Phase 3 - Advanced (more than one main point to the post, ebooks)

Podcast - What’s Next For 
The Office Market?

Marcia Cuenca
July 18, 2022
Podcast - What’s Next For 
The Office Market?
Remote flex work will remain a factor. It's all this flight to quality in the physical office space, people's livelihoods, and what people are looking for going forward."

-David Kahn, Director of Market Analytics at CoStar Group

Are you curious about the future of the workplace and what it means for the office market?

On this episode, we were joined by David Kahn, Director of Market Analytics at CoStar Group. He discussed the current state of the office market, how the pandemic reshaped the workplace and shared key factors he's tracking to monitor the office market. 

About CoStar Group

CoStar Group, Inc. is the leading provider of commercial real estate information, analytics and online marketplaces. Founded in 1987, CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information.


Learn more about CoStar Group, click here

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Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. 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 (00:48) Our guest today is David Kahn, Director of Market Analytics at the CoStar Group in today's conversation. David discusses the current state of the office market. The impact the pandemic has had in what factors he believes investors should be focusing in on. Be sure to check the show notes for links, discuss in the episode to learn more about David and everything CoStar is up to, we hope you enjoy today's episode with David Kahn.

Adam Hooper (01:06) David, thank you so much for joining us today. It's great to be back here in the studio and early 2022. We appreciate you taking the time to share with us what you're up to and the work that you guys are doing at, CoStar Group. So thanks for taking the time.

David Kahn (01:17) Yeah, absolutely. Thanks Adam. Thanks for having me.

Adam Hooper (01:22) So before we jump in. Why don't you tell us a little bit about how you got into real estate and more specifically the path that you've taken at CoStar I think that's gonna be interesting to get some of your insights from deep within,

David Kahn (01:33) I actually graduating from college. I was a political science major and I've had interest in many different subjects over the years. Really? History, geography, politic. And economics in particular. And if you think about it, real estate combines all of those interests into one. And as many people who I've talked to in the commercial real estate industry, weren't necessarily looking into real estate right out of school. And I follow that similar path as well. So early in the career, when, in my career, when I had the opportunity to join CoStar and learn the industry from the inside out, I took advantage of that and started in co-stars research, depart. Actually gathering the data for our analyst team to analyze and then quickly move to the market analytics side of CoStar.

Adam Hooper (02:20) And so tell us a little bit about the different, CoStar has been on an acquisition spree last handful of years. Tell us a little bit about maybe the universe of different verticals within CoStar. And then we'll dig in a little bit more, we've been a user of CoStar for forever. We can talk a little bit more about CoStar specifically and some of the research and analytics that you guys are collecting

David Kahn (02:40) Well, CoStar. We do have a lot of different brands out there, so of course, CoStar, which. Data analytics really driving for the commercial real estate professional. But of course we have LoopNet as well, which is the commercial marketplace. We have Ten-X, which is also a commercial marketplace biz by sell. We recently acquired and that's been a big push lately into the single family market, but we also own Brad Bellflower and the commercials that everyone sees throughout, throughout the year and during big event.

David Kahn (03:13) That's CoStar as well. So with that, and how that translates to what I do is a lot of the data that we're able to play around with is coming from both those marketing websites. So, LoopNet, Ten-X, and are also being driven and gathered by our research team. So having all of these different platforms, feeding us data, it gives us such a wealth of information to take and analyze and make sense of commercial real estate.

Adam Hooper (03:41) Yeah. And that's, what's been interesting to me is to see, it sounds like when you started with co-star right in, in the early days of co-star, it was a lot of calling, right? It's internal reps are calling brokers or calling owners to do hand to hand, combat to get to that data. And now to see what CoStar's grown into with all these different avenues that are massive feeds of data. It's just been, it's been fun to watch. Aggregation play and seeing all these different areas of data that, that CoStar can now aggregate. So don't you tell us a little bit, so when you got started, you were in those rooms calling on folks that I'm sure many of our listeners have maybe even received calls from CoStar to verify comps or sales transactions.

