reasons why we're seeing it, is that organizations are telling us that on peak days, which are maybe one or two days a week, usually mid-week, they're actually up above 60% occupancy, I think three-quarters of our survey respondents told us that. Well, that's where we were before the pandemic. And so that means that there is only so much that you can do to be able to make that more efficient. The issue is, is that on non-peak days you might be losing an element of vibrancy in your organization because you are planning towards peak days, and therefore on non-peak days it might feel a little bit dead and empty. Now, there are multiple ways that you can solve for that. Number one, we obviously have seat sharing. And seat sharing in this survey showed loud and clear that we are moving in the direction of more people per seat. So somewhere around two people per seat is, I think, where the average is now, give or take, depending on the type of industry that you're looking at. And we have an occupancy insights group that actually studies their own clients and what they're doing. And for the first time last year, they saw in their own data that there are more people than seats in organizations. And that is a huge turning point, because we have been talking about seat sharing for a very long time, and now we're finally seeing that it is actually bearing out in the numbers. Secondly, you could maybe shut down a floor, right? So if you have a multi-floor portfolio and you have unassigned seating, you can turn on and off floors as you need to in your portfolio to really make sure that you're getting a mass of people where it counts to make the environment feel vibrant. But additionally, some landlords are getting really creative with the ways that they are offering flexibility in their building. And they might offer flexible office space within their building that can serve as overflow space for organizations who need it. And that is something that we maybe don't see the majority of landlords doing. But we do see some very progressive landlords doing. And I even heard one say that they can start to use that as a concession instead of tenant improvement allowances and free rent that used to be the typical and traditional concessions. Now you can offer time within flexible office space that you can start to use as credits that are offered as a concession in these situations. So there's a lot of different levers that organizations can pull. And frankly, they're experimenting with them right now. I wouldn't say that there's one that's more popular than the other, except for seat sharing, of course.

Jeff Frick:  
And I didn't catch it. And maybe you do or don't track it. Do you track if you break down activities within an office, say, between individual work, you know, my time when I’m just by myself doing whatever I'm doing, versus, say, socialization type of activities, versus, say, collaboration activities? Do you break out what percentage of the space is dedicated to kind of those three buckets? Or maybe you have different buckets and are you seeing, you know, less space as a percentage dedicated to chairs and more space dedicated to other things? And, you know, there was a great piece the *Wall Street Journal* did years ago on LinkedIn having a new office they opened. I think they said they had 75 different types of seating configurations, most of which were not at a desk. So I wonder, are you tracking kind of the morphing and changing of what the portfolio of types of spaces are within the client?

Julie Whelan:
Yes. So not in this report we're not. But again, we have a sister report that our workplace team does, that occupancy insights team that I talked about. And they actually track their own client portfolios, and they split it into ‘we space,’ ‘me space,’ and ‘amenity space.’

Jeff Frick:  
Okay.

Julie Whelan:
What they see is that the ‘me space’ is shrinking. The ‘we space’ is increasing. But that comes with a big caveat because I think for a while there, we were moving too much towards the ‘we space.’ And now we're realizing that people need to still have focus and privacy. And so that means that their ‘me space’ is still really important, but how you solve for that ‘me space’ doesn't have to be an assigned desk per person. There might be smaller huddle rooms that people can go in. There may be a banquette area that's private that you can go into. You may end up going into that overflow landlord space just to have your ‘me’ time and answer a few emails or take a private phone call. So there's a lot of different ways to solve for it. But in traditional lease portfolios, we do see that the ‘we’ space is increasing. But what we also see is that the biggest meeting spaces, the ones that tended to be these showcase boardrooms that people might have used for three and four people meetings, most of the time those are being broken down for more typical size meetings, because what we see is landlords are offering larger meeting space on amenity floors that you, as an organization, can use on the basis of which you need it maybe a couple of times a year, and it's going to be the best furniture, the best layout, the best technology, probably have services associated with it such as catering, and you're able to use that within the building that you're in now, instead of having to build and manage that within your own leased square footage. So very interesting what's happening between ‘we’ and ‘me’ space and how you interact with the larger building as a result of those changes.

