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Spencer Levy
I'm Spencer Levy and this is The Weekly Take. This program is a very big deal. We've got a major player in the real estate business and a milestone for our show. On this episode, a business trip and our first ever in-person conversation. We visit the New York City headquarters of Brookfield Properties for a face-to-face with leaders of a company that's at the forefront of real estate return.
Brian Kingston
We started bringing people back last summer. We thought was important as a large office landlord that we sort of led by example.
Spencer Levy
That's Brian Kingston, managing partner and chief executive officer of Brookfield’s Real Estate Group and Brookfield Property Partners. Overall, the firm is the largest office owner and investor in New York and one of the biggest in the world.
Ben Brown
Now what we're thinking about and what we're talking to our tenants about is less so about the safety around health and more about the experience and what's it like when it gets back. And I'd say, fortunately, we've had a year to run a lot of those traps and have a lot of lessons learned.
Spencer Levy
And that's Ben Brown, a managing director who heads Brookfield's U.S. Office Real Estate Group. We'll talk about the world's return to the workplace after the pandemic, how things have changed both within their own company and in the world at large. We'll focus on the recovery and look to the future of office across asset types and with a wider view on the industry. Quite a view it is from Brookfield Spectacular office high above the Hudson River.
Coming up, we take the show on the road for a visit to the headquarters of one of the most influential and important investors in real estate. That's right now on The Weekly Take.
Welcome to The Weekly Take with our friends from Brookfield starting with Brian Kingston, the managing partner and CEO of Real Estate from Brookfield. Brian, thanks for joining us.
Brian Kingston
Thanks for having us.
Spencer Levy
And then Ben Brown, head of U.S. office. Ben, thanks for joining us.
Ben Brown
Thanks, Spencer.
Spencer Levy
Well, this is an exciting day for us. Let me set the scene when I walked into the office here today. It is buzzing. There are a lot of people here and they all seem to be not just productive, but happy. And I just stood up a second ago and I saw the Statue of Liberty. I mean it is not only great to see this place hopping, but it's also great to see such a beautiful office, beautiful view. So before we go into the specifics about real estate, I just want to know: How do you feel to be back in the office, Brian?
Brian Kingston
Well we've been back for a long time actually. Actually, for Ben, it's over a year now. I think that we've been in the office. But, you know, we started bringing people back last summer. We thought it was important as a large office landlord that we sort of led by example and showed the tenants, et cetera, they could come back in the office safely. So, you know, we started bringing people back in the summer and by about Labor Day or so of last year, we were probably at about 75-80 percent of normal with the remaining people having some sort of underlying health condition or something like that that kept them away from the office. So it's been—here in our little bubble—it's been life as usual since really the last Labor Day.
Spencer Levy
Really. Ben, how do you feel?
Ben Brown
Yeah, you know, it's surprising to sit back and say it's been a year because it's gone by quickly and we take for granted sometimes, we come in every day and we're back to normal life and the rest of the world is just embarking on that return.
Brian Kingston
You can tell none of us have covered beards or long hair or anything like that.
Ben Brown
No one gets a haircut. But the interesting thing that I would say is, you know, when this happened, so we're obviously a landlord, but we're also a big employer. So we were going through the same thought process of any other company on, you know, what do we do? How do we bring people back? How do we bring our employees back? How do we do it safely?
And it's interesting where we spent the first couple of months thinking about health and what was happening with the with the virus and so forth. And I'd say now what we're thinking about and what we're talking to our tenants about is less so about the safety around health and more about the experience and what's it like when it gets back. And I'd say, fortunately, we've had a year to run a lot of those traps and have a lot of lessons learned. So a lot of the conversations we're having with our clients and our tenants are informed by, you know, us being back and having most of our people back. And so it feels good, but it at least feels like we have the transparency that we're trying to give some folks so they can leverage what we've done and what we've learned over the last year.
Spencer Levy
Well, I like the way you framed it, health plus experience of coming back.
Brian Kingston
So what you're seeing is the product of 12 months of hard work. You know, we put a lot of thought and energy into how to safely bring people back to the office, not only for their personal safety, but also in a way that they felt safe and comfortable in coming back to the office.
