Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Are Offices Making A Comeback?

Tyler Stewert
September 14, 2021
Podcast - Are Offices Making A Comeback?

Is working from home here to stay? Have transactions in the office market come to a halt? Are property values and rental rates crashing?

If you're like a lot of listeners, you have some big questions about what's happening with office. Which is why we are excited to have a big time guest on the podcast to help answer those questions!

Michael Roessle, Director of US Office Analytics at CoStar Group, joined us on the podcast to provide clarity on the story that the data is telling.

About CoStar Group
At CoStar Group we equip our clients with the information and tools they need to succeed in every aspect of their business, across all asset classes. As the largest commercial real estate information and analytics provider, we take pride in empowering industry professionals with the most compressive data to make decisions with confidence. That’s the power that comes with knowing.


Learn More About CoStar Group And Michael's Research at:

If you'd like to learn more about how ReAllocate + Mariner Wealth Advisors can help you build a roadmap for your real estate investments head to —

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Tyler Stewart (00:00):
All opinions expressed by Adam, Tyler, and podcast guests, are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Adam Hooper (00:22):
Hey, listeners, Adam here. Have you ever wondered if you're investing in the right real estate deals? What about if you're making the right decisions for your overall financial health? Over the last seven years of running RealCrowd, the number one question we received from investors is, "Should I invest in this deal?" Well, we're excited to announce that we can now help you answer that question through our sister company, ReAllocate. And through ReAllocate's partnership with Mariner Wealth Advisors, you can now have access to teams dedicated to helping you build a real estate portfolio based on your personal investment roadmap and financial goals. If you'd like to learn more about how ReAllocate can help you, head to Again, that's

Adam Hooper (01:12):
Hey, Tyler.

Tyler Stewart (01:13):
Hey, Adam, how are you today?

Adam Hooper (01:15):
Tyler, I'm good. I'm excited about our conversation today. It's been a part of the market that I have been probably most curious about since the beginning of the pandemic, and we had a fantastic guest come school us on the office market today.

Tyler Stewart (01:28):
We did. We had Michael Roessle, who is the national director of office analytics at CoStar.

Adam Hooper (01:35):
Yeah, Mike is as in tune with office analytics as anybody. He told us about his background and his history in data and analytics, and I don't know if there's many people out there that have a stronger background in data in the office space as Mike. He was kind enough to share some time with us. We originally took sock of the office market, where it's at. We talk some areas that are doing better than others, what it's going to take to trigger recovery. Just really covered everything about what he's seeing in the office market these days.

Adam Hooper (02:01):
We did a little talk towards the end there about this balance of what we've talked about in the show before, companies going partially remote, partially working from home, and how that interplays with the need for more space in a post-pandemic world. And again, still very early to figure all this stuff out, but we talked about some interesting trends there, some key factors that listeners can pay attention to as you're thinking about health of office markets and what some of those trends look like. So, again, just a really great episode top to bottom about the office market and what to expect here going forward.

Tyler Stewart (02:35):
Yeah, yeah, great episode, great guest. Mike even pointed out some early indicators to look at to see when companies may start rolling back to the office. He believes there's going to be a domino effect, but you have to listen to the interview to figure out what's going to kick off that domino.

Adam Hooper (02:50):
Perfect. Well, I think that's enough of us talking. So, as always, if you have any comments or feedback, please send us a note to, go ahead and give us a review or a like on wherever you listen to us. We appreciate that as well. But, Tyler, with that, let's get to it.

Adam Hooper (03:11):
Mike, thank you so much for joining us today. We're excited to chat with you. Office has been one of the question marks since the beginning of the pandemic that we've been trying to figure out, so, hopefully, you can bring us and our listeners some clarity today.

Michael Roessle (03:24):
Yeah. Thank you very much for the invite and having me on today. The tide has certainly changed, I would say, where, a year, two years, three years ago, office was looked at as almost the boring stable sector that nobody wanted to talk about. It was all about multifamily. And I've gotten quite, quite popular over the last 12 months exactly.

Adam Hooper (03:47):
Yeah, we were talking before we started recording, it sounds like things have been a little bit crazy in your space. So, before we get into the madness we find here in early 2021, why don't you tell us a little bit about your background, how you got into the real estate space? How'd you end up at CoStar? And what you guys are up to today.

Michael Roessle (04:05):
Yeah, sure. I've always been involved in research and analytics, and my initial start in commercial real estate data and analytics was, gosh, a long time ago, a couple of decades ago where I worked for another real estate data provider. And after doing that for awhile, I decided I wanted to make the transition and get a little bit closer to the deals and see exactly how a lot of our clients were using this information to try and actually be market makers. So, I transitioned into working in research and analytics for some brokerage firms, it was known as a Studley at the time in New York, then it became Savills Studley, and now I believe it's Savills North America.

