10 minute read
BUSINESS
Valley could be heading for post-pandemic office glut
BY PAUL MARYNIAK
Executive Editor
As the pandemic appears to be giving way to a semblance of normality, the world of commercial office space is anything but normal. Just ask Jay S. Kramer, an experienced real estate and finance attorney.
As Fennemore’s commercial transactions section director, Kramer has counseled numerous commercial and industrial developers, national and local homebuilders, planned community developers as well as financial institutions.
These days, as companies recall workers from their home offices or look at what post-pandemic work sites might look like, Kramer sees many employers asking themselves, “What now?” Owners of big office complexes also are wondering the same thing.
“What now?” is only the beginning of a cascade of questions reflecting the uncertainty of post-pandemic office life.
“I think we’re all kind of focused on the same type of issues,” Kramer said: “How do you return to the office? Are we ever going to have 100 percent work from home? 100 percent at the office? Or some type of a hybrid approach. How do we retain and recruit employees in either a hybrid or work-from-home environment? How do we develop a sense of community, camaraderie or whatever kind of firm togetherness?
“Those are the kind of large issues that everybody is grappling with,” he said.
The pandemic brought a new sensibility to office workers that can’t be undone with a simple directive, Kramer suggested. Thanks to the virtual office environment, qualified employees often have more options since they can seek jobs at companies hundreds of miles away without ever thinking of moving. Kramer sees no one-size-fits-all anAttorney Jay Kramer of the Fennemore law firm said employers are asking a lot of questions as they ponder future office
rental needs. (Courtesy of Fennemore)
swer to the myriad of issues that the pandemic has raised for employers who inhabit large swaths of office space in many parts of the Valley – and the country.
For some employers, he said, the questions include: “How do you make offices places where people want to come?” and “How do we make the office more enticing?”
Others are grappling with how they can provide a comfortable environment for workers who want to alternate work time between home and office.
“One thing that we’ve been talking about for a long time is hoteling, where you have offices that you reserve,” Kramer explained.
“But I think a lot of people feel their office is almost like a second home. They want to make it more personal. They’ve got papers all over the place and pictures of their family and what-have-you.
“So the idea that every day you’ve got to pack up your stuff and either take it home with you or put it into a locker … that’s kind of disruptive.” Kramer said the fact that many employers discovered employees often are more productive working at home complicates the issue.
Some workers might actually yearn to shed the sweat pants and head into an office at least a few days a week.
“It’s really the younger people who crave having that office experience, where they can be mentored and trained and have those interactions,” he explained, “while lot of the older people who already have their connections and relationships may never come back to the office.” To some degree, employers may find themselves caught between a rock and a harder place.
On the one hand, some employers may find it beneficial for team spirit to have all their workers in one place.
Yet, team spirit may have to defer to other considerations, Kramer said.
“You spend a lot of money training them and getting them familiar with your systems and so you’ve got to retain them. It seems to be just extremely difficult to do and not just because it is an employee market,” Kramer said.
“It’s a challenge and it’s going to be a challenge for quite some time,” he said. Kramer also said many employers that carried empty office space on their books realized some benefits of a home-based workforce at least for a while since they could cut as much as 20 percent of other expenses, obtained increased productivity form workers and wound up with higher profits as a result.
“I think short term is going to be a positive to the bottom line,” he said, noting that