And I think the experience in talking to our people is they're happier for it. They come back with a little bit of trepidation at first until they get into the office. And then, you know, once they're here for a day or two, they realize how much more productive they are, just being in the office and being around their colleagues, talking to people that you don't necessarily see on purpose, but you bump into them at the coffee machine. And that's where a lot of that collaboration and that culture gets built. And so, you know, it's a hugely important part of the of the journey.
Ben Brown
I agree. The thing that probably surprised me the most—look, we as a organization brought people back much sooner than average. But we were truly out of the office for 60 days. But 60 days felt like a really long time when you go to the office every single day.
Like we talked about earlier, I think those are the things that we're trying to have those lessons learned for a lot of our occupier clients who so they can take those, understand that and educate their employees when they're coming back. Because a lot of it's a comfort level and it's sort of like ripping the Band-Aid. And once you rip the Band-Aid and you sort of jump into the deep end, you know, the pool's not as serious as you thought it was when you were standing there looking at it.
Spencer Levy
When the CDC changed their policy on mask wearing, it changed the way a lot of people were thinking about how quickly they were going to go back to the office—vaccination. How have you guys been dealing with that Brian?
Brian Kingston
When we first returned to the office, there was no vaccine even on the horizon. The vaccine started to roll out in February and we saw cases coming down and generally people getting more comfortable coming back. And so as part of our regular check in, we've had people upload their vaccine cards as they've been vaccinated.
And so we know that within our own population here in the office today, 85 percent of our people have had at least one dose of the vaccine. And by the end of this month, the full 85 percent should be fully vaccinated, which obviously gives us a lot more confidence to start to relax some of these other safety measures that we put in place, whether that's, you know, capacity in meeting rooms, et cetera. So, again, if you are a tenant coming back today and you were starting from that situation, you probably wouldn't have to go through a lot of the learnings that we did.
Spencer Levy
Ben, from your perspective, are you using your learnings as a company at Brookfield and passing along to you?
Ben Brown
Yeah, every discussion we're having, we're constantly checking in and understanding, you know, return timelines. And frankly, the last, you know, I'd say 14 days, we've seen a marked change across the country, every single one of our markets with tenants telling us what their initial return date will be, what their full return date will be, and then engaging in those conversations on, “OK, what is it like? What have you done?” We start to walk them through all of these things. “This is what we did. This is what we've now taken down. This is what you can do.”
Spencer Levy
Brian you have assets all over the world and the whole situation isn't the same all over the world. So how do you deal with that difference being in New York versus one of your other markets?
Brian Kingston
I'd say first and foremost, throughout the world, we're following local—whatever the local guidelines are. We've got a big business in Australia, for example. It's been a very different experience down there for them. You know, they had an initial flash, but really, it's been business as usual throughout the country for the last 12 months other than you can't get in or get out of the island. But down there, it's a very different situation than, say, we have in India where, you know, many of our people right now are at home, under stay-at-home orders. And so, you know, in that case, the offices are closed. It’s case by case around the world. And it was really varied based on where the particular country or particular location is with respect to the disease.
Ben Brown
The biggest pain points, and this is an answer around major gateway urban markets will likely be transportation. And most of these cities, specifically New York, they're just not set up for the infrastructure to allow, you know, a substitute of vehicular transportation as the solution. And so I think it's incumbent upon a lot of these places to make sure public transit is safe and efficient. And I know I met Brian up in Manhattan West this morning. He just got off the subway and said it was empty. And you probably would say it was probably clean, felt safe, and you didn't have to wait and you got a seat. And so, you know, I think a lot of it triangulates around transportation and feeling comfortable on that.
But I think cities are working really hard to do that. You know, I think when most people return with the vaccination rates on where they are, the comfort level with social distancing and masks and all these things that we're getting used to, and I think that's going to be sort of a quick, distant memory. And I think it's going to be more about what am I experiencing when I'm at the office.
So I've now learned for the last year I can do components of my job elsewhere. That's from my, you know, kitchen table or weekend house or whatever it is. I can do some of that. So when I come to the office, I want to know what's the differentiated experience I'm going to have. And so I think a lot of—I think companies but landlords are going to think about, well, what does that mean? Like what do you have when you come to the office and say, we're fortunate with a lot of the assets that we own? You know, there's a lot of the mixture of the fabric of those amenities and all those things that make a day a great day when you're coming to work, not just to work, but, you know, to what we all talk about, live, work and play—all of that. We have a lot of that. So we're fortunate there.
