This article originally appeared in Commercial Property Executive on February 28, 2019
Lisa Picard is the president & CEO of EQ Office, the owner of 80 office properties totaling 40 million square feet. She joined the firm, which is wholly-owned by Blackstone’s real estate funds, in 2016 as its COO and was named to her current role in 2017. Prior to EQ Office, Picard was with Skanska USA Commercial Development, where she worked on the company’s strategic development, investment and execution for the Pacific Northwest. She also founded Muse Development in Seattle, worked several years for Hines Interests and managed several national accounts for pension fund investments in real estate.
In an exclusive interview with CPE, Picard delivered her thoughts on the office property trends gaining steam: how late stage funding in tech markets impacts U.S. cities, how technology is changing what an office looks and feels like, and how coworking and the desire for flexible options are leading traditional office owners to re-evaluate the product they currently offer.
Tell me a little about your background and how you got into real estate.
After high school, I went into urban planning and urban design, and I think probably the best reason why I got into real estate is that I found that some of the people making critical decisions about how our cities felt were developers. People who really kind of owned and controlled the real estate—they ultimately were shaping the cities and the world that we live in.
Basically, after pursuing my undergrad in urban planning and urban design, I applied for a graduate program in both planning and real estate finance at MIT—so still keeping with the right and left brain. Then upon graduation I kind of went directly into real estate finance. I felt that everything in this world, particularly real estate, takes money and you have to know how money works before you can begin to start to shape what it is that you build.
Looking back at 2018, what are a few highlights in commercial real estate that stand out to you?
I think, in 2018, it was how much technology continued to shape life and work—from the monstrous growth we’re seeing in our cities, the jobs that are dedicated to technology and the growth that these kinds of major organizations made. Instead of thinking about the productivity of the workforce, it’s really about the effectiveness of the workforce. And that is demanding that for the growth and the success of these organizations, they need to grow by people to create these continued platforms that are fed on technology.
That leads really into sort of all of us speaking about convenience of experience, which is both a physical and a digital thing—I would say probably digital first and then physical. The digital being the convenience part, the experience being the physical … And so that finds its way into the workplace, and we obviously saw in 2018 an even bigger growth in the use of flexible space and coworking space.
We saw the lack of investment in public infrastructure to deal with and address transportation challenges, and that is drastically shaping the way in which we think about mobility in our cities and it’s also affecting value.
We also saw in 2018 a serious trend of pressure on the cities in terms of affordability—not a little, a lot—in most major metropolitan areas that had job growth. That’s pushing people further and further out, and I would say we’re starting to see jobs follow people to areas outside of cities.
There was a significant amount of late stage funding that flowed into the tech markets last year. How does that influence U.S. cities both physically and economically?
Late stage financing is kind of the alternative IPO. Companies at that stage, when they’re given a big capital infusion, they’ve got to grow through talent. So as tight as the labor market is, you’re growing your talent through paying for talent. If you had to work for a startup back in 2000, you sort of wanted to go work for a startup for the dream and, at the time of the IPO, that was your big payday. So now, a lot of people are receiving sizable salaries to get drawn from technology players that are well capitalized and have good salaries to compete. These late stage financed companies are able to pay up a lot in salaries and, because of that, a deep amount of capital was driven into companies in 2018. It’s demonstrably different.
I think what we’re seeing is, as a lot more of the population is making higher wages and able to bid up housing, it’s creating a deeper crisis in these high-growth tech markets in terms of housing affordability. It’s almost a little bit of a vicious cycle. We just saw stats in New York that engineering pay just in the last three months has gone up 6 percent. So that’s 24 percent per annum. And knowing a young engineer can be making $200,000 a year, what does that do to the (price) of a one-room apartment? It’s more and more people and less and less supply. We’re sort of coming into that dynamic. It’s definitely shifting who can live in cities and who can’t and the types of jobs that we see in cities. Disposable income is lacking the diversity, but it’s really becoming concentrated in dense, growing urban environments.
Which metro areas are poised to see strong growth in the office sector over the next couple of quarters and why?
Some markets can see supply growth and not necessarily rental growth because they don’t have any constraint to supply. We’re definitely focused on areas where that late stage investment comes in because there’s obviously high employee growth. And where you have high employee growth, you have a high demand for space.
Those areas are, strongly, the Pacific time zone and Boston because Boston really kind of performs like a West Coast city just from the investments and so forth that have happened there. I think the eastern cities have had a slow uptick of that. They’ve had a lot of supply and a lot of tensions are going on in that supply. I think that’s where we’re seeing strong growth in the sector. There are constraints for talent in these markets, so their ability to attract labor will continue to be a challenge.
I think the interesting point is we are seeing massive growth in Canada, particularly Toronto and Vancouver, and that is purely just from the standpoint that they have wide open immigration for skilled labor and technology employment is at a lower cost. We would expect our neighbor to the north to see pretty substantial rental growth and growth in the takedown of product.
Do you have a particular mantra or business strategy for 2019?
I would say fundamentally, No. 1, our business strategy for 2019 is we’re kind of rolling in from what we did in 2018, which was really about focusing on the customer experience and also evolving the product. It’s interesting to hear a real estate person talk about the product. But I would say for us in 2019, as we kind of take those strategies and roll that forward, it’s really about productizing our real estate. And you’re probably saying, Lisa, what does that mean?
