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Spencer Levy
I'm Spencer Levy and this is The Weekly Take. We thought about replacing our theme song with pomp and circumstance for this show because with graduation season upon us, we're hitting the campus circuit. On this episode, we welcome three accomplished educators, a free ranging seminar on the ABCs of commercial real estate … with a studious eye on everything from campus life to workplace trends, labor, data and more.
Mary Beth McCormick
Intellectually, it’s fascinating. As an investor, it's kind of scary right now. But I know that this means there's opportunity.
Spencer Levy
That's Mary Beth McCormick of the Ohio State University. Mary Beth is a Senior Lecturer in the Fisher School of Business and Executive Director of the Ohio State Center for Real Estate where she brings a wealth of private and public sector experience in real estate, capital markets and corporate governance.
David Hartzell
Student housing is doing well here. Many of our students are holed up in hotels, which have converted to being more long-term residences for the students. And it appears that at least from driving around downtown that the quality of life that a college town enjoys for undergrads and MBAs is in full brace at the moment.
Spencer Levy
And that's David Hartzell, a professor of real estate and finance at the University of North Carolina's Kenan-Flagler School of Business. Dave runs the Woods Center for Real Estate Studies and sits on the board of a unique enterprise, the UNC Real Estate Investment Fund, which is the only student managed private equity fund of its kind.
Brad Bell
I think we've taken a much more employee-centric view—not only in how we study labor, but also I think in organizations themselves.
Spencer Levy
Last but certainly not least, that's Bradford Bell of Cornell University's Industrial and Labor Relations School grads, a professor of strategic human resources and the Academic Director of the Center for Advanced Human Resource Studies. Cornell's ILR school is just about the best place to learn about work, employment and labor—a program that counts among its alumni none other than yours truly. Go big red.
Coming up, it's back to school for a crash course in commercial real estate. That's right now on The Weekly Take.
Welcome to The Weekly Take. So folks, before we get into the specifics of labor and real estate, I just want to give our audience a sense of what's going on on your campus. And so, Mary Beth, if you don't mind, just tell us what your experience has been like at the Ohio State University in the past year.
Mary Beth McCormick
It's been remote. I have not been on campus since March of 2020. I've talked maybe two hundred students remotely. We've had amazing speakers like yourself. But it's definitely been an unusual year.
Spencer Levy
Dave Hartzell, tell us your experience on campus and just generally how it's gone for the past year.
David Hartzell
I've been on campus probably eight times for professional reasons. Every class has been virtual since March 23 last yeara. And as such, you know, it's all from the comforts of my little study at my house here in Chapel Hill.
It's interesting, though, and I question my students, both MBA and undergrad, about where they are. I was surprised to hear the probably 80 to 85 percent of them are actually on campus, even though we are almost fully virtual. We have some hybrid courses, but they're rare and small. And that's both for MBAs and undergrads. So student housing is doing well here. Many of our students are holed up in hotels, which have converted to being more long-term residences for the students. And it appears that at least from driving around downtown, that the quality of life that a college town enjoys for undergrads and MBAs is in full brace at the moment because there are lots of people on the street. There are you know, as things are opening up, life—collegiate life—has gotten back to normal, I would say.
Spencer Levy
Brad would love to get your experience. And then from a labor perspective, is it sustainable to have this work-from-home, dual-work environment?
Brad Bell
That's a great question, Spencer. Just like every university in the spring of last year, Cornell sent students home when the pandemic broke out here in the US. But interestingly, Cornell was maybe one of the few universities that actually brought students back in the fall.
I personally taught in a hybrid model where I had some students in a classroom, I had some on Zoom. And for me I think what I experienced last year here at Cornell, for me is likely going to be the model going forward in terms of work as well. That hybrid model—really figuring out how do we leverage the best of both of these worlds, in person when we need that, but also the benefits of virtual that have been highlighted in terms of reducing travel costs, giving us an opportunity to interact more regularly with colleagues that are far away. So I think you know that's really the model that I think is likely to take hold as opposed to these extremes of people being entirely in the office or entirely remote.
David Hartzell
We are planning to be back to normal in the fall. Of course, we are—our Chancellor said last July, that we would be back to normal and last fall as well. But I think that just given the way that vaccines are going … I don't know whether we will require a vaccine to be on campus … but my expectation, my hope, because it is just a whole lot more fun to be in person and networking and communicating and being with the students than it is to be sort of secluded like this. So that's my hope and I'm very confident that we will be.