Adam Hooper (04:19) Tell us a little bit about what that looked like and then how that transitioned into more of what you're doing now on the market analytics side of the

David Kahn (04:26) It was a great opportunity to learn how CoStar’s data gathering happens from the ground up. And that's been instrumental and has really helped my career as an analyst because I not only understand where the data is coming from the research side, as well as our client side, but I really can get my hands dirty and see and re-verify and check out to see.

David Kahn (04:49) Net absorption trends are exactly what's going on in the market. If leasing is trending in a specific way, construction, it really has helped me understand the market from that ground up perspective. And from taking a look on a building level, bringing that out to a submarket or a market, and then getting the macro view of say the national office market, having that real understanding of how to gather the data and what that means for the sector, the commercial real estate sector as a whole has been very valuable for me in my career. Yeah.

Adam Hooper (05:23) And we've talked a lot on the past on the show about the market reports that CoStar puts out invaluable information. I know some of those are available to public. Some of those are available only to subscribers. We'll have links in the show notes here for any of the listeners that want to see some of the work that CoStar puts together for just high-level market analyses. Really good information and tons of. Really key insights into how those markets are operating. And today I think we're going to take a little bit of a focus on the office market, which has been to me one of the more I guess still asset classes as we're now two years into the, since the pandemic started back in, in 2020. What has the impact been on office space and there's a lot of different. Avenues to look at that through, but I think just generally, what have you seen as it relates to the office market with the impact of the pandemic.

David Kahn (06:11) The big word is still uncertainty and that sounds like a broken record when you say that over and over again, but really with the trajectory of the pandemic and the initial impact of the pandemic. We haven't really gotten back to normal yet with the new variants, with the vaccines. We haven't returned to normal just yet. So even though we're starting to get a handle of what's going on in the market, we still don't know what the long-term impact of the pandemic is on work trends in general, and in particular, how that impacts office use. So initially when the pandemic hit, leasing, fell off a cliff. Very slow leasing volume, which led to negative net absorption, lots of move outs downsizings but since then we have seen an uptake in leasing activity. Firms are starting to feel more confident about what their future office footprints will look like And whether that means a reduction in space or an expansion. They're starting to understand that now about two years in. But we're still below the pre pandemic norm that we saw from about 2016 to 2019 in terms of overall leasing volume until we get back up to that pre pandemic pace, it's probably going to be a relatively slow recovery from the initial hit that we saw in 2020 through early 2021.

Adam Hooper (07:32) And now you mentioned here are some office space reductions, footprint reductions, and maybe even some expansions, I. That's been still, one of those unknowns is the use of the office space, right? Are we going to look at a footprint that's going to be reduced because we're going to have more remote work and we're going to have less people nine to five in the office every day? Or are we going to need a larger footprint because of how we're going to program the space and what we're going to do in this space is a different look than it was pre pandemic. Still too early to see any trends there, or have you seen any trends of. general patterns of reduction across or expansion in some areas or maybe even by industry. Have you seen any unique insights on that front?

David Kahn (08:12) I think the important aspect of looking at that is dependent on the individual company and it's very difficult to draw conclusions even on industries at this point, because if you look at the headlines and you would. Someone like a Twitter or a certain tech company say we're going, anyone could work from anywhere indefinitely into the future. And then of course, everyone else hops on that bandwagon. What we've seen recently is tech companies like meta, like apple, like Google, Microsoft. They're the ones who are leading in terms of office space, leasing, but also office space acquisitions, investing into physical office spaces, building that out, or building out campuses in physical office space. So, it’s very important to look at those headlines and maybe there, some of the headlines are click bait in a lot of ways and people are seeing what's going on, but to then parse out the data and look to see if that actually justifies what that. What that narrative is pushing right now. And as of right now, yes, there is slow leasing volume. Yes. More firms are looking to potentially go to a flex or remote setup, but has that actually led to a sharp reduction in space use in terms of Le overall leasing, not necessarily. And things have flattened out and started to stabilize over the past couple quarters.

Adam Hooper (09:39) And so when you look at those acquisitions of office space and leasing activity increasing in some of those bigger tech companies that are at the same time saying that we're going to be remote forever, potentially. What is what's causing that? Is it a value play is that they can acquire space now at a discount to maybe where they were before. And they're just, does that growth still, just that intense that they need that much more space, even with an unknown or uncertain physical office need in the future.