Well if you think about it, real estate owners of big commercial office buildings really only sold one product, and that was a long-term lease. And we only really viewed our customers as probably the capital markets, the financiers and people who are buyers of our buildings. Given what’s happening with demand and the trends that are driving demand, particularly as it relates to coworking and flex office, this is actually causing us as an industry to sort of realize: Oh, wait a minute. We are a two-sided market, not a one-sided market. We don’t only serve the capital markets. We have these individuals who actually pay us rent. And they need a different product because the product is outdated. A long-term lease is very difficult to manage a business with. It becomes one of the highest risk components to our customer. The productization of real estate is really: How do we start to create different products for that market that are based upon their business needs? And we haven’t done that in the industry.
For me, our mantra and business strategy for 2019 is staying close to the customer and inventing and creating around the thoughts and the stresses and the tensions they’re experiencing through their businesses. That will allow us to productize the real estate.
How have changes in culture both at the office and in society affected the real estate industry, especially in terms of advanced technology?
Technology has enabled a highly distributed, flexible workforce and I think for our customer it enables the talent reliability in terms of securing them and keeping them and retaining them and inspiring them. Particularly the advancements in cloud computing, which enables work to happen anywhere. We also now depend on Wi-Fi reliability and, in fact, we’re quite angered when it’s not working on a plane. I flew from New York to Vancouver recently and was surprised a 787 did not have Wi-Fi. The people I was traveling with were younger, and they were just besides themselves.
The reliability and the speed just completely untether work, if you think about it. It completely untethers where we do work and how we do it. And those dynamics, plus the fact that the cybersecurity aspect of it just gets better and better. We can send private data through these networks and also stick it on the cloud and feel pretty safe. It has enabled work to happen anywhere and it really expands the reach of the office.
We see the office showing up not only at the office, but we see it showing up in apartment buildings, in coffee shops and restaurants, in a multitude of places. We even have retail shopping centers that are introducing coworking and operators who are doing lifestyle fitness stuff that’s actually incorporating a coworking element.
What that’s done to office owners is certainly created a fair amount of competition, or you could also say it’s absolutely expanded the market. But we have to shape the product to realize that where the consumer wants to do work—we’re competing with all that. We actually have to create remarkable spaces that feel good and have a positive experience.
From a metric perspective, if you look at some of the top-performing REITs in the country, you’ll see that their tenant retention rates have dropped drastically. And that’s just because it’s so easy to move a company today because of this untethered work. And it’s also made you as a landlord probably at a disadvantage if you have a tenant vs. them looking at all the options they have in the city and thinking they can completely reinvent themselves by picking up their laptops and moving to another office space. Those things have obviously put a lot of pressure on the office industry.
Another trend that you see happening is small company growth. Eighty-nine percent of the new jobs created in 2017 were small organizations, companies of less than 50 people. When you see that kind of new job formation happening at the smaller business scale and those smaller businesses actually have more volatility in their business model, signing a seven- or 10-year lease is problematic. It introduces a lot of risk to a company and it’s not scaleable, either up or down. And because we are working everywhere, we want lifestyle product, we want things to feel like home, we want a sense of community at work, because we’re not just going there from 8–5, we could be there for an extended day.
All these things are really driving and shaping how we think about real estate. I think most owners are feeling these pressures, feeling economic pressures, and I think those that are staying closer to the customer are clearly the ones that are going to be able to invent products and create products the market desires.
In your opinion, what are some of the biggest trends in the office sector that will continue to be a factor over the next several years?
I think you’re going to continue to see flex office, as a product, probably double over the next three years. You’re going to see continued growth in that and I think it’s irrespective of volatility in the market, just because it is kind of a product that deals well with volatility. In fact, I think London might be a bit of a barometer just because they have a higher supply of flex office in that market, as it saw a lot of economic volatility during the discussion of Brexit. I think the flex office providers have done very, very well in that market, because in an uncertain market, why would you go sign a five to seven-year lease? I think, as a result of that, the largest third-party providers won’t be able to provide all that inventory. You’re going to see more and more landlords getting into it and figuring out how to service tenants. I that’s going to be a critical strategy for all landlords.
I think another thing you’re going to see is a hybrid office strategy, and what I mean by that is no different than what happened in the server market. Oracle and Cisco were selling big servers to corporations that needed to house their own data. Only if you were a big corporation could you afford to have these big servers. They figured: ‘Gosh, let’s do shared space on a server. We’ll sell server space’. And what happened is the server market exploded, just because the big corporates could scale their real estate as well. And right now, corporates are doing that by themselves, but I think you’re going to see landlords begin to offer a blend of HQ space and flexible space because there’s still this desire to have this private, branded space but also have flexible space for how the organization might grow or ebb and flow in different markets and ebb and flow in home markets.
The third trend I think we’ll see is a bigger explosion in remote work. We have so many people that have taken themselves out of the workforce―maybe as caregivers either to children or aging parents―and organizations are missing that talent, someone who still has a significant amount of time to give. I also think if organizations shift over to this kind of modern leadership to drive businesses, this means leaders are less focused about face time in the office and more about the quality and the effectiveness of the work. It will probably drive remote work both in terms of how they design their space but also in terms of corporate policies. And that’s going to further tether or untether the work from the office.