But it's like how do we optimize those components to make it a much better experience when you do come back versus the alternative, which is remote on the video at your kitchen table, et cetera, which will be some component of it. But you've got to make that experience really special when you're coming back. I think they'll just be a bigger focus on that now.
Spencer Levy
Well, that phrase differentiated experience keeps coming up in this podcast. Brian why don’t we turn to you on that one. How has your point of view on the differentiated experience changed not just in the short term, but maybe long term about what people expect from the office?
Brian Kingston
This was happening long before COVID. And I think covid just sort of highlighted and was talking about, which is, look, there are certain commodity stuff you can do in the like sitting on your desk and reading something or, you know, just typing numbers into a spreadsheet that you can do from anywhere in the world. And so we don't need to be in an office necessarily to be doing that.
On the other hand, there's this huge other part of our business and probably most of your listeners’ business where it's this apprenticeship in a way of working where, you know, older, more senior people are sort of imparting their wisdom on the younger people by learning on the job where they're working together and they're collaborating or they're coming up with creativity. And that's a bit we've all been missing for the last year.
That has been, you know, right at the forefront of what we've been doing with our mixed-use developments long before covid. Now we didn't we didn't predict where any of this was going. But things like Manhattan West, where, you know, you've got it, it's located in an area where lots of people want to live. There's lots of entertainment and dining amenities around nearby. There's hotel, there's this whole mixed-use environment. And it really creates this atmosphere where, you know, people want to come down and they want to collaborate and they want to be there.
They're not just there to input numbers into a spreadsheet and catch the 5:30 express home that has started a long time ago and continue. So I don't think it's changed anything. I think it's certainly accelerated people's thinking around the importance of that, though.
Spencer Levy
When we talk about amenities, I often quote one of my great friends and colleagues, Mary Ann Tighe, when she talks about what is the best amenity in Manhattan and you know what she says? Manhattan.
But at the same time, you can create a mini Manhattan of sorts with this live-work-play type of environment. I'm talking about outdoor amenities and other things. So what are some of these amenities? If we could go into that a little bit further, Ben, that you were trying to put into use some of your new buildings?
Ben Brown
I couldn't agree more with that phrase. And I think that is the answer to the question, which is what makes what makes Manhattan great is Manhattan, which is culture right? It’s experiences and it’s food and beverage and it’s entertainment. And it's, you know, it’s beautiful built-world and public realm and places to go for a run and go for a bike ride and experience different things. That's Manhattan in a nutshell.
And so I think you try to weave each of those things into a project when we're thinking about repositioning a project or we're thinking about developing, you know, brand new ground up. And it's all of those things at a different scale.
Spencer Levy
Let's go a little bit deeper into Manhattan for a moment, because I think it's fair to say that there's some people who are said, “Oh, big city is not coming back. People are going to live out in the suburbs. They're going to go to move. Everybody's moving to Austin, Texas and Nashville.” What do you say to those people, Brian?
Brian Kingston
We obviously don't subscribe to that. And I do think there was a period of time where all of the great things about Manhattan ceased to exist or didn't exist in the same way. So Broadway was closed. The restaurants were all closed.
I think now that New York's reopening—and you just need to look outside right now—people are back. You know, our multi-family portfolio here in the city went from pre-COVID occupancy levels in the high 90s, got down as low as 78 percent, which is the lowest it's it sort of ever been. We're back in the 90s. It's sort of 96, 97 percent occupied. Incentives have gone away. Rents are actually going up.
So people are piling back into the city. And I think it doesn't mean that people aren't moving to Austin. And obviously there's companies that are opening up headquarters down there. But, you know, just the scale of Manhattan and there's just no way that Manhattan disperses into these other places. So, you know, I think for all the reasons that Ben said, this is a great city. San Francisco is a fantastic city. People love living here, young people coming out of college—this is where they want to be, this is where they want to start their career. And if you've got a company like Google or Facebook and those are the people you're trying to attract to work for you, you've got to go where they want to live.