Spencer Levy
Mary Beth, you think that you guys will be back to normal in the fall?
Mary Beth McCormick
I don't know what normal is now, Spencer. We hope to be back in person more fully whereas last year 75 percent of the classes were remote. Even though students came to campus or moved back to campus I think to embrace the college life—still 75 percent of the classes were remote. Next year we expect 25 percent at most of the classes to be remote. And so we think there'll be much more activity on campus. I haven't heard about football tickets yet and you and I talk about football sometimes—and so here it is, practically June. Normally I would have known for months where my seats were going to be. And so that's the uncertainty for me. It's kind of an important piece.
Spencer Levy
Well, I know it's important because they're holding back the tickets, because which game are you going to be dotting the eye this year?
Mary Beth McCormick
Now that's my life's dream, Spencer.
Spencer Levy
We’re going to make it happen, Mary Beth, we’re going to make it happen. Professor Bell, Brad Bell, let me harken back to my Cornell School of Industrial and Labor Relations degree from 1992. And I studied labor history for my four years there. So tell us a little about how we study labor or how you study labor at Cornell.
Brad Bell
Yeah, I think you hit the nail on the head, Spencer, with your statement around really understanding the employee, right? I think we've taken a much more employee-centric view—not only in how we study labor, but also O think in organizations themselves, right? In HR today, we talk a lot about the quote unquote, “employee experience.” You know, recognizing that, you know, one-size-fits-all HR practices—whether it's development, whether it's rewards, whether it's flexibility around where and when people work. There's not one practice that's going to fit everyone. So it's really understanding, “How do we make sure that employees, you know, get the work environment tailored to them to allow them to achieve their full potential?”
You know as we look at it, kind of hard labor research today, one of the most popular models out there is the “Ability, Motivation, Opportunity” framework—you know really thinking about do employees have the ability and capabilities to succeed and do their job? Do they have the right motivations, incentives, job design, cetera? And then the opportunity? Are they empowered to get their work done in the best way possible? And so a lot of our work is really kind of focused on how can we shape the work environment and work practices to really facilitate that ability, motivation and opportunity.
Spencer Levy
Mary Beth, given your decades of experience in real estate, how important is this labor issue as it relates to your investment decisions in the real estate space?
Mary Beth McCormick
Oh my goodness, it's key. You cannot separate the people from the real estate, right? Real estate is all about people—whether it's investors or brokers or lenders or employees, the people who are tenants, the people who occupy the real estate. And listening to Brad, it makes me wonder about how this will shake out in corporate America because I am reading and talking with people and some say, “Well, you know, we want to be responsive to our employees needs and flexibility is key.” And then others—I'm sure you're reading the same things I am—are saying everybody's back at work on July 1st or September 1st.
And after a decade or more of seeing corporations move to city centers because that's where young people want to be, that's where they're their most precious resource, the talent is. I wonder what that's going to mean for the corporate model going forward. And then naturally, what does that mean for office demand, which does that mean for retail? How does the shake out for all of the different property types that people invest in? Intellectually it's fascinating. As an investor, it's kind of scary right now. But I know that this means there's opportunity.
Spencer Levy
Brad, let's come back to you. How is the workspace going to change from a labor perspective post COVID in your opinion?
Brad Bell
That's a great question, Spencer. You know, I think if we go back, let's say, 5-10 years, what we've seen is many organizations going to these kind of open-office models, kind of really reconfiguring what the office space looks like. I think now companies are stepping back and thinking, “Well, at least in the near term, that might not be the best setup as we seek to bring employees back in a socially distanced, safe manner.”
But I think beyond just those immediate concerns, I think companies are really thinking about what is going to be the purpose of the office going forward, particularly as employees might be splitting their time across these hybrid work arrangements, working some days at home and some days in the office. And if that's the reality, then companies really have to think about, well, how do we need to set up the office so that when employees are there, they can do what they need to do. And that, I think in most cases is really around collaboration. It's about social interaction. It's about that you know human element of the work. And so I think companies are reconfiguring their spaces to really think about how best to design and facilitate those types of interactions.