Michael Roessle (04:49):
And after about a decade there, I jumped over to be the national director of office analytics for Colliers International, also in New York. Following that, I relocated out to the Midwest and there was an opportunity that I came up with CoStar. I was very familiar with CoStar being a client obviously at brokerage firms for a decade-plus prior, and I thought it would be a great opportunity to really jump back into the pure data side of the business, and what a great opportunity for kind of a data geek like myself to have the ability to access all of the commercial real estate data rather in bits and pieces. So, it was a really an exciting opportunity and I've been with the CoStar group coming on four years now.

Adam Hooper (05:37):
Great. And now, what is your day to day like at CoStar?

Michael Roessle (05:42):
Yeah, as the national director of U.S. office analytics, it's my role to really oversee the macro-level office markets. So, what's going on in the U.S. as a whole, looking at our historical trends, looking at our forecast, and also studying impact and demand drivers that are affecting the market and really going a little bit deeper than the numbers to analyze why the numbers are going wherever they are, whether it be rental rates, vacancy rates, absorption, so on and so forth. So, it's a bit of a Jack of all trades, rather than focusing on one particular market, which I have in the past, but it's also very exciting to get that macro-level and be able to compare and contrast markets across the country.

Adam Hooper (06:28):
Yeah, definitely, to be able to have that much data at your fingertips and be able to pull some insights from that has got to be a kidney candy store.

Michael Roessle (06:35):
Absolutely. Yeah.

Adam Hooper (06:36):
So, take us on a little journey, we'll maybe talk about an update on where we're at, what we saw last year, maybe some trends that we've talked about quite a bit on the show, and I think one of the biggest questions that I've been asking and wondering is what are some of these behaviors that we're seeing during the pandemic? And as we start to head back to offices, what are some of those longer term behaviors that are going to shift? And what does that look like going forward? And then maybe some of the metrics that you're looking at and how the listeners can maybe track some of these things on their own.

Adam Hooper (07:08):
So, maybe as an update and to set the stage of where we're at right now, where was office heading into 2020? And then what have we seen throughout 2020? Obviously, that's a big paint brush, but just generally, how was the health of the office space coming into the pandemic? And then maybe just some high level things that you've seen as we find ourselves again here early in 2021.

Michael Roessle (07:31):
Yeah, absolutely. I think, wow, what a tale of two years, and even, it was a tale of two years from the beginning of 2020 to where we ended up at the end of the year. Heading into 2020, and even early on, the first two and a half months, the U.S. office market was really in great shape. We were still hovering around historically low vacancy rates, rental growth, while decelerating slightly in the pace, it was still positive. Rent growth was still occurring across the country. Transaction volumes were very strong. And in fact, the first quarter of 2020 ended up being the strongest first quarter in terms of investment volume that we've had in about a decade.

Michael Roessle (08:10):
So, if not for the pandemic, things were feeling really good. We could approach record transaction volumes, we're seeing strong rent growth, vacancies are at record lows. The construction pipeline was very manageable, so we didn't have a lot to worry about in terms of speculative office flooding the market. So, I think a lot of people at the end of 2019 and January 2020 were still feeling quite bullish about the office market. And of course, things changed very quickly once we hit mid March and into April. And really, that's when a paralysis took over the market. I would say, second quarter of the year, transaction activity just really ground to halt, things dried up, leasing activity plummeted, investment volume plummeted.

Michael Roessle (08:59):
I think everybody just took a step back, tried to take a deep breath and reevaluate where we're going to be in six, 12, or 24 months. And that lasted throughout most of the year. I would say leasing velocity for the year totaled to about 270 million square feet, and that was about a 40% drop from where we were in 2019. And even more important than that, I think it was nearly 15% lower than the bottom we saw coming out of the great financial crisis in 2009. And really, there was a difference. I think a decade ago, forward-looking firms who managed to have solid balance sheets and some clarity about their outlook, really took advantage of the steep rent cuts that were occurring at that time to either move up to higher quality space that they had been priced out of previously, or locking early renewals at highly discounted prices.

Michael Roessle (09:53):
And I think this time, tenants really opted to hit the pause button, unless they were faced with an imminent lease ex. And then in that case, many of those tenants opted just to kick the can down the road with a short term renewal. And I…

Adam Hooper (10:08):
I was going to say that's the exact same position we're in, in I think, a lot of this. I'm asking these questions both as an interested person in the office space, and also as a tenant, just trying to figure out what the heck we're going with here. But, yeah, it's same, same thing. We had a lease that expired in September. Landlord was friendly enough to work with us and kicked that can and just see. And I think it's, we've contrasted 2020 with the global financial crisis a few times, but it's just a very different phenomenon, right? This is a very acute external health threat that's not a fundamental business driver of these decisions.

Adam Hooper (10:46):
And so, the thought process about trying to jump into some of these spaces that you were priced out of, or locking lease renewals, when we have no idea what the future of office usage looks like coming out of this. I think it's just a very different dynamic than what we saw back in '08 through 2010.