Spencer Levy
So to quote the great philosopher L.L. Cool J. who said, “Don't call it a comeback because I've been here for years.” I think that's what describes Manhattan. Wouldn't you agree with that?
Ben Brown
Yeah, that's the second quote I would subscribe to definitely. You know, because today—look, we have this debate constantly, right? Every we're investing across, you know, pretty much every major city you could think of in the U.S. and we're constantly comparing and contrasting and trying not to be biased by obviously what we already own or what may be good or not good for existing investments. And I would—I'd say two things I'd say. One is I think both can be true—like I think Miami and Nashville and Austin and places like that can thrive and New York can thrive like I don't think it's a zero-sum game.
And when you think about the scale, as Brian said, you're talking about a city of a half million people relative to some of these cities of 400,000, 600,000, 700,000 people, which are big cities in their own right. But they're not exactly cities where they're going to have, again, the talent pool, the infrastructure and frankly, the professional opportunities that New York all of a sudden, you know, everyone decamps to the beaches in Miami. And as we joke, you know, no one wants to be in Miami in July and August. So we'll see a lot of those people come back.
But the second thing that I would say is, you know, I hadn't been on a plane for a year and I got around to most of our offices over the past couple of weeks. And being in San Francisco and being in Chicago and being in L.A. and being in Houston, you start to remember, like, these are great cities and they're great cities for a reason. And we even urbanizing for a couple of hundred years. That's not changing because of the last year. But that doesn't mean that some of these emerging cities won't be great cities and in 10 years, we're talking about those as phenomenal world-class cities as well.
Brian Kingston
Yeah, I mean, it's like we're talking about with amenities. This was this was already happening pre-COVID. Like Austin was becoming a, you know, a pretty interesting dynamic market long before COVID and that will continue. You know, Miami has continued to grow and with its proximity to South America and all of that stuff—like those are all great advantages for them. I think the last year has maybe pushed a few people to move there quicker than they might have otherwise. But also New York and San Francisco remain, you know, sort of the centers of commerce in this country.
Spencer Levy
Let's talk about one more Manhattan thing that will move on—the advantages of scale. You are the largest landlord in the city of New York, about 60 million square feet. And so what are the advantages of being basically a significant portion of a 450 million square foot market?
Ben Brown
Yeah, look, I think I think it's as simple as our competitive advantage as a landlord is information. And so we get more information than any other landlord in the market. Whether that's, you know, we have five million feet in Brooklyn, we are the largest landlord in lower Manhattan, we have assets scattered throughout Midtown on the far west side in the Plaza District. So we are making decisions every single day, whether it's a leasing transaction, it's an asset management decision or frankly, a development decision with more data points than most.
So that's got to be an advantage. And then how do we synthesize that and how do we build conviction around that, you know, that's ultimately what we get paid for, but it's having all that access to information.
And then I would tie it to scale generally, where I always say when we think about our office business, we tend to be the landlord to most major, large, major corporations, right? Whether those are technology companies, other financial service firms or law firms. That is true in a single market like New York where we are having relationships with those large tenants all around the world, whetherit's in Sydney or it's in London or it's in New York. And having that scale in New York and that diversity of product I think is a big competitive advantage. I think it's information, but then it's also a relationship with our end customers and having theasset base that can optimize the outcomes there.
Spencer Levy
Let's go back to these big multinationals for just a moment, because they're going through COVID, too, as an occupier. And they're saying, “Gee, do I need all this office space? What do I do to make myself more flexible, including flex space, including different lease terms?” What kind of conversations are you having? How are you responding to these types of questions?
Ben Brown
I'll make one comment, which is I am so relieved after a year to realize that most of our tenants just haven't done anything. And I'll explain what I mean by that. But at the start of this, I was
concerned that they would all knee jerk and make big, massive changes on space design—how do they work? what does work look like?
And while they haven't answered most of those questions, I think it's a good thing because clearly, as we started this conversation, we've evolved so much from where we were in May of last year to where we are today. And so those thoughts and the implications on what that means has changed so much that I'm glad they haven't made, you know, for lack of a better term, some mistakes around what that looks like.