David Hartzell
That’s interesting just in terms of perspectives. You know, as that was happening with respect to the coworking and kind of all that stuff, at least down here, we didn't see a tremendous decrease of the amount of total space rented. But it was a shift from the “me space,” right—my cubicle or my office or whatever it was—to more congregate space, the “we space.” You know, whether it was kind of my coffee, coffee cafes or conference rooms or just general open areas like you might see. And, you know, that seems like something that would continue to exist and that trend should continue I think.
Spencer Levy
Mary Beth, a lot of the things that both Dave and Brad mentioned here had nothing to do with the job specific function of creating a widget or whatever it is that you're doing has to do with collaboration, has to do with social interaction, the human element, the purpose of the space. Do those words resonate with you when you're thinking about the bottom-line decision to invest in real estate?
Mary Beth McCormick
Sure, absolutely. Brad, I don't want to put words into your mouth. What I think I heard you say is that the time workers spent alone working on spreadsheets or writing or something is not something they need to do in the office. And maybe people have found that they can be more productive at home.
If that's true, that doesn't bode well for office developers, does it? And as an investor in real estate, I'd be very, very cautious right now. It would be great to see people coming back to Manhattan, but I don't think it's there yet. And so I don't know how long that's really going to take. How long will it take for your favorite restaurants to reopen, if ever? I've had quite a few students move to Manhattan last year for their new jobs. And then they said, why am I paying Manhattan rents if I can't have Manhattan?
So as an investor, I'm very cautious about that. I'm probably more bullish on certain hotels. Retail I'm really interested in. I think I'm feeling much better about local retailers because I think that there's much more of a move to buy local and support each other. I think that's one of the positives that came out of the past year is this feeling of community that we see. And there's nothing like cutting you off entirely from your support system in your community for a year to really make you appreciate them, right? And so the farmer's markets seem to be doing well. The local retailers we have around campus or in downtown Columbus seem to be doing well—I think perhaps better than the malls are doing. You know, a couple of our local malls are really struggling.
David Hartzell
Let me provide just a little culture view. You know, in some sense, the office is a community, right, that where ideas thrive and mentorship thrives and onboarding thrives. And my sense—and this is just a hypothetical— is that, you know, say you're working at an investment bank or say you're working at a manufacturing companies office or whatever, when it feels like there's a critical mass that has gone back to the office, maybe 50, 60, 70 percent and you're the one that's not … I think there could be a big sense of, as my students call it, FOMO, right? Fear of missing out. And I'd be curious, Brad, if you if your research sort of indicates that or is that something that you don't expect to happen?
Brad Bell
It's a great point, Dave. You know, research and the kind of remote teleworking space is just recently really started to consider these what you think of as kind of team aspects or, you know, really kind of environmental pieces, right?
One of the interesting findings is I think early on, people thought, oh, the more that people that are in your work unit are telecommuting like you, the better you'll feel about it, right, and the better it will be for you. And actually, what the research found was the exact opposite. The more people that were doing it, the worse you felt. Why? Because it was no longer a special work arrangement for you. Everybody was now doing it. So those kind of motivational benefits, the fact that I have this idiosyncratic work arrangement—that was gone because it was now just kind of the norm.
And that's one of the things that worries me a bit as we think about the future, where remote work, telework, whatever you want to call it, becomes the norm is are we not going to see some of those motivational benefits? I think the social aspect that you're highlighting and how many of your coworkers are doing it is a really important element, but I'm not sure it's going to be positive or maybe negative.
Spencer Levy
Well, I think this point was summed up by the character Syndrome in the movie The Incredibles—which, of course, I had to watch because I have three young children—who said, “If everybody is special, nobody is special.” And maybe that sums it up a little bit.
So Brad let's stay with you for a because I think it also brings up a much more serious issue as it relates to the HR implications of treating employees differently. And I think this has never been more important than it is today as diversity, equity and inclusion—ESG. These issues are at the forefront of every conversation I'm having today with my largest investors and occupiers. So given your expertise in HR, let's assume for the moment that people are treated differently. Does that open up a very, very dangerous can of worms from an HR perspective?