David Kahn (10:04) I think that's absolutely part of it. And I also think. With a lot of firms that are thinking in the future. And once we're past Aron and any other future variants as mass mandates are lifted, as we start to get back to normal, these firms are looking at what's their workforce going to look like? 2, 3, 5, 10 years down the road. And when they want to bring people back to the office and when people want to come back to the office, even if they are working two, three days in the office, they want to be. The top tier space in a lot of cases, they want to be able to recruit people to come to the office and feel comfortable And in that case, it's worth investing in that for those certain firms. Because if you think about physical office space for many companies out there, it's a drop in the bucket compared to labor costs. And as we're seeing with the labor market right now, and white collar labor, as, as well as blue collar laborer, it's very difficult to hire.

David Kahn (11:03) And that fight for talent, that challenging environment has persisted over the, since the pandemic. And it's going to be of heightened importance in the near term. And if you look at office using employment right now is about 1.5% above where it was nationally in February 2020. The national average for employment is about 2% below still. So office using sectors or office using jobs have bounced back a lot quicker, and it is becoming a lot more competitive for firms, not just your tech giants, but really anyone who you can consider professional services, financial activities to find that high quality labor and part of that formula is physical office space and having an environment where people feel comfortable, safe to collaborate in the future.

Adam Hooper (11:53) Yeah. That's something I hadn't thought through that before of pre pandemic office space was just, it was a given, it was nothing, it was neither a tool or a, I guess if you're in like a really bad office space, that could be a detractors, but it wasn't really something that was like a crucial recruiting tool. Right. now it almost seems that, like you just mentioned as we get back into. because in person work has become somewhat of a different, not a, it's not a requirement necessarily as much anymore. Right? So, to be able to have an environment where if you're going to require people to be in a physical office, how important that is right from a making it desirable for people to come work there.

Adam Hooper (12:34) As a, as even as a recruiting tool, that's actually a really interesting point of why you're seeing maybe more. Upgrading to higher quality. And I guess maybe does that, have you seen that bear out as you look at across a different office classes between, class A, B and C, have you seen a breakdown of activity trending more towards A or people moving, upgrading into nicer spaces? Have we seen people that are maybe downgrading into less space, less lower quality space? I'm just curious, how does that look across a different quality of asset classes?

David Kahn (13:03) It does depend on the individual firm and to that point of certain companies, still flocking to that quality space in your downtown or downtown adjacent areas. If they're recruiting a certain talent pool, let's say recent college grads from an engineering school, they want to be near that location in the hip urban area while maybe a certain other firm, which is more back office operations. Maybe they want to go to more of a hub and spoke model where they have a lot of different suburban offices or they're able to utilize a co-working space for that, those types of workers who are out in the suburbs and have school-aged children and value that flexibility now compared to maybe three, four years ago. But in terms of the quality of office space, I think another important trend that we've been tracking recently, The fact that firms who are reducing space are making these decisions. They're not doing it out of financial stress. At this point. Most companies are doing very well during or during the pandemic.

David Kahn (14:08) And now coming into the economic recovery, the economy is trending in the right direction. All things considered and firms who are possibly looking for a move or looking for a reduction in space. They're not doing it out of financial downturns, like we saw in 2008, 2009, this is more, they're looking to SP to adjust to the new labor environment and adjust to the new world. So I think that's important to keep in mind when thinking about class A class B class C, it really there's less price sensitive is less price sensitivity. Firms, of course they want to get a good deal if they possibly can. Which is also a reason why we've seen a lot of sublet leasing recently. But in terms of the flight to quality, the flight to quality has persisted and companies that want to be in that top tier location, the top tier space, having sky high rents they're not really blinking an eye at that at this point.

Adam Hooper (15:08) Yeah, and we'll talk a little bit more about the sublease activity. I know that was huge in the early stages of the pandemic. I'm curious if that's calmed down at all, or if it's continued, but before we get to that, maybe we can talk a little bit just geographically, how you've seen across the us are certain areas performing better than others? Are you seeing a differentiator between, you mentioned kinda urban. More hip office space for attracting, maybe the younger kind of tech or engineering talent. What are you seeing geographically in terms of how office space is holding up?