And so, you know, look, I would tell you that flexibility was a discussion we were having well before COVID, right? Flexibility was every company now with, you know, the emergence of technology is a big part of their business is changing so much quickerthan they had ever changed before. And if you talk to an H.R. person or you know, you know, the Chief People Officer at any company, they have projections on what the five-year headcount looks like. But they know that they're wrong, right?
And so how do you plan and set aside five-, you know, 10-, 15-, 20-year commitments with such a, you know, sort of fluid headcount when you're thinking about people? And so flexibility was there.
So, yes, will COVID drive more flexibility? Probably. But what it'll really drive is probably more indecision and some of the short-term decision making that we're seeing. And look, I think our view on this is it would behoove you today to actually make a long-term commitment if you are a really sophisticated tenant. I think some that will do it early and look back and say, well, you know, we bought on sale. And I think what we'll end up seeing is if you took the bet on does the economy feel better five years from now than it does today and your answer was yes to that, you probably in five years with a short term renewal will be sitting there going, man, I really had a buying opportunity.
So, you know, but I think a lot of large companies will pay for that flexibility. And so we're startingto see that. And so I think as a landlord, you can capitalize on that. And as long as you can sort of understand that and the capital markets start to come around to it, I don't think it is as material as we may think. And I think when people get back into the office, they’ll understand, I really need some stability in my business. And so I actually do need long-term commitments and I do need space that I know I can have for the next 10, 15 years. And it's all the stuff around the edges that US landlords will have to be flexible with.
But I think there is a marriage value there. I don't think it all goes out the door and says, you know, tenants need flexibility and landlords lose value. I think there's a way where that calculus can sort of be one plus one equals three.
Spencer Levy
Recognizing this is primarily an office discussion, we do have to talk a little bit about retail. And I will just say when I was a young kid in the business, I used to come to this very building to go because it was super cool—the palm trees, the whole deal. This place was a forward-thinking building, Brookfield Place. And I'm sure is today and will continue to be. But I think it's also fair to say that retail is probably behind office in terms of its comeback, in terms of how it's changing. We would like to get your point of view, Bryan.
Brian Kingston
Yeah, I don't know if that's true. Again, trends that were afoot prior to COVID have continued on. Soclearly, you know, there was a move for, you know, some commodity retail to move on to the Internet. And this is a space that Amazon has sort of owned. Obviously over the last year with everything shut down, there is a massive amount of adoption of peoplethat maybe didn't ever think they would try buying groceries online or some of these other things. So that's changing.
But I think for the strongest retailers—and I actually just read this morning that Arnault at LVMH is now the richest man in the world—clearly, some retailers are thriving in this environment. And I think it's the same ideas what we're describing with office, which is for those retailers—or for the retail real estate—that's creating a reason for people to want to go there. It will continue to thrive and excel in the future. And so that is, you know, either having a product that you really need to come and see and touch or a sales experience around that or a shopping center that brings you in and gives you experiences you can't just replicate online—entertainment, food and beverage, you know, this real sense of community, et cetera. You know, I think that retail continues to thrive.
Do we have too many square feet of retail in the United States for the amount of sales that are happening? Probably. And that'll continue to change. And that was already happening, right? And so some of those older shopping centers that haven't either evolved in that way or that they have competition, they will continue to suffer. But I think for the really high-quality retail centers and the really high-quality retailers, the future is really strong. For most of our shopping centers today, foot traffic is back 80 to 85 percent of normal, sales are largely back where they were or pretty close toa pre-pandemic.
And that's why I say I'm not sure I quite agree with your statement, because the reality is our office buildings, we're still trying to get people to come back into them. The malls, they're back.
SpencerLevy
From the standpoint of Brookfield, let's talk about your company for just a moment. First of all, you're a Canadian based company and you have multiple capital bases, not just the publicly traded, but you also have private funds. Let'stalk about that. But also it's been in the papers that you're looking
at a potential privatization. So I'd like to hear about your capital base today and how the privatization might help you in the future.
Brian Kingston
You know, look, I think like any other real-estate company, it's all about access to capital. And we try to make sure that we've got multiple avenues to capital, whether that's through publicly listed vehicles or private funds. And within those private funds, there's a whole suite of different products—everything from debt to core plus or value add or opportunistic.