Jeff Frick:    
Yeah. That's interesting. You talk about amenities and when you break down amenities, you talk about what's, what are my amenities, what are the amenities in the building, and what are the amenities in the neighborhood. And that's interesting that more and more of that is shifting to kind of the shared space or the variable space, to offload having to sit and carry that expensive boardroom that nobody sits in all the time. But when we looked at amenities in one of our other conversations, you talked about kind of the evolution of what is class [A] space, what are people looking at? So I got your list here, it’s 18, 18 things listed on this one thing, food and bev right at the top. But what's interesting is the commute stuff is still towards the top—access to public transit, car parking. I was happy to see scooter parking making its way up the list to number six. Amazing. So still, commute is the biggest amenity. If you can avoid it, it’s great. EV charging station. The one that surprised me is daycare. Way down the list at 16—34%. Is that because it's not necessarily, you know, most people get it taken care of outside of the office place. Was that just a tech thing with oil changes and dry cleaning? The daycare was incorporated in the office. I'm surprised that’s so low.

Julie Whelan:
Yeah, so daycare is an interesting one. And I think that it is very organization and location specific. And what I mean by that is if you have an organization that is made up of people that need daycare, then they are going to want daycare more. Whereas if you have a large organization that has all different types of generations working in it and commuting from everywhere, the daycare may be less of a discussion. So I really think it's company to company specific, depending on the employee base that they have, where they commute from, and you know, what they want. So that one doesn't surprise me because again, this is a survey that really is geared towards the large global multinational companies. And I really do think that it is a much more specific discussion to have within a company, if a daycare is important. But what it does bring you to is this discussion about what's important in the neighborhood versus in the building. And what we're seeing more and more of is that landlords used to think, well, if I have food and beverage and a gym and maybe some retail, like a dry cleaner, then I'm set. And what we realize now is that organizations actually prefer to be in the neighborhoods, and the districts that have all of that available so that you aren't prisoner to the building for that. And then they want their landlord to provide more service-oriented amenities that are going to help them as a specific tenant. So there is a real interplay right now that is happening between neighborhoods and buildings, and landlords themselves have to really pay attention to who is my tenant base, what do they want? What does the neighborhood already provide versus what do I need to start to provide? And that's a lot different than I think it was even just five years ago.

Jeff Frick:  
Yeah. And we talked about that a lot, that healthy neighborhoods bring traffic from different types of people doing different types of things at different hours of the day, and it’s the vibrancy of the neighborhood that then makes the, the building itself even feel more vibrant. The other amenity that was on here that's surprisingly low, I don't know, it’s number 12—indoor air quality and, you know, Covid. One thing it did is really highlight the importance of internal environment inside of an office building. And clearly Covid was all about HVAC. But there's other things and it kind of ties back a little bit to sustainability. You have that under wellness. I would just—I would think that there would be more investment in internal environments, air quality being one. But other things, lighting, biophilia, you know, all the different things that that can make an internal environment better. I was surprised that that one was still as low as it was.

Julie Whelan:
So the way that I read that finding is, I don't know if I ever shared the story with you about coffee. One time, somebody shared a story with me about providing coffee in an environment. If you provide really good coffee in your workplace, you're probably not going to get a pat on the back for it. But if you take that away, you're going to get dinged for that in a really big way. And I see that as the same for indoor air quality. I think at the beginning of the pandemic, just like elevator access and how you were going to get elevators to move, everybody was talking about it because it was just the subject of the day, and it was interesting to people, and there was an unknown around it. However, now it's just a table stake. I think that in the buildings that are—any building really in the, in the US, at least that's of the ilk that organizations are going to want to lease them. They're going to have good indoor air quality, and the landlords are going to pay attention to that. And the second that it doesn't, people are going to start to scream and shout, but I don't think it would really ring out on a survey like this because it's so expected, you know.