Michael Roessle (11:04):
Yeah. I think that's spot on. A decade ago, it was more of your pure traditional financial crisis, and this time around, it's really, at least for the office-using sector, it's a pandemic-driven crisis. People have been able to shift to the work from home model. That's been largely successful. Rent collection rates for landlords have stabilized to pre-pandemic levels. So, there's not a lot of defaulting on leases. Institutional owners themselves remain very well capitalized in part because of those high collection rates. And also, as importantly, their lenders are well capitalized right now. Again, it's not a financial crisis that's putting a lot of stress on everybody.

Michael Roessle (11:45):
So, it's very different than what we're seeing, and some of the behaviors we're seeing, and some of the expectations that one might have in terms of, "Well, I'm going to wait for distressed assets to hit the market. I'm going to wait for a 40% plunge in asking rents." And we're not seeing that that's really been necessary yet because there is that liquidity of capital keeping people afloat and in a solid financial position.

Adam Hooper (12:06):
And have you seen anything, if not the financial crisis, have you seen anything where offices behaved this way? Where… I mean, this is really a first of its kind experiment, right? Again, with work from home, and remote, and just not being in the physical location, seems like that's a pretty unique circumstance.

Michael Roessle (12:26):
Yeah. This tremendous forced work from home experiment has been unprecedented on scale. But in terms of looking at the data, we have seen downturns similar to this before. I would say the last time we saw a drop in absorption that's been this steep and this quick, we'd have to go back about 20 years to the dot-com bust. We've dwarfed the absorption losses that we saw a decade ago. But conversely, if we want to continue the comparisons with the great financial crisis, the rent cuts and the drop in pricing in terms of the investment market were much, much steeper during that period than we've witnessed now.

Michael Roessle (13:08):
And also, I think going to your point about the increase in the work from home or remote work models that may be adopted a little bit more, this time around, we've seen sublet additions to the market that have hit absolute record highs. It's been staggering. I think we ended the year with about 190 million square feet of available sublease space. And that was almost a 100 million square foot increase from the end of 2019.

Adam Hooper (13:38):
Wow. So, over 2X.

Michael Roessle (13:41):
Exactly. And this wasn't a phenomenon that was limited just to CBD high rises. I've heard some speculation that there's going to be a mass exodus from CBDs to suburban areas, and companies are leaving. And we really haven't seen that. While certainly there was an elevated level of sublet additions in CBDs, accounted for about 67 million of that 190 million square foot total, but conversely, about 70 million square feet was put up for sublease in suburban areas. So, this is really a widespread phenomenon. This wasn't everybody leaving CBDs for suburban areas, this is still everybody reevaluating what's going to happen in the next 12 months.

Adam Hooper (14:23):
And I guess digging in on that a little bit more, how have you seen CBDs versus suburban dynamics throughout this? Are they similar in response? Have you seen any dynamics between those two different kinds of markets or I guess maybe regions geographically that are performing differently than others?

Michael Roessle (14:41):
Yeah. Again, we haven't seen a tremendous stark difference in performance in terms of suburbs and CBDs just yet in terms of rent growth, or absorption, leasing activity, but in terms of areas around the country that are performing a bit better than others. I think it's a continuation of what we saw heading into this even pre-pandemic. It's a lot of sunbelt markets that have seen the highest population in job growth that are continuing to perform a little bit better in terms of office market fundamentals. So, while we had a lot of perennial leaders prior to the pandemic in those categories, rent growth, for example, San Francisco, San Jose, Austin, were perennial leaders in terms of rent growth. Those now have moved to the laggards.

Michael Roessle (15:30):
But those smaller sunbelt markets, Nashville, Raleigh, Charlotte, Richmond, South Florida, those areas, while their metrics have decelerated in growth, they are still managing the post-positive growth and not seeing a steep pullbacks as some of the major gateway cities.

Adam Hooper (15:47):
And what are some of the areas that you've seen hit the hardest? I mean, you mentioned San Francisco and San Jose, some of the more, I guess, what you would assume are normally more volatile markets anyhow. Have you seen that similar trend or have there been any surprises, I guess, in areas that have been maybe impacted more than others that you wouldn't have expected?

Michael Roessle (16:05):
I think really, it has been a story of tech markets, but as we've mentioned, that is more of a boom and bust type cycle. So, this time around, you could make the argument that they're particularly well-suited to transition to a more permanent work from home model. But really has been gateway markets as well. Chicago, New York, has really been struggling. And I think that's a combination of a number of factors. The vast majority of their employment population is commuting in via public transportation from either New Jersey, Westchester, Long Island, Southern Connecticut. So, employees really haven't been in a hurry to crowd back onto the subways or commuter trains to get back into the city, and then you're waiting to cram into an elevator to get to the 47th floor.