And so depending on where certain investor appetite is, we want to make sure that we've got a product that helps to address all that. And sothat's you know, that really is our business is sort of trying to find that lowest cost capital and then put it to work into assets and leverage off of the operating platforms that we've built to earn great returns for them.
In the case of the public vehicle, Brookfield Property Partners, it was not trading at a at a price that reflected the value the underlying real estate, which made it difficult to raise capital in the public markets. And so we just saw there was an opportunity for us to take it private, reconstitute it a little bit, you know, probably put that real estate into more efficient hands, you know, that was better able to understand it.
The problem with Brookfield Property Partners was it was just too many—too much for everybody to focus on because it was a number of different asset classes that included development. It was in a lot of different countries and just wasn't well suited for public markets. Whereas our, you know, our fund investors are able to look at individual ones.
Spencer Levy
Let's talk for a moment about a topic that I keep talking about on every one of my calls is ESG environmental social governance. And some investors have added an R, “resilience.” Solet's talk first with you, Ben. How often is this coming up in your conversations with occupiers? How are you addressing it?
Ben Brown
Yeah, it's definitely on the top—it's definitely on the top of the list now. And what's interesting is it's on the top of the list. But I think people are getting educated on what they really mean when they say ESG. They'll tell you from a corporate perspective, it's very important. And so a lot of these conversations are, I'd say, fluid and changing over time. But it's definitely on the top of everybody's list. Right. And I think it will continue to be and I think it will be no longer a check in the box.
But I think one of the people at the table making the decision around real estate will be someone that's responsible for, you know, ESG and whatever that definition is for that occupier. So it's important. It's coming out more and more. And I think at some point it'll start to institutionalize, and we'll really be
able to react to what the occupiers are looking for from an ESG perspective because we have a ton of EU policies and programs as a company ourselves, and that could frankly be different than the occupier we're talking to. And what they're looking for from an ESG perspective.
Spencer Levy
What I find most interesting is that it's evolving, right? I think it’s certainly different in Europe than it is here in the States. So, Brian, how do you keep tabs of that when a European investor might have adifferent point of view than an American?
Brian Kingston
I think it's a unique perspective that our business brings, because it's not you know, it's not just Ben and I sitting here in New York running a European business fromhere. We have real operating businesses that are on the ground. And, you know, just like we're front and center on shaping some of that policy here in the U.S., our teams in Europe are leading best practices over there as well.
And frankly, it goesmuch broader than just our real estate business, but into our infrastructure and private equity and renewable power generation businesses as well. So, you know, the scale, as we talked about earlier, of our business from a capital perspective certainly helps with transactions.
But from a people perspective across our various operating platforms including real estate—we have 120,000 people around the world with real operating platforms in all of these markets. And so I think it is—absolutely it'll differ, you know, in Asia versus Europe versus North America. But I think, you know, having real businesses on the ground kind of helps us stay front and center and all those things.
Spencer Levy
Well, Brian, you might have cringed when I said the most important piece of infrastructure—your own two feet. Because I believe you used to run the infrastructure group right here at Brookfield. But I would love to know your point of view on infrastructure versus real estate.
Brian Kingston
Yeah. So to be clear, I ran it in Australia. But look, they are very—at first when we describe our business to people, they say, well, it's a really broad range of different businesses and it's sort of a an unusual concentration. But the reality is, I think what's happened over the last 10 years, and particularly with a lot of our clients, is those two businesses have become much more closely linked.
Because if you if you sort of step back and think about what does it mean to invest in real estate or in infrastructure, it's a massive upfront capital commitment. You're generally entering into long term contractual arrangements with a tenant or a government that that pays you financing. And then it's really about maintaining that asset and continuing to grow the cash flows. And so we could be talking about real estate or infrastructure. Our investment approach to both is exactly the same. The tenants
are a little bit different. The basic principles are the building blocks of what we're doing are the same.
Spencer Levy
Ben, I got to ask you a Boston question. Since you're a Northeastern grad in New York. I know this is maybe blasphemy, but New York versus Boston. Boston seems to have the reputation for Cambridge and life sciences. But then again, you have 60 million square feet here in New York and the entire CBD of Boston is 60 million. How would you compare and contrast the two cities from an investment standpoint?