Jeff Frick:    
Right, right. Another thing is, big topic we talked about last time. More on the corporate side and a corporate objective side is sustainability and sustainability objectives. Since we’ve last talked, what's it called? Local Law 97, I think, has kicked in New York, which has added additional sustainability challenges, objectives. I don't know what the right word is. It's not that high, is it more because it’s just a corporate—a corporate initiative. How are you seeing sustainability either become a more important priority or not? There was a bunch of people, I think, on the list that really didn't have sustainability goals per se. How do you see sustainability objectives playing out?

Julie Whelan:
Yeah, well, it's a challenge or an objective depending on what side of the table you're on, I guess. But sustainability is another interesting one, and it's one that I feel has lost a little bit of momentum in terms of the way that we're talking about it. But that doesn't take away the fact that many organizations still have net zero targets that they are approaching very quickly, at least by, you know, many by 2030. And then you have some 2040 and then still some 2050. But they are in the horizon where organizations need to think about this. And at the same time, as you said, there are regulations and rules that are changing in municipalities all over the United States that are making this very, very real. And so it does change from largest organizations to smallest organizations and whether you are landlord or an occupier. But I would argue that most landlords, just for their own regulation and protection, need to start moving in this direction if they're not already, and certainly the ones that want to capture those large credit tenants that have these net zero goals need to do it, because it is a differentiator in terms of how your building is quote unquote “graded.” Because there's a lot of Grade A buildings out there. Not all of them have sustainability features, but the best prime buildings absolutely do. And those are going to be the ones that have the greatest demand. By the best and the largest tenants that need a landlord partner to go on that journey with them on the sustainability and net zero target journey. So there are multiple reasons to really continue to move in this direction. But from my perspective, I do feel like the narrative in the market has pulled back a little bit, but that doesn't mean that it's any less important.

Jeff Frick:    
Tangential question, but you're sitting there in a big company. Do you see any movement, acceleration in conversions of those buildings that just aren't making the grade post something like Local Law 97? And I know it's not your area of expertise per se or this report, but CBRE is involved in all types of real estate. So are you seeing, you know, is there a path forward for some of these places that just don't make the grade as a Class A office space anymore?

Julie Whelan:  
Yes. So we actually do a lot of work on conversions. Twice a year we collect around the United States what is being converted, and it is still a very small amount of inventory that's being converted—just under 2%, which is not going to be enough to move the dial in terms of any of these challenges, whether it be vacancy or sustainability issues or the need for more housing. However, the good news is that it has increased over the last few years because the need is so great. The issue is that we are in a bit of a traffic jam from a capital markets perspective, where a lot of building values have not reset yet. There's been a lot of deals made between lenders and current owners kicking the can down the road. And now we're starting to get into the period, and at least there's a sentiment out there that as interest rates start to come down and there's more stability in the market, we're going to start to see more of this price discovery in the market, which is going to allow building values to be reset. In order for a building to be converted and still make it fruitful for the developer who's going to take on the risk to convert that, it needs to be at a certain basis. The beauty of it is that when it does get converted, it usually is going to get converted to its highest and best use, because those that are doing the conversions typically know that. And they're going to, you know, make sure that happens to get the biggest return themselves. And in that process, they're going to bring it up to the standard that it needs to be from a sustainability perspective. Because many of the lowest class buildings and the oldest buildings have systems in place that just cannot be upgraded in their current form. They have to be scrapped and new systems have to be put in.

Jeff Frick:    
Wow, okay, so biggest surprise on this? I mean, you've got the great benefit of this kind of longitudinal data, which is so, so powerful, you know, beyond the data that you're collecting. But now you get trends, and what was some of your biggest surprises this year? And next summer when we catch up, what do you see as... that you see just little peeks, little hints, little touches of something that maybe is below the radar, that's going to be a more significant portion of our conversation a year from now?