Michael Roessle (16:56):
So, there are a lot of structural problems there that have really… And that's not even to mention the resurgence of the Corona virus cases that they've had there. So, it's really been a tough go for New York, which is to say they may lag the country this time around in terms of recovery, where in previous financially based recessions, they tended to lead the way out, this time, I think, they may see a little bit slower recovery because of those fundamentals and just structural differences. But I really wouldn't count New York out long-term. If you're looking at investment, certainly, New York has come back from the pandemic of 1918, they were on the border of bankruptcy in the mid-'70s, they rebounded from the tragedy of 9/11.

Michael Roessle (17:44):
So, long-term, I think New York will be there and be a player, just may take a little longer. But really other other areas like Chicago, Atlanta, and Philadelphia, that are home to more traditional fire sector tenants and industries, are also seeing firm-shed space at record clips and seeing some subdued growth there. It's not just the tech-centric areas.

Adam Hooper (18:09):
Now, as we start to think about recovery, what are some of the things that you guys are watching that might indicate we're getting close? Obviously, vaccine is starting to roll rollout. I think we're seeing a lot of the technology companies and more traditional companies are saying, they're not even going to address coming back to the office until some time. You think June was the new January, right?

Michael Roessle (18:31):
That's right.

Adam Hooper (18:32):
Til mid-late summer. What are you guys seeing or paying attention to as an indicator of some recovery or going back to office environment? And have you seen any signs of that already? Are you seeing any early indicators?

Michael Roessle (18:48):
I think a couple of months ago, we were seeing some increases in utilization rates, and as the pandemic then flared again, we saw those come back down. So, right now, we're still at a pretty low level of people who have returned to the office. And as we mentioned, I think this is really going to largely be governed by the course of the pandemic and vaccinations. I think until employees feel safe, that not only themselves are vaccinated, but the coworkers and the people that are riding the buses and trains with are. It's going to be a very slow slog back to the office. People have adapted pretty well.

Michael Roessle (19:26):
And as for as many people who generally do want to get back to the office, and I think there are a lot of people who do, you really need to feel safe. So, I think once the vaccination effort really ramps up and starts rolling out, that's a key indicator to look for. Also, I think, at that point, you're going to look towards major employers in your CBDs, in your areas, who start to bring people back. There needs to be that sort of critical mass, that density, and almost a little bit of that FOMO, the fear of missing out, where X, Y, Z, is bringing back three, 4,000 employees, or a thousand employees here, and that signals that maybe it's okay to start coming back.

Michael Roessle (20:08):
So, I think once we see that, the dominoes may start to fall, and we'll get more of those mid-size and smaller firms to join them in coming back to the cities or suburban campuses.

Adam Hooper (20:18):
And now, you also mentioned a little bit earlier, some of the planned or I guess anticipated distress opportunities that we would have. I think certainly if we were having this conversation March, April last year, we would have anticipated a lot of distress buying opportunities, investment opportunities by the end of last year, maybe first quarter this year, which largely we just haven't really seen yet. As you mentioned, there's liquidity in the market, lenders are liquid, they're much more prone to try to work with a borrower now than they were in the global financial crisis. There's been a boatload of opportunistic funds that have raised up mountains of capital for these deals, are they going to materialize? Do you have any kind of take on whether or not we'll get to a spot where we'll see some of that distress? Or is it going to be just maybe kind of ride it out in this pause interim stage until we get to some of that healthier recovery?

Michael Roessle (21:14):
Yeah. I think a lot of that largely depends on the course of our economic recovery, and again, the vaccination roll-outs. If we don't have any setbacks, if we don't have major flare-ups nationwide, if our economy doesn't take three steps backwards, I'm not convinced we're going to see the flood of distressed assets that we saw last time around. And historically, if we look back, it takes about 18 to 24 months after the onset of a recession for distressed assets in the office market to start appearing. So, we're not there yet, and I'm not convinced we'll necessarily get there. As we talked about, owners and lenders are well capitalized, so this time around, even if an owner is facing a little bit of a financial crunch, they can go back to the lender and refinance the deal at historically low interest rates.

Michael Roessle (22:02):
And that's generally a better option for both owner and lender, rather than doing a short sale at fire sale prices, or turning the asset back over to a bank that really doesn't have any interest or ability to manage a million square foot office building.

Adam Hooper (22:19):
And anything that will change that that you guys are seeing? Or is there any, I guess, concerns or things that you can pay attention to, our listeners can keep an eye on if that might change some of that willingness to work?

Michael Roessle (22:35):
I think it's really more of an asset by asset case. If you have an older asset, and maybe a tenant has vacated because they've decided to go to a permanent remote work scenario, it's maybe a deep suburban location that hasn't been updated, there's not a lot to offer, there may be some issues there. But it really depends, again, on how long the lease is, because if the tenants locked into a lease for the next eight, 10 years, whether they're occupying the space or not, they're on the hook for the rent.