David Kahn (15:35) Sunbelt markets have clearly outperformed so far. A lot of markets, basically every Metro is hit by the initial effects of the pandemic vacancies rising pretty much everywhere. We saw some negative net absorption and flattening rain growth. At this 0.2 years in the markets that are further out in front of the recovery are your Miami's, Salt Lake City, Atlanta, Nashville have been really leaders in terms of the office recovery with demand returning leasing activity, returning to normal. And then your expensive gateway markets, New York, San Francisco, DC. In a lot in a lot of cases and what I've talking to. A lot of people still on the ground, certain downtown areas still have very low office usage and people still haven't come back in mass like they have in the Sunbelt market. A lot of metros are still shedding space in terms of vet absorption while your Sunbelt markets in Florida in Arizona, Georgia, Tennessee, Texas are now on the leading edge of positive net absorption. So there's been a big difference in terms of performance, just over the past couple quarters or so.

Adam Hooper (16:49) And what do you think is driving that the Sunbelt states some of these other ones, Salt Lake I don't know if I would consider that as Sunbelt necessarily. But what where do you seeing that's driving some of those markets that are doing better or holding back markets that maybe aren't recovering as quickly?

David Kahn (17:04) Many Sunbelt markets, such as Dallas, Fort Worth, Atlanta, Nashville. They've been magnets for corporate relocations for decades now and that trend has really persisted over the past 10 years or so. Still you're seeing a migration of corporations and jobs, white collar jobs to Sunbelt markets. So for example, a Nashville which has added 80% office using employment since 2010. So office using employment increasing by 80%, just in, just over the past decade or so similar in Austin, you're seeing major tech companies relocate or expand operations in an Austin in a Nashville. That's helped drive demand and office uses as well. But I think part of it, it is a cultural factor and a lot of markets that are more dependent on public transit and are more densely populated, whether that initial impact of COVID really did cause hesitancy, there has been hesitancy to get back to normal and to come back to the office. So, I think a little bit of that is, is cultural and it depends on the specific geography, but, in general, that is something that we have seen and noticed. It's, the Sunbelt markets really get starting to get back to normalcy quicker than your gateway markets overall.

Adam Hooper (18:23) And now when we look at the transactional volume, you'd mentioned, we'll talk a little about leasing, but I'm curious from the sales transaction volume, you mentioned some of the bigger tech companies making a pretty big move to acquire space. What have you seen from investment volume? Any kind of investor sentiment? I don't know if you guys track anything like that, but just anecdotally, I'm curious what you've seen in investor sentiment towards office. Is there a contrarian right now? Is there a contrarian play or are there that much value out there right now, in terms of trying to take advantage of some of this uncertainty?

David Kahn (18:57) Office volume slowed quite substantially in the early months of the pandemic, lots of uncertainty with the capital markets there, but things have started to return to normal recently. And a lot of what's driving the uptick in sales volume is confidence in net lease, trophy towers lease to credit tenants, essentially. Investors feeling more confident in a long-term lease in a Class A location with a Class A building that has driven a substantial portion of transaction activity. There has been some value seeking, there hasn't been some Class B and C class in the suburbs selling. But to a positive sign there, we haven't seen much in terms of distress sales. So, you're not seeing banks retaking the keys from investors everyone's generally well capitalized and most tenants are solvent and paying rent. So that has been a really stabilizing force for the capital markets in the office sector. And, looking forward because of the way office leases roll over. We might not see distress come out for years to come, just because of the fact that even if companies do start to shed space more in certain areas, you have plenty of time to react to that.

Adam Hooper (20:13) For listeners out here that are maybe looking at investing in an office property or managers that are acquiring office  properties. Where we stand today. What are some of the metrics that are most interesting to you or that maybe take a look at or start to think about that maybe weren't before in a, in the pre pandemic world any kind of key metrics that you are watching now, or you think are interesting for people that may be interested in investing in office space?

