Todd Kellenberger, REIT client portfolio manager at Principal Global Investors, has, like everyone in the commercial real estate industry, had to adjust to doing business during the age of COVID-19. REITs haven’t been spared COVID’s impact, after all.
Kellenberger recently spoke with Midwest Real Estate News about the changes hitting the commercial real estate market and REITs during the pandemic.
Here is some of what he had to say:
Let’s look at the office market first. Obviously, plenty of people are working from home these days. How long do you think we’ll see people still working from home offices?
Todd Kellenberger: I think we’ll see people working from home in industries in which you can replicate in a very easy way the work you do in the office from a home office. You’ll likely see people working from home for a longer time in the financial services industries, for example. You can be very productive while working from home in the financial services industry.
Some of the denser urban areas, places like San Francisco or Manhattan, that cater to those financial services businesses will be impacted the most by work-from-home decisions. Those are markets that tend to be costly. Employers and tenants can look at this as an opportunity from a cost-savings perspective. They might have a greater willingness to adopt a work-from-home type of viewpoint.
We’ve been hearing about a slow move toward the suburbs when it comes to renters and multifamily housing. Do you think companies that were making the move to urban areas might instead choose to remain in or open offices in the suburbs now?
Kellenberger: We have seen some migration changes. Companies might move from more expensive markets to suburban markets to cut down on their expenses. This will also impact apartment and retail, too. Some of the companies making the move to denser, urban areas were doing this because that’s where the talent was. If you now find a greater preference for more spacious living areas in the suburbs, companies might find benefits to relocating their offices to the suburbs, too.
We would expect to see a fairly gradual progression if this happens. This wouldn’t play out in an immediate way. Not every employer or tenant will make the same decisions on how to handle this.
In what other ways do you expect the office market to change after this pandemic?
Kellenberger: I think we’ll see a future where employees will feel more empowered. They can choose where to get their work done. Employers are likely to give them that decision-making ability. There might be days where employees find that they can get their work done from their homes. But there might be other days with certain types of work that they need to go into the office.
That head-down work is sometimes best performed at home because there aren’t the distractions of other employees around you. Office space might be used more often on the collaborative work.
There are some real estate sectors that are seeing an increase in demand during the pandemic, including data centers. Why has the data center side of the business been so active today? Kellenberger: Data centers are now the largest U.S. public REIT sector. What we are seeing now is just an acceleration of changes that were already underway. Data consumption trends are changing. There is a large demand for the build-out of IT infrastructure. Social media. Cloud storage. The demand for data is only accelerating with COVID-19. The potential increase in the work-from-home type of dynamic only increases the need to build out an infrastructure. We need that greater connectivity and stronger networks for businesses to be able to handle that demand.
The demand for ecommerce has increased, too. We are seeing more online shopping. More business is being performed online. That has led to an increased demand for well-located data center facilities to meet those connection needs, too. The market believes that this trend will only increase.
It’s not just the present, then, but the future that looks strong for data centers?
Kellenberger: Contrast what we are seeing with data centers with what we are seeing with many of the other real estate types. There are so many industries thinking about how bad things might get. Who is going to have a shallower downturn or face less of a headwind? That is not the case for data centers. That stands out. That is why we are seeing such a tremendous performance from data center REITs. The market has gravitated to this.
These are obviously challenging times. Do you see any signs of hope out there in the REIT world?
Kellenberger: I think there is a level of optimism out there. Over the course of time as economies recover, people will still want to invest in REITs. As we move past this life with COVID-19 that we are experiencing now, there will be a natural recovery in real estate. That will bode well for REITs. It is a matter of when that occurs. The macro conditions are going to continue to be dependent on what is happening with COVID-19. There is an optimism out there that we will move past this pandemic. When that occurs, we will see a REIT market that is healthy and strong.