Michael Roessle (23:08):
So, again, I think unless there's really a deep setback in terms of financial markets and liquidity out there, I don't see it because there is a lot of dry powder still on the sidelines waiting to get into the market, and whether it's because they are a true believer in the future of the office sector that people will return, whether it's a pension fund or REIT that needs to have X% of dollars of that fund allocated specifically to the office sector, I think we're going to see activity. With that said, I'll say we haven't seen a lot of deals that have been pure value add plays going on the last several months.

Michael Roessle (23:45):
I would say the major deals that we've seen closed have been for trophy grade buildings with credit tenants on long-term leases. So, there's a lot less downside risk there, and those deals really haven't been repriced, they've been trading at pre-pandemic pricing.

Adam Hooper (24:04):
Interesting. So, I guess to, again, further expand on that, do you see… I guess, how has pricing and transaction activity been impacted as you look at the different classes? You got CBD core trophy properties, you've got, like you said, some of the suburban, have there been enough trades to really suss out any trends there? Or is it still thin enough in the transaction markets to really identify any meaningful trends?

Michael Roessle (24:30):
It's been pretty, pretty thin, I would say. Annual volume for 2020 totaled about $92 billion. And that was the lowest it's been since 2011. And that was 40% lower than the annual average over the previous five years. So, it's been pretty slim. But, again, what we've seen in terms of high dollar value trades, again, it has been in your more core gateway markets, and also interestingly, tech markets. But those tech markets I've seen deals largely revolving around having anchor tenants that are your Amazons, your Facebooks, your Apples. So, it's really been hedging there. And I think that the real trend, again, has been class A trades, trophy assets, long-term leases with strong credit tenants that you're feeling secure aren't going to go bankrupt and not be able to honor their financial commitments.

Adam Hooper (25:31):
And now, as you mentioned, you have an office tenant, say you've got a corporate credit grade tenant that's on the hook for eight to 10 years, longer-term leases. They're not using the space. Do you see any concessions around utilization? Do you see any trends in terms of, again, obviously, we're very early in what the future looks like, but are you seeing any utilization based clauses in leases that are coming up? Is there anything interesting that you guys are observing out there in that side of the world?

Michael Roessle (26:08):
Anecdotally, I would say I have heard in some deals that are being signed, and again, there were very few deals that were being signed, specifically large longterm deals. But in certain markets, we have seen space reduction clauses, where in the past, it was quite common to have expansion options, now it's reduction rights. And that's become a big thing. So, you have the ability to shrink, rather than grow. So, that's been one of the most noticeable things, I would say, in new transactions. And obviously, elevated concession packages. So, if you are willing to make a large long-term commitment, concession packages have increased.

Michael Roessle (26:54):
And again, I think that's a smart play in terms of ownership, because when we saw the extraordinarily steep rent cuts from 2009, 2010, owners realized, "Well, that devalued my building for the next 10, 15, 20 years."

Adam Hooper (27:14):
Substantially. Right. Yeah, it takes a long time to grow that back.

Michael Roessle (27:16):
Exactly. So, this time around, I think they've learned those lessons from a decade ago and have been very hesitant to undertake those steep rent cuts, and instead of that, they have the ability to offer elevated concession packages, which is more or less a one-time write-off. And frankly, when they entered into loan for their asset, generally, concession packages are part of the loan pool. So, they're not having to dip back into their pockets or take another loan for this money to give generous concession packages, it's already there for them.

Adam Hooper (27:48):
And what are you seeing in concession packages? Are you talking more TIs and build-out? Are you talking rent concessions? What are you seeing there?

Michael Roessle (27:56):
Yeah, I think a little bit across the board. But, again, instead of the 15 or 20% rent cuts that we saw a decade ago, we're seeing more modest rent cuts, maybe eight to 10% range. Obviously, it's a deal by deal, building by building. And we've seen even renewal deals are getting elevated concessions of about 75 bucks a square foot, 14 months of free rent. There's a renewal deal in Philadelphia that stands out that you would see a concession package like that really for a new tenant, new build-out, rather than a renewal deal. So, that was a bit surprising.

Adam Hooper (28:33):
Let's shift to some of the trends that we've touched on here. Obviously, the biggest one in the office space is this remote work, working from home. This is, again, a very, very, very big nationwide experiment at a grand scale that happened overnight. So, it's been interesting to see how different sectors, different companies, down to individual employers that have reacted to that differently. This was something that was already underway, this crisis accelerated it and made it, again, happen overnight. Where do you see working from home and remote work fitting into office space and utilization of office space going forward?

Michael Roessle (29:17):
Yeah, I think that's the multi-billion dollar question everybody has is how widespread this is going to be-

Adam Hooper (29:23):
That's why we've got you on the show. That's why we're asking you. No softballs here, Mike.