David Kahn (20:44) I think you touched on one thing that I've been looking at least recently is the run up and values for multifamily and industrial over the past few years has been absolutely tremendous. And if you look at office values have held steady and increased slightly, which might surprise some people, but, looking at an office building that apples for apples to apples was trading for a similar price that it did in 2019. If you compared that to the overall CRE world, other than hotels, office values appear to be a relative bargain compared to a few years ago. So, if you can get the same building at a same value or a same cap rate today, then you could have in 2018, 2019 that's potentially value going forward. As long as you're confident that you'll be able to. maintain occupancy and eventually push rent. Once things get back to normal just because multifamily values have skyrocketed and industrial is now becoming such a hot property type as well. That’s something that we expect to continue because listening to all these investment calls and all of these earnings calls. All the national international investment firms want to pour more capital into multifamily. They want to diversify their portfolios by putting more money into industrial. And for those investing in office if there's, less capital out there, maybe there's more advantages or opportunities for you to invest in office compared to maybe a few years ago.

Adam Hooper (22:15) Yeah. And now switching a little bit to the leasing side of the market we mentioned the sublet activity and I'm curious if we look at the occupancy rate versus actual usage. Is that anything you guys track in terms of what the actual usage of spaces relative to the occupancy of space and is that a maybe more relevant metric to be looking at right now, rather than just pure occupancy vacancy rates?

David Kahn (22:45) When looking at the sublet market, the sublet market has increased substantially almost doubled since the start of the pandemic. So, we're tracking about two hundred million square feet of sublet availability. While in 2019, we were a little bit above a hundred million. So, if you think about that and you think about companies that are either looking to reduce their footprint or are just fishing to see what's out there. And that's a big question that we've gotten, how many of these companies are really, they do want to forego that space and they do want to just go either pure remote or mostly flex, or they just seeing if they can get someone to back fill and maybe they'll adjust from there. And we have seen some companies put space out for sublet withdraw and then expand into the same building or nearby building as well. So there's still a lot of figuring it out. When it comes to the sublet market, when it comes to the actual physical usage, everyone seems to cite the castle systems data, which shows that office usage is slowly climbing up. But I'm not sure how indicative that is of the overall office leasing, because what we're finding is even in the cities where office use is just still 40%, 50% of pre pandemic norm. Leasing volume is back up to normal. So, you wouldn't have companies lease space. Like they were back in 2018, 2019. If they wouldn't eventually think that they were going to come back to either close to full usage or back to full pre pandemic usage.

Adam Hooper (24:23) I'm curious, when you look at some of these sublet opportunities. where are those amounts relative to their contract rents or are people trying to offload space and just save money or are they looking, there's not an arbitrage where I have office rents been on up for some of these, or is it trying to just get out at market rents or what is that dynamic looking like?

David Kahn (24:44) By large the sublet space is leasing for a discount compared to your relet space in a similar building or the same building. So that is challenging for owners to contend with because in a lot of cases, if you have a sublease, if you have a floor then, and if you're a tenant and you're looking for space and you want to plug and play, get right into that new building right away. A lot of times those sublet spaces, they come with furniture, they come ready to go and ready to be used right away and you don't have to negotiate necessarily. You could just take over the lease in a lot of cases. So that can be an advantage for certain firms that are looking for space. And we have seen firms gravitate to that sublet space. Actually, the percent of RBA, the percent of space leased as sublet lease compared to overall leasing is at a record high right now.

David Kahn (25:40) So more firms looking for sublet space, whether it's for a discount or for that kind of plug in play mentality. You're able to get right in, start your operation right away. You don't have to wait for someone to move out necessarily. You don't have to wait for another lease to roll over. You can just take over that lease and go from there.

Adam Hooper (26:02) You mentioned earlier a little bit about some of the pain, not necessarily pain, but some of the effects of what's going on right now might not be felt for a few years, just due to the length and the longer term nature of office leases relative to something like multifamily. Maybe for listeners that aren't as familiar with what that velocity might be. Can you compare a little bit of how you typically see an office lease playing out versus something like a multifamily or maybe even industrial?