Brad Bell
I think it absolutely does, and I don't think it's just a hypothetical. We know from the research that employees work remotely do experience some potential drawbacks, one being they don't get promoted as quickly, right? Because they're not top of mind, they're maybe not getting the same types of experiences, assignments as their coworkers that are in the office and are right there in front of their manager. And then I think if we layer on top of that, we might see certain segments of employees choosing to work more often remotely. Maybe it's caretakers, maybe it's lower income employees that want to save that long commute in the city or live more distantly where it's cheaper to live.
I think if we really start laying on top some of these demographics, other personal characteristics on top of people's work choices, I think we really do run the risk of exacerbating or backtracking on some of these DE&I efforts that companies have been so focused on in recent years.
Spencer Levy
So I know a lot of what we're talking about today involves the office space because that's the hottest topic in real estate. But labor really impacts all sectors— including industrial.
And Dave and Mary Beth, in addition to your work at the Ohio State University and University of North Carolina, you’re both on corporate boards and so you have great and diverse experience on different asset types. But let's talk about industrial for just a moment, Mary Beth. How much is labor impacting decisions within industrial about where to buy?
Mary Beth McCormick
Industrial is a broad term, right? Are we talking business distribution centers? Are we talking about, you know, with maybe an average of 25 to 40 thousand square feet tenants? Are we talking about cold storage or data centers? You know all of that gets lumped under the broad heading of industrial. But of course you need labor even if you have a large enough mechanical means of filling orders too. But you need a workforce.
I don't think there's a labor shortage necessarily so much as there is a shortage of proper compensation. So I think if you pay people properly, then they will come. And we've seen this with some restaurants that have gone away from the I say $2.13 plus tips. And, you know, they're offering a solid $15 an hour wage and they seem to have plenty of applicants. So there is some inequity that needs to shake out. But I think it's happening.
Brad Bell
Yeah, I think there's good evidence that certainly employees care about pay. It's an important factor for them. Often when organizations will survey employees, though, they won't say it is because they're trying to, you know, social desirability bias. But it certainly does matter.
At the same time, I think what you're also highlighting is it's not the only factor that matters. What we're also seeing over time is generational differences in terms of just how much it matters. The younger generations today, again, are willing to give up pay for flexibility, for working for a company who they identify with the company's mission and values. So, again, those intangible intrinsic work motivators are becoming increasingly important, particularly for new entrants to the workforce.
Spencer Levy
So, Dave, let's go back to school again here and talk about data. You've been underwriting and teaching about real estate for 30-plus years. But there's a whole host of new data out there. Mobility from Google and looking where people have moved from the US Postal Service. Tell us about how the analysis of real estate has changed in your many years in the business Dave?
David Hartzell
At the end of the day, the actual job that people do in terms of underwriting the loans or analyzing investment feasibility hasn't changed all that much. Right. I think what are the most important things people can learn in an MBA program is discounted cash flow and how to value assets. And, you know, the tried-and-true ways that we used to do on calculators and then Lotus 1, 2, 3, and now it's Argus and Excel.
We may have gotten more efficient. And I think the data has helped us to make better decisions in the sense that there is a whole lot of data out there. But it's a question of what the quality of that data is—or those data are—and how they're utilized. Because I think at the end of the day, it’s intuition and experience on how to use the data and how to use the discounted cash flow tool that I think separate sort of the winners from the losers, let's say, or the people who are good investors versus those maybe who aren't so good. Data has helped us make better decisions. But at the end of the day, it's basically the same fundamental techniques that we've been using for years.
Mary Beth McCormick
There's always been a lot of data. The hard part was differentiating between the noise and the information to something that we truly could use. And so I'm a huge believer in walking properties, walking neighborhoods, driving neighborhoods, seeing what kind of cars are in parking lots. In retail parking lots. I like to see … is there, does it look like cars have been parked there for a while? Can you see oil stains where maybe somebody came in and the car sat for three hours while they were shopping? You know, I always thought that was helpful information.
Multifamily—are people hanging out during the day? During pre-COVID times that indicated that maybe people didn't have jobs or maybe they didn't have typical jobs. They're the things that you just … you just learned.
Our students are so smart and they're really good with the numbers. But it's things like the experiential opportunities and, you know, visiting other parts of the world that really helped them gain a sense for how to invest. And some of that I don't think you can teach. Some of it is innate. And some of it you learn by making mistakes. If you're afraid to make a decision, then you'll never learn because you'll never make a mistake and a mistake is how you learn. So I'm not sure how we teach that in the classroom other than finding a way to give them opportunities to fail with real world problems.