Michael Roessle (29:26):
Exactly. And how long is this going to last? And I think we really have to step back and listen to a lot of the public-facing statements firms have made, and then take a look at the data and see where the money's going. And I think interestingly, I mentioned the tech sector, which many people thought may be the best suited for remote work because of the nature of the jobs and the demographics who tend to be in the tech sector. You have your Facebook and Microsoft coming out and saying you could work remotely, to some capacity, indefinitely, and Facebook mentioning five to 10 years from now, they're envisioning 50% of their workforce permanently being remote. And then they continue to double down and expand their office footprints at really breakneck speed throughout the pandemic, which says the complete opposite that long-term, they're viewing people are going to come back to the office.

Michael Roessle (30:26):
Facebook signed a deal in New York for about 740,000 square feet this summer at the new Moynihan station project, and that deal brought their footprint in New York City alone to over two million square feet in terms of office space. Then about a month later, they doubled down on that commitment across the country in Bellevue, Washington, and they purchased the brand new headquarters of outdoor outfitter, REI, I think for about 390 million square feet in the same sort of general area of Bellevue that they leased a few hundred thousand square feet as well this year. Apple continues to grow, Microsoft continues to grow across the country, not only in Washington, but also in Northern Virginia as well.

Michael Roessle (31:08):
So, we're seeing these large forward-looking commitments by tech companies, who have been telling their employees, "You could work from home for a while." But I think, when you're outlaying that much capital, you have plans eventually to get people back into the office. So, will we see some firms try a complete work from home experiment? Yeah, absolutely. We've seen that, and it's run the gamut. Like I mentioned, REI decided they were going to go remote, State Farm Insurance has been a big one across the country. They've been closing a lot of their regional centers and going remote.

Michael Roessle (31:53):
Even if there is a five to 10% reduction in footprints across the board, it's not the multi-family market that changes on a dime with 12 month leases, this is going to be a 10 to 15-year churn before we see really noticeable effects across the board. And by that time, the pendulum may have swung the other way. We don't know. There may be strong population growth, where even though there's less people in the office at any given time, you're expanding your business, so there are more people coming in and rotating in throughout your office. So, where we are right now, I don't want to have a recency bias and say this is where we're going to be in 24, 36, or 60 months from now.

Michael Roessle (32:38):
And even those firms who have decided, "We're going to be 'permanently remote,'" they may realize that in two, three years, it's really hasn't been working out. "We've had an erosion of corporate culture. Our employees are tired of sitting at the kitchen table." And you just missed that general socialization. You could have spontaneous meetings with your coworkers or just bouncing ideas off of each other by turning around or going into the next office, running into each other at the coffee maker. And I think a lot of that's been lost. As great as technology has been with Zoom meetings and Microsoft Teams and all of the productivity that's been managed to stay at elevated levels, you just do miss that humanity and collaboration.

Michael Roessle (33:27):
And I think that'll be another factor that gets people back into the office is, again, that kind of fear of missing out. If you do have the option to work at home, but your coworkers or the majority of your team is back in the office on a regular basis, you're probably going to feel, "Wow, maybe I should be there too. I'm missing out on those spontaneous meetings. I'm not getting the same exposure to the executive level, my managers, or the C-suite, that all my colleagues are getting. And certainly, the CEO isn't coming to my kitchen table to tell me what a good job I'm doing. So, maybe I should get back to the office too." So, I think even for those firms who may permanently try this, but that doesn't preclude them from ever jumping back into the office sector again.

Adam Hooper (34:16):
Yeah. Two questions, I guess, are kind of related. I'm curious to get your thoughts on how you see that dynamic of some percentage of the workforce either permanently or primarily work from home, which would indicate a need for less space, less office space per employee or just as a company, and how do you contrast that with, in a post-pandemic world, the desire for the ever tightening, I think we're down to like 125, 150 square foot per employee, that's got to go back up, right? So, I guess, how do you see that dynamic playing out? Which dynamic wins? Do we need less office space or do we need more office space?

Adam Hooper (34:57):
And then, as an extension of that, what does the usage of office space look like going forward? Are we going back to private offices? Is it going to be just for social time and focus time? Again, that's a very loaded question and asking you to get a huge crystal ball out, but just curious of your thoughts on what you've seen so far with those questions.

Michael Roessle (35:20):
Yeah, sure. In terms of what we're going to net out in terms of space usage, these are rather offsetting competing forces that we have here. So, if you allow some remote work, but will need more space, more square footage per employee, that can even out in a large manner office usage of footprints. And I think employees really weren't too keen on the concept of hot-desking even prior to the pandemic, if your firm did allow you to have some remote work during the day. A lot of employees weren't too happy about having to share a desk with five other people. You'd come in, you'd break out the Clorox wipes, you'd wipe down the mouse, the keyboard, all of that. It was very appealing concept, and certainly, it's become even less so now.