Julie Whelan:  
The shift in sentiment around downsizing. I did expect that there was going to be a moderation, but I didn't expect that there was going to be such a pullback. And then I certainly didn't expect that that was going to come in tandem with the Q2 numbers that we saw. We are very careful to say one survey in one quarter does not make a trend, but it's certainly something that has sparked our interest and that we're going to continue to stay very close to.  And I believe that as long as the economy, knock on wood, stays on stable footing, that we will be having a much more clear conversation next year that this is, in fact, a trend. Now, that does not mean that I think that we're going to quickly get back to the vacancy levels that we saw before the pandemic. However, I do think that it means that we're going to get more comfort in the office market, which is going to allow for more capital markets transaction activity, more resetting of values, which is going to bring more tenants to the market because they're going to feel like they're then able to achieve better deals from that landlord that now has a better basis. And there's just going to be a lot that is unlocked in the market because all of a sudden, things are starting to move in the right direction. If the economy falters and we do not have that path forward, then we'll probably be having a very difficult conversation next year. That made us feel that we were taking a few steps back, but let's hope that we are not there.

Jeff Frick:    
Yeah. So I mean, this whole kind of recap on the stuff that needs to be recapped. On one hand, you think, oh my gosh, it’s going to come as a big wave all at one time. On the other hand, you know, we do see these headline grabbing stories every now and then about such and such a building that sold for this two years ago. That sold for this today. I mean, do you think we're kind of working through that? Is it like a cliff that's overhanging, or do we have enough activity where it can be kind of, built in to the day-to-day activities? And it's not going to be this momentous, kind of event, you know, a calendar day event?

Julie Whelan:  
Yeah. So I think that the narrative has been that that cliff is coming, and it's going to be a really scary time for real estate. And we believe that there are challenges out there, but we have never believed in that cliff mentality where all of a sudden, overnight we're going to see, you know, the commercial real estate markets implode. The reason for that is because fundamentals are relatively good across commercial real estate, notwithstanding office. But even in office, there is a huge bifurcation in the market. And depending on your city, your location within that city, and the type of building that you are, there are some that are still renting for historical high rents based on, you know, the history of what we've tracked. So that is hard for some people to understand. But generally, fundamentals are good, understanding there is a portion of space that is absolutely struggling. So for many reasons, we do believe that, you know, things are going to slowly work their way out. Office is becoming thought of as a more investable asset right now. There are many that are indicating to us that they're actually interested now in investing in what they call generational deals that might be out there. And along with that sentiment, there is a lot of dry powder that is looking to be invested. So all those factors between fundamentals, people that are now interested in office, and also the capital that is out there to be invested, lead us to believe that although there will be pain for certain parties in this equation, overall at a national level, we should work this out over time in as least painful a way as possible.

Jeff Frick:  
Yeah, and all those aggressive Fed moves up seemed to have settled down, maybe even going back the other direction.

Julie Whelan:  
Hopefully.

Jeff Frick:  
You've talked about the six critical elements for cities and really how important, you know, the cities are in the health of the office. Because kind of back to what you said, it's about the whole neighborhood. It's about the entire ecosystem that you sit in it, right?

Julie Whelan:  
That's exactly it. And the difference, I think though, is that location, location, location still holds true. But what we mean by location, location, location is changing. Central business districts, financial districts used to be just fine because you had that commuter population coming in at least four and a half days a week, and now that has really changed. And so what we mean by location, location, location now is those vibrant mixed-use districts are more important than ever. And we're tracking them very closely. We have a methodology to track them. And our hope is that over the next decade, cities change to have more of those vibrant mixed-use districts, which is ultimately for the office space that’s in them going to be a rising tide.

Jeff Frick:  
Great. Well, Julie, thank you again for the update. I appreciate it. I look forward to our annual get-togethers, and it's a whole different world than when we started this a couple of years ago. As the Covid kind of fades in the rearview mirror and we kind of get back on more normal footing—whatever normal footing means in 2024.

Julie Whelan:  
Thank goodness.

Jeff Frick:  
All right, so she's Julie, I'm Jeff, you're watching *Work 20XX.* Thanks for watching, thanks for listening on the podcast. We'll see you next time. Take care.

Cold Close:
Awesome. Thank you.
All right. Awesome.
You're easy to talk to, as always.
Thank you.

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English Transcript
Julie Whelan v3: Sentiment Shift, Location, Vibrancy | Work 20XX podcast with Jeff Frick Ep31

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