Ben Brown
I will say I'm biased. I do love Boston. I think it's a phenomenal city, although I just gave New York all that praise. So I won't say it's definitely not better, but it ranks highly. Look, here's what's interesting. Boston is a city of neighborhoods. So when you talk about the scale of Boston, it's exactly that.
From an office perspective, traditionally you have financial district and Back Bay, both pretty small, like you could walk in an hour from one end to the other. Then you have the emergence of the Seaport, which is new, and you sort of have this collection of neighborhoods, you know, and you then you have a pretty institutional what I'd call like inner suburban ring—sort of investible office market.
What was interesting about Boston is—and this goes to your life science comment—is it is a city unlike any other in terms of intellectual capital, right? I mean, I think I think it's fair to say, but you're the research guy ... it's got more higher educational institutions, students than any other city in the world.
Spencer Levy
It is true, though, if you were to quote the band, Thisis Spinal Tap, they said that Boston's not really a college town, but that was, you know ...
Ben Brown
OK, that was I beg to differ, but yeah. But like we said, the whole vicious cycle of how real estate decisions are made on the office side ... it's all about the talent and that city has the best and the deepest talent. Now you go to the Bay Area and you can say the same thing about, you know, Stanford and Cal Berkeley and so forth. But in a small market like that in an East Coast market, a pretty parochial town, it's pretty impressive in terms of the talent.
So it's from an investment standpoint, it's a great market. It should be a better office market based on all those fundamentals. It feels like it should be more of a tech town just given MIT and all of the surrounding universities and engineering talent. And I'm not sure it really feels like a tech town when you spend time in Boston, but I think that's it sort of upside. But the great thing it has is it's a
phenomenal quality of life. I wouldn't say it's inexpensive, but I'd say it's a relatively decent cost of living. It's got a little bit of something for everyone. And so for all those factors, I think it's a great place to invest in the logistics. I think it's agreat place on the multifamily side and we'll find our spots on office.
But, you know, we did fortunately have a lot of life sciences there through the Forest City acquisition, which we've now obviously disposed of. But, you know, a market that we’ll continue to look at just given all the obvious fundamentals that should drive that market for the next couple of years in terms of in terms of demand, as long as supply stays intact. So I'm always bullish on Boston.
Spencer Levy
So one of the things you mentioned there Ben was a reinvention when you talk about the Seaport. But you could talk about that in any great city in America. You could talk about the Meatpacking District right here in New York, not a few blocks from here. I used to only go there to a restaurant called Frank's. I'm not even sure if it's still there, but it was really good while it was still there. But I like to look at this from a global perspective, Brian, because I could look at the Fulton market in Chicago. I can look at the Wynwood section of Miami, the L.A. Arts District in L.A. I can go right down list. Are you seeing that same type of reinvention happening globally?
Brian Kingston
Yeah, you could add Canary Wharf to that in London, you know, Xintiandi in Shanghai and in a number of places around the world. So, you know, I do think it's sort of back to the point about what made these cities great. Shanghai has been a great city for hundreds and hundreds of years. San Francisco has been a great city for a couple of hundred years. They continue to be great cities, but the infrastructure and the assets need to be reinvented and certain neighborhoods fall into a lower state of repair and need to be turned back over.
So I think, you know, our Manhattan West development here was, you know, really kick started off that re-gentrification of that area. That's going to be, you know, a central location within New York for the next 25, 30 years. That's the kind ofthing that we're trying to invent around the world.
Spencer Levy
If you are an office occupier, what should you be thinking today? And if you're an office investor, what you should be thinking? Let's start with you.
Ben Brown
Yes. So if I was an office occupier today, you know, I meant what I said before, but I think it's all about experience. And that can be anything from, you know, what your space design is to what location you're in. Like you said, neighborhoods, you know, proximity to transportation. All of those things are so critically important right now because you're going to be in a sales mode to try and
convince people why they need to be back in the office and they should be backin the office and they're productive back in the office. So I think it's a that experience on the occupier side.
On the investor side, you know, part of me loves to trade away from office because I think we're seeing some really fundamental opportunities on the buy side here where, you know, for all intents and purposes, like globally, we’re in a yield-starved environment. And you read article after article about, you know, junk bonds trading at all-time lows and all these other financial instruments for people seeking yield.