David Kahn (26:29) Absolutely most office leases they're going to be signed at a minimum for 5, 3, 5, 10, years sometimes longer. So if you're locked into that lease, it's very difficult to break that lease because of regulations there and what you've negotiated with the landlord. So, unlike multifamily, where if economic stress happens and you have a lot of individuals who are on one-year leases. It's easier to either, either break that lease or to then after the lease is over, just move out. For hotels, our national director of hotel analytics, he likes to say we only have one day leases. So, as we saw with the hotel market when the pandemic hit, you saw all indicators basically fall off a cliff. And now they're slowly recovering back to normal. Office is definitely on the complete other side of that spectrum when you have longer term leases and important for owners. A lot of these office leases in a specific building. If you have a multi-tenant building they're staggered, so you don't have one big tenant, just moving out in most buildings across the country, you have multi-tenant buildings where leases are expiring over time. Sometimes you backfill that space right away. Sometimes it takes a little bit a while to backfill that certain space. You usually have a lot more lead time to backfill space because you know that when your tenant is going to not renew and when you're going to be able to market that space and you then have some more lead time before that vacancy hits your specific building and impacts you financially.

Adam Hooper (28:06) That's one the most important charts or graphs to look at. In any office acquisition is what your rent roll timeline looks like, right? Understanding how much term do you have left on those leases? Is the turnover going to be pretty chunky? Are you going to lose, 50, 60, 70% of your leases in one year? Or is it pretty smoothed out where you don't have any major chunks of space coming up, in any particular calendar years? I think that's definitely. A key area to look at for listeners that are maybe looking at an office investment. Have you seen that kind of insulate, I guess somewhat the office space during the pandemic, if you have these longer-term leases, sure? If you had some expirations in the last year or two, that's going to be space that you're likely not going to see a renewal on. But for office owners that have had longer term leases. How has that insulated them during the pandemic, with what we've seen?

David Kahn (29:05) We definitely have and again, we haven't seen, we have seen a run up in vacancy, but we haven't seen it. Maybe to the point where the headlines would like you to believe, most owners are still doing well. Most tenants are still paying rent, whether they're subletting space or looking to sublet or not. They're still on the hook for that. What I've seen too recently is in certain cases where companies are looking to expand, you have a case where a firm is looking to sublet a decent amount of space in the market.

David Kahn (29:35) If you're looking to land a larger tenant, you can possibly use that as to your advantage and put together a few contiguous spaces, maybe a floor or two for a tenant that wouldn't have been able to expand into your building before. But now that a company is looking to downsize. You could take back that space and put together a couple floors in one building while traditionally maybe they would've had to go into multiple buildings or not contiguous space. We saw that in a couple cases here in Atlanta and central perimeter, where there was a big sublet listing, part of that space was leased. Part of it was actually used to put together one continuous space for a new tenant to move into. They didn't have that much space to lease in that building before the pandemic happened. So maybe that building wouldn't have landed this new to market tenant.

Adam Hooper (30:23) And then I guess a little bit on, on what we talked about before I'm just curious to get a little bit of a deeper dive in terms of what you're seeing in rental rates remaining flat, seeing some reductions in new leases. Are you seeing any increases? What are you seeing on the rental rate side of the world?

David Kahn (30:38) Well, owners and landlord brokers have really held firm with rents. Our asking rent series has shown essentially flat rents since the start of the pandemic, which might surprise a lot of people.

Adam Hooper (30:54) It is. I know, again, because we were one of those tenants that had our lease that did expire in late 2020, or at least expired. And yeah, we were looking for a new space and we're like, what the heck? Why are there no deals out here?  I was shocked at how flat the rents had remained.