Spencer Levy
One of the challenges of our industry is also one of its great beauties. One of the challenges of our industry is there is no commercial real estate property that is the same as another. And I also harkening back to my early career, the first deal I ever did was for a hotel right here in Manhattan. And while walking the property as a young lawyer, they said, you know where we're going first, we're going to where they keep their perishable trash. And I'm like, don't you want to see the rooms? Don't you want to go see the restaurant? He's like, no, because if this hotel does not have a secure way of managing its perishable trash, how are they going to manage the cafeteria? How are they going to manage the rooms? And that is where you know if somebody really cares about their asset.
David Hartzell
That's interesting, Spencer, because I used to work with a guy named David Schulman at Salomon Brothers when we were one of the research groups back in the late 80s that, you know, put out a lot of hopefully interesting research. And he always used to want to see the HVAC closet and then go into the bathrooms and basically flush every toilet and turn the water on to see how long it took to have the hot water come on. And what was in the bones of the building, right? Which is sort of similar to what you were saying.
Mary Beth McCormick
The bit about the trash really rings true with me, Spencer, because when I was working at OPERS, I had two young sons and we would go … we always drove on family vacation and they learned that, you know, we always had to stop and look at some apartments that we owned because there were always apartments somewhere that we owned. And we also while I was at OPERS, we built the largest private portfolio of outlet malls. And so my sons grew up thinking that when you go to a mall, the first thing you do is drive around back and see what the trash area looks like and see if it's well maintained. And if it's not, then, you know, it's not well managed. And to this day when I'm with my sons, who now are 33 and 37, when we go to a shopping center, they drive around back to show me what's happening there.
Spencer Levy
I want all our listeners to hear it. And I say this with absolute respect to Dave and Mary, but these are two of the most experienced, brightest minds in the history of real estate. I mean that literally. And they're both saying there is no substitute for kicking the bricks, checking out the asset more than the numbers, the data that's out there today. And I know some people will be disappointed to hear that. But this is a physical business. Check out the asset.
OK, and I would love to ask one concluding question to each one of you, which is really the reverse crystal ball. Transport yourself to five years from now looking back. What do you think is the most important thing we got right … the most important thing we got wrong about how we're looking at the future today? And maybe we'll start with you, Dave. What do you think?
David Hartzell
I would say if you look back to all of the crises that we've had be it 9/11 or the financial crises of sort of late 80s, early 90s, in each case, we ultimately got back to normal.
My personal opinion is that we will come out of this COVID-era and I think we're generally in real estate, let's call it fast forgetters. In the short term, there will continue to be some dislocations. But I think the short term will be relatively short. I think offices in certain markets are going to be strong and that they will continue to be so.
I think from a more broader perspective, we have seen a sea change in how investors look at different types of assets … be it single family rental or student housing or senior housing or self-storage each of which in its own way has moved out of the niche category and into the more mainstream. I think that what we'll look back on we'll say that, you know, we were a little bit more pessimistic maybe than we should have been, and that I think we'll hopefully see a bounce back.
I'm a lot older than you, Spencer. I graduated from college in ‘77. I've been through now five cycles and my first mortgage was in 1981 when rates were 18 and ¾ percent. And I do think we'll look back and say, man, inflation. We didn't expect inflation to be quite as high as it is to have quite the impact that has on our real estate markets.
Spencer Levy
Well you know, 1977 is also a very important year because I believe that is the last year that Cornell won the national championship in lacrosse, which is our last national championship, lacrosse or hockey, the two most important sports of all, of which Brad, of course, will say in just a moment.
But Mary Beth, let's come to you. Same question given your decades of experience, transport yourself to five years from now looking back. What do you think we're going to be say, boy, we really got this right and maybe we really got this wrong?
Mary Beth McCormick
I'm sorry, Spencer. I was distracted trying to count national championships.
Spencer Levy
I had to show some sports love for Cornell. We had Marinaro with Ken Dryden.
Mary Beth McCormick
Marinaro … yeah, he was. Yeah, he was good. So here's what I hope. I don't know what we'll get right or wrong. I hope that coming out of this, we'll have used some of this time to hit the reset button about values. And people I think maybe had time to step back and breathe and think about what is really most important to them.