And we're buying really, really high-quality office assets with really good underlying credit, which feels really cheap relative to where base rates are. So I think on the investment side, it's sentiment driven andI think that's a good thing for us. I think we tend to swim in the opposite direction. That's where we find opportunities. I think we'll continue to do that. And on the office side, that's probably the busiest.
Spencer Levy
Is your point of view that you're going to see a shift of capital back into all of us and maybe now's the right time to go there?
Ben Brown
I do. I think you will. I think there'll be a window where there's a capital void. I think investors like us will try and take advantage of that. But your point is right, which is cap rates really haven't moved and values probably haven't moved, but rates have moved tremendously and the financing markets have been so supportive that inherently when someone's looking on a levered basis, you should and I know this is you know, this is always a slippery slope, but you should see cap rate compression on the best assets—assets that are high, high quality, high barrier to entry markets with really good credit.
There's no reason why you shouldn't see compression and where yields are today and where they should be going forward, even if the outlook for fundamentals is softer than people anticipate. Because if you're buying a thirteen-and-a-half-year lease, you really shouldn't be impacted by what happens in rent fundamentals in that market over the next 36 months.
Spencer Levy
Ben I'm going to take a wild guess. One or both of you are on your own investment committees here in the company. And I would say that when you try to underwrite a building—I've been saying for years now, now I'm saying it on the record—that people have been underwriting wrong, that they have been putting 50 to 100 basis points on the exit cap and saying, oh, we're conservative. Well, I disagree with that underwriting assumption. I've been right the last 10 years. I think I'm still going to be right. So that being said... an investment committee, it's harder to sell. What do you think, Brian?
Brian Kingston
Yeah, you know, look, I think we've had that same view, I think, for a long time, which is that we are in a very lowinterest rate environment for a long period of time. Will they be exactly where they are right now? Probably not. And as the economy recovers, they'll probably move up a little bit from here. But I do think, you know, anybody who's expecting, you know, yields to move materially higher than here and cap rates to move up higher, you're going to be shocked to the other direction, which is, you know, I think they stay down here.
The bigger question and I think the bigger challenge right now with underwriting is where rents are going and where and that's where I think people are. Like to Ben's point, although there hasn't been a lot of trades, I think the sentiment generally around office has been quite negative and more so than on rates. It's really beenaround where rents are going because I think people are making an incorrect linkage between increased flexibility and less requirement for space. And I don't think the two necessarily follow.
We've had a flexible work arrangement here for 25years, right? Like if you want to take Friday off because you're going away for the weekend or you need more flexibility during the week because you're looking after your kids while your wife or your husband's away like you've been able to do that. It doesn't mean you can now get rid of half the desks because nobody's here on Wednesdays.
Both of these things are going to happen. There will be an increased amount of flexibility. We've all found that you can you know, you can use your phone, you can use your laptop, you can dial into calls from the road, which a lot of us already knew. But I think your point about tenant advice, you know, I wouldn't be using this as a reason that you can certainly shrink your overall footprint. I think what you need to be thinking about is what's important about the office? How do you change the way you're using the office to get those benefits out of your people for the hours that they're in the office? And whether that's three days, four days, five to seven days a week, the important thing is how do you use the office.
Spencer Levy
Well, on that note, I just want to thank our friends from Brookfield. First, Brian Kingston, managing partner, CEO of Real Estate. Brian, thank you for joining us.
Brian Kingston
Thanks, Spencer.
Spencer Levy
And Ben Brown, head of U.S. office from Brookfield. Thank you for joining us on our first live broadcast—well live in the sense that we're live together, but we'll be taped—of The Weekly Take. Thank you for joining us.
Ben Brown
Thank you for having us. Appreciate it.
Spencer Levy
For more on our guests and on our show, as well as other insights into the world of office real estate, check out cbre.com/TheWeeklyTake. You can send feedback and suggestions as well as share our show. So please subscribe, rate and review us wherever you listen. It was fun being on the road. And even though I'm back in the remote world next week, we're already working on more great shows to come. For now, as always, thanks for joining us. I'm Spencer Levy. Be smart, be safe, be well.
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