David Kahn (31:10) And one of the main reasons for that is, what happened back in 09, 2010. And really up until the market started turning around in around 2013, 14. You had a situation where a lot of companies, a lot of firms were locking in or a lot of owners were locking in firms to well below market rent and instead of having well below market rents now. We're giving or owners are giving a little bit more free rent up front a little bit more free rent possibly on the back end additional TI’s, because that would indicate that the firm that's taking that. They're investing in that space with you in, in, if you will and are willing to say, Hey, if you're giving me some more TI’s, you're giving me a few months free upfront. I'm more willing to stick it out and stay and keep this office space for the remainder of the lease, which is. For a longer term, definitely a good thing to have someone who's a good tenant staying in there and, not looking to sublet space in that specific building. So I think, a lot of owners, they learned their lesson from the previous downturn where you had all these below market rent leases. And then all of a sudden, once the market started getting hot again in, in 2016, 2017, 2018. Those renewals were pretty big sticker shocks to those tenants and we've by and large avoided that in a lot of cases and have instead owners have generally opted for the concessions, the TIS as well as early in the pandemic, more short term renewals so that you're kicking the can down the road until things start to normalize. You're not locking into below market for five, 10 years.

Adam Hooper (32:50) Yeah. I think from a supporting building value as well. If you have a lower lease rate that you're locked into, that's going to affect your value of your building versus keeping those rents higher and offering some of those concessions. Maybe it's just perceptual. And if you really dig in behind the numbers, you'll see what the net effect is. But I think there is definitely some desire, I think, as an extension of what you're talking about right. In the last cycle. When they were doing these low lease rates that directly affects the value of your building. If you look on cap rate basis. Having, I think those rents stay high, but offering some concessions. That's certainly what we saw here in, in our local market. So how about pipeline, supply, pipeline? You said 200 million square feet of sublet space. I can't imagine there's a ton of new office development going on right now, but I'm curious of new development coming back. We've certainly seen it, industrial has just continued. You can't build enough fast enough. Multifamily are starting to see a lot more in that space from new construction as well. But what are you seeing in the office market with new projects coming online?

David Kahn (33:53) There is actually a lot of office space under construction, about a hundred more 40 million square feet is underway right now. And about 35% of that is spec. So about 35% unleased and perhaps more importantly about a quarter or 25% of space that's delivered since the start of 2020 is still unleased. So, supply will continue to be a factor. Now, part of that is office space is generally in particular, the office space that's being built now. Very high quality. Typically going to be in your Class A submarkets Class A locations, you have materials costs which have gone up, you have labor costs, which have gone up construction timelines have been extended since the pandemic, because no one's really been in a huge rush to deliver speculative supply since the start of the pandemic. Looking forward because there's such long lead times for office development. It's going to take a while for that pipeline to Peter off. There are good reasons to believe that developers will continue to break ground on office space. Because of that flight to quality trend that we've seen. And the fact that if you are going to be in a Class A location and build the best building on the block, and when you deliver, you have these tenants who are willing to pay up to be in the Class A address. That could still be an effective option for a lot of developers out there.

Adam Hooper (35:24) Yeah, it gets back to what we were talking about before of again, office space being this amenity now being an attract or recruiting tool of having the nicest, newest, shiniest, most, most friendly office environment. And I'm assuming there's a similar dynamic as what we're seeing on the multifamily side. New construction. You can't make a Class B or C project pencil, right? So, all the new construction on the multifamily side is going to be that higher Class A luxury type property sounds like similar dynamic in the office space. Are you seeing any deliveries coming down the line that are not the newer Class A, flashier space?

David Kahn (35:59) It's mostly that. And then you do have certain areas where if you look at mixed use developments and we've seen a lot of suburban, mixed-use projects particularly in the Sunbelt, but then we're also seeing it in some Midwestern, Northeastern markets right now, traditionally you would have a certain ratio of office to multifamily. That shifted a lot more towards multifamily recently and retail as well. But those are the types of products. Maybe it's not your Class A trophy in your downtown submarket, but it's still nice quality space and it will come equipped with all these breathable, livable lifestyle type amenities that everyone will want when they're coming back to the office as well. It's being more selective with development. It's not building your, three story office buildings that we see that were built out in the 1990s during the tech boom. We're not seeing that anymore either. Whether it's a creative loft office or a conversion from multifamily or excuse me, conversion from industrial adaptive reuse. It's going to be some high-quality space with walkability or amenity on site or right nearby.