Maybe they found some things that that we all did automatically and—without really thinking about it—doesn't produce the best lifestyle. And I had a job once where everybody knew that if we weren't at our desk at 7:00 p.m., we would never be promoted because the president walked around at seven to see who was still there. And it actually didn't lead to profitability for the company.
I think oftentimes we keep score by how many hours we put in, by how new our cars are, how big our houses are, things that I don't to me don't matter as much as the time I spend with my family and what I give back to the world. And I think that there's been a shift, really a fundamental shift in the past year. I think we all appreciate these things more, but I really think it's maybe a return to more fundamental values and less consumerism. So I hope that that's the change that we'll see.
Spencer Levy
Well, I think what you're suggesting is that there is a silver lining into this cataclysm of COVID-19. And I think that one of them is clearly family. And one of the things that I've suggested is that I actually found hope during COVID-19 because I didn't travel overseas. I didn't travel on airplanes. I drove around my own neighborhood. And there's a lot of stories like that about rediscovering your family, maybe rediscovering America. So it's not all dystopian—there is some silver lining here.
And speaking of silver linings, I will let you know, Mary Beth, that I just looked it up that. Yes, yes, indeed. The Ohio State University has eight national championships in football and Cornell does have three. Though, our last one, my producer reminds me, was in 1939. So, Brad, same question to you. 5 years from now. Looking back, what do you think we got right about labor? What you think we got wrong in that five-year crystal ball?
Brad Bell
I was struck by both Dave’s and Mary Beth’s comments, right? Because I think on the one hand, it highlights the hope that we all have for a kind of better world of work that this could create. I think, you know, as Dave highlighted, though, we've been through things in the past and things always kind of seem to go back to normal, right? There's this kind of gravitational pull to what we've always done.
I think there is a sense that this is kind of a real opportunity and inflection point for organizations to really think seriously about what the future work really means. We've been talking about it for a while, largely thinking about technology and things like that. But I think this is really sparked a new conversation because, one, companies have been forced to have those employees working remotely. The world hasn't ended. In some cases, they've been just as if not more productive, and employees have realized benefits from that.
So I think we are likely to see some changes. I am cautiously optimistic, though, because I think even in recent weeks, we've seen the headlines about companies coming out and saying, if you're really a high performer, if you really care, you're in the office. Right? And I think that's a tough mentality to change. And I'm not sure it's really going to change until we see the next generation of leadership really coming into control in some of these companies. But I think this will push the needle on towards that direction. But I am not optimistic that in five years from now we're going to see a majority of employees having super flexible work arrangements. I think it's still going to be a gradual progression over time.
Spencer Levy
So on behalf of The Weekly Take, our back to school episode. And Ken Dryden, the greatest hockey goaltender of all time, happens to be a Cornell graduate. I want to thank Mary Beth McCormick from the Ohio State University for joining us today. Mary Beth, thank you for joining us.
Mary Beth McCormick
It was my pleasure, Spencer. You're welcome.
Spencer Levy
Dave Hartzell from the University of North Carolina, Chapel Hill. Dave, thank you.
David Hartzell
Thanks, Spencer. This was a lot of fun.
Spencer Levy
And Brad Bell from Cornell University's School of Industrial and Labor Relations. Professor Bell, thank you for joining us.
Brad Bell
Thanks, Spencer. Go big red.
Spencer Levy
We hope you learned a thing or two from today's discussion. I know I did. And if you're interested in learning more about our guests and their higher education view on commercial real estate or to get more information on our show, please visit CBRE.com/TheWeeklyTake.
In the weeks to come, we’ll span the globe to cover more important issues and markets, including an episode on flex space and the banking sector in the Asia-Pacific region with leaders of Standard Charter joining us from Singapore. We'll take a trip down to Lake Nona in Orlando, Florida, a place Fortune magazine once dubbed The Future of Cities. We'll do a face-to-face visit with real estate leaders in this developing community and more. We'll hope that you join us for these conversations. And in the meantime, subscribe, rate and review the show on Apple podcasts, Spotify, or wherever you listen. Thanks for joining us. I'm Spencer Levy. Be smart. Be safe. Be well.
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