Michael Roessle (36:16):
So, I think you're likely going to see dedicated desks, even if you're rotating in and out of the office. And I think there's a general consensus that even prior to the pandemic, the pendulum had really swung too far in terms of densification, that maybe office occupiers and architects took this a step too far and it's become counterproductive. I've walked through several floors where firms had that really dense open-benching concept, and you walk through, and what do you see? 85% of the employees are wearing noise-canceling headphones. You have eight phone calls going on around you, a guy playing table tennis three feet behind you. It wasn't conducive. And it was meant to spur collaboration, that was the big buzzword, "This is going to help collaboration," but everybody's isolating the noise and just trying to isolate themselves. So, it really went the other way.

Michael Roessle (37:10):
Now, are we going to go back to a classic law firm style of wooden glass-paneled offices at 600 square feet per employee? No, but I think there's a happy medium there where you can increase the space per employee. And I think, again, we were slowly probably heading that way heading into this, and this really, I think, made employers look at that, and maybe we'll ramp that up a little bit more quickly going forward again because there won't be as many of that, of shared desk, and it's just a better environment. So, those office layouts that incorporate some spontaneous meeting rooms that we saw, great ideas, all of that, collaborative spaces, but I don't think we're going to see people bench on top of each other going forward. And I think employees will be happy about that, there won't be any pushback.

Adam Hooper (38:06):
Yep. And do you have a sense on this flight to suburbia for living? We've talked about that a lot on the show, this kind of urban exodus, do you think that will mirror in office space? Do the suburbs, are they the winners in this once we come back from the recovery?

Michael Roessle (38:30):
I really don't see a reverse migration of what we've been seeing over the past decade or so of suburbs to CBD shifts. Again, I think there's been struggles and challenges that we've seen in metros across the country at different periods in history, but by and large, people want that activity. They want an activated city, they want to be a part of it and live there. So, I think once we're past this, we'll see millennials return, we'll see Generation Z behind them return. There's nothing to say that younger generations won't find the same appeal that millennials did, and wanting to live, work and play in cities any longer. So, I do think it may take a little bit longer to recover for cities, particularly those heavily relying on public transportation, but I do think we will see a recovery.

Michael Roessle (39:22):
And once we start seeing offices return and employees returned to the CBDs, that's going to boost everything. It's going to boost your retail, your restaurants. It's really going to get that activation back. And once people see that, "Oh, downtown, my area is active, restaurants are open, it's vibrant again. There's retail opportunities, there's entertainment venues." I think that's still very attractive for people. And so, I do think we will see a return, and I think, I'm not a multifamily expert, but if you are betting on that, and you do believe in that, there's probably never been a better time to lock into a two-year lease right now.

Adam Hooper (40:07):
So, as we look at some of the indicators and tracking some of these factors that listeners can maybe get, a couple of different data points that they can be watching to see some of these trends, office space usage used to be just completely about jobs, right? What does the pipeline of supply look like? And what does the job growth look like? Has anything new been added? I mean, is it still about jobs? Is it still about employment? Or are you seeing other factors or interesting data points or trends that are maybe informing some of these opinions about what it looks like going forward?

Michael Roessle (40:42):
Yeah. Look, I think largely, it still is a story of where you see the largest population and employment growth. That's where people are, that's where people are moving to, as well as more cost favorable environments. I think we've seen a definite shift towards those areas. And again, it's a lot of sunbelt Southern, Southwestern, Southeastern markets that have really benefited from both population and job growth, as well as corporate relocations. We've seen a lot of firms out of California relocate to Texas, to Phoenix. On the periphery, we've seen some boutique financial firms and hedge funds relocate from New York and Connecticut to Southern Florida. Atlanta has been another big hub for corporate relocations.

Michael Roessle (41:33):
So, I think those more cost and tax favorable environments will continue to see accelerated growth. Businesses have realized it's just a more favorable place to do business, the taxes are lower, it's a better quality of life for their employees, and I think all of that is ultimately pretty attractive. In terms of the near term, what we should be looking at is subleased space. And are we going to see a plateau or any sort of measurable reversal of that, that signals firms have a greater confidence going forward and are starting to make forward-looking plans? And also, on top of that, we should really be looking at leasing activity because leasing activity is obviously a precursor to absorption and demand.

Michael Roessle (42:21):
So, if we see a large bump in mid-year or the end of this year in terms of leasing activity, that signals that we're coming out of the other side of this. Businesses have certainly had ample time over the last year to take a look at where they are financially, to take a look at where they want to be in terms of growth, and really evaluate strongly their needs in terms of office square footage and their footprint. And are they going to go part remote? Are they going to have everybody back in the office? What are we going to do? And I think, by the end of this year, we'll see a lot of clarity in that. And if things haven't picked up by then, then I think there may be some conversations to have about time to worry a little bit more.

Adam Hooper (43:02):
Yeah. And now, CoStar, of course, a fantastic source of data and tracking a lot of these trends, you guys put out a ton of great research reports. Not everybody, unfortunately, can have access to some of the data behind the scenes though. Are there any public data sources that listeners might be able to pay attention to, obviously, again, in addition to the report that you guys put out? Anywhere people can look at or start tracking some of these stats that are going to be important and indicative of what that recovery looks like in the office space?