Adam Hooper (37:10) So I know you've got a plane to catch here in a few minutes, so maybe we talked a little bit about some of the factors that you're tracking. Any other, either demographics or, higher level job metrics that you're looking at for listeners out there that are thinking about investing in the office market. Any other interesting data points that you're tracking that they maybe want to pay attention to. And, some sources, obviously coast guard being one of them. But some other alternative sources for accessing some of those data points.

David Kahn (37:35) I think leasing activity is the main leading indicator that I always point to whether it's on a real macro level, like national office market, or if you're looking on a market level or a submarket. So looking at leasing compared to historical norms, because once that leasing gets back up to a normal level, the more churn there is in the market, the better it is for you as an office owner you want companies looking for more space. You want to be able to take capitalize on that to either, have expansions or to raise rents. Also checking in terms, a metric that I watch closely is office using employ. And that's professional and business services, financial activities, and information. And whether that means the people who are employed in those sectors are using physical office space or hybrid or remote, the stronger the growth is for office using employment. The more likely it is for specific MSA to see an up uptick in terms of office leasing and office net absorption and office usage. So those are the two big leading indicators that I like to look at and I would recommend looking at, and of course the office using employment that's from the BLS, the leasing activity would be through CoStar.

Adam Hooper (38:52) Perfect. Yeah. I think those are great data points to consider. So, before we let you out of here, why don't you let us know what is keeping you up at night as it relates to the state of the office market right now?

David Kahn (39:01) It goes back to the demographic and demographic growth in the labor shortages, we've seen a pretty substantial slowdown in population growth. Some of that is due to the pandemic and the lack of immigration, long term, we need a growing population to drive our economy and that's for both blue collar sectors and white-collar sectors. And that competitive environment will make it more difficult for office users to hire up to scale. And if you can't hire office workers you don't need to expand into more office space. If I were, if I owned an office building, that would be, would keep me up at night. And when looking at it from our perspective. You need more people working in office using sectors to justify more office space going forward.

Adam Hooper (39:49) What has you the most optimistic right now?

David Kahn (39:51) For the office market values have held up and rents have generally held up relatively well. Leasing is improved. So that has me optimistic and really what has me more optimistic than anything is that remote flex work, it will remain a factor. But as you mentioned earlier, Adam, that's an amenity as well. It's all this flight to quality and flight to quality in terms of both the physical office space, but also, people's livelihoods and what people are looking for going forward. And because the labor market is so tight, companies will want to look to expand into areas where their employees want to be. And whether that is allowing for them to be. Possible flex or a little bit remote or what have you having that home base of an office building to come back to collaborate in. That's something that we've seen and we've heard from tenants, from CEO’s down to small mom and pops who, who lease office space. That's really something that's valued. And in 2022, looking forward, hopefully with all these mask mandates, starting to be lifted, as we get back to normal. I think there's going to be a push to return to normalcy in all of our lives and that there were some good things that came out of the pandemic, but there's a lot of negatives that came out of the pandemic as well. And one of the things looking forward, I think people are really anticipating is through the end of this year. Once we get back to normal, having a routine, a schedule that we can rely on. And part of that is, is going back to the office.

Adam Hooper (41:27) Yeah, I know. We're certainly looking forward to figuring out what that new normal is. So, whenever you guys nail that and you figure out what it is, let us know, okay.

David Kahn (41:33) We'll be keeping a close eye on it, for sure.

Adam Hooper (41:35) I think that's a great place to wrap up. Why don't you tell the listeners how they can learn more about what you're up to with CoStar and get access to some of the really just fantastic work that you guys are putting out in analytics side.

David Kahn (41:47) Absolutely,, by sell from a commercial perspective. And then for the housing, all our other brands right there. But we've been putting a lot of effort into not just our market reports, but our market videos. So, if you are CoStar user, please check those out and reshare them. We put a lot of time into it and hopefully it's valuable for y'all to check those out and understand what's going on in the market real time.

Adam Hooper (42:18) Perfect. David, again, we really appreciate you coming on the show today and thank you so much for your time and sharing what you guys are seeing in the office market.

David Kahn (42:26) Great. Thanks Adam. Thanks for having me.

Adam Hooper (42:28) All right, listeners. That's all we've got for today as always. If you have any questions or comments, please send us a note to and with that, we'll catch you on the next one.

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