Michael Roessle (43:31):
Yeah. I would say, obviously, first and foremost, if you're not a subscriber to CoStar and interested in this, that's your number one place that you should be going. But in lieu of that, there are a lot of publicly available data sources that you could really mine for this information. Bureau of Labor Statistics puts out employment information, which is a great source. The National Bureau of Economic Analysis puts out GDP information. And again, some brokerage firms likely will have a research report, perhaps not behind a payroll, but they're tracking similar metrics, slightly different methodology. But if you're just looking for general trends, that could be a resource as well, if you're not yet a CoStar subscriber.

Adam Hooper (44:18):
Great. So, as we wrap up here and about to let you go, what's keeping you up at night? What are some of the things that are of concern to you as we think about recovery of office space here in 2021?

Michael Roessle (44:33):
Yeah, I think, I often wonder how long this is going to last. And that's big determining where we're going to go in terms of the office sector that, when are we going to have a really mass supply of vaccinations and the ability to roll them out, and not only roll them out, but have the public largely adopt that? And I think, the longer that there are delays in that, that becomes more worrisome, I think, not only just for the office sector, but the general economy. Also, we are still on a rather rocky economy, up and down. We saw some slowdown in job growth last month, so, that worries me. If we do have some sort of other exogenous event, or some sort of fiscal disruption between now and when we're largely vaccinated, there is a lot of fragility there, and that can certainly play a large role in where we're headed in the office market.

Michael Roessle (45:35):
But things go on the similar trajectory and where we all hope and think they're headed that we could at least now see the light at the end of the tunnel and realize it's not a train. I think that's giving a measure of hope to employees, to employers, to tenants, to owners, that hopefully by mid-year or the end of this year, we should have a lot more clarity and be as close to pass this as we can and return to some sort of normalcy.

Adam Hooper (46:08):
And what has you most optimistic right now? What are you looking forward to? What are some of the bright spots in looking forward?

Michael Roessle (46:15):
We did see some green shoots towards the end of the year in terms of investment dollars. It was the highest quarterly total of investment volumes since the first quarter. So, that's certainly a signal that investors are becoming a bit more bullish on the office sector and do believe that once we reach herd immunity, people will return to the office. I thought it was very interesting that in early November, when we got the initial positive vaccine news from Pfizer and Medina, the Monday after that, there was a very noticeable pop in the stock prices of office REITs. And that's largely been sustained. So, I think the investment community is starting to grow more bullish on that.

Michael Roessle (46:59):
And frankly, I think, just personally and anecdotally from other people who have been working from home that I've spoken to, have said, "Well, I really like the flexibility, but I'd really like the flexibility to go into the office too. It's really tough working next to my spouse who's on phone calls all day, my dogs are barking, the kids are crying. After a year of sitting at my kitchen island or dining room table, I've had enough."

Adam Hooper (47:26):
Ready for change.

Michael Roessle (47:27):
"I'm ready for change." So, I think, ultimately, employees may get the long desired for flexibility of workplace, and I think if that's offered, people may be surprised to find how many people actually do want to return to the office. And I believe a lot of people do.

Adam Hooper (47:43):
Yep. No, I think that's definitely true. I'm in the office recording this right now. I've left the home studio to come into the office just because you have three kids in school, you've two people working in a house that was never intended for anybody to work out of is, one can only endure so much.

Michael Roessle (48:01):
Exactly. Yep.

Adam Hooper (48:01):
So, we'll see how that plays out. Well, Mike, this is fantastic. Really appreciate the conversation. How can listeners learn more about what you're up to at CoStar and get some of the research reports that you guys are publishing?

Michael Roessle (48:13):
Yeah, absolutely. Feel free to go to, scroll through the product. We have a wealth of information right on the homepage. We have a terrific news team covering all markets across the entire country, as well as national news stories. Obviously, our subscriber content has a wealth of market, sub-market reports, data analytics. We do video updates as well on a monthly basis. So, if you don't want to read a report and you're more interested in digesting content digitally, we have that available for you. So, any way you choose to consume data analytics and information, it's available for you in the product.

Adam Hooper (48:50):
Perfect. And we'll, of course, have a link down in the show notes for listeners. Fantastic. Really appreciate coming on today, Mike, maybe we'll get you back on latter part of this year and check in and see where things are at. And again, really appreciate you spending time with us.

Michael Roessle (49:05):
Yeah, sounds great. I appreciate the invite. It was a lot of fun getting to talk about the office market and I hope it's a better 2021 for sure.

Adam Hooper (49:13):
I think we all do. We all do. All right, listeners, that's all we've got for today. As always, send us a note to with any feedback. And with that, we'll catch you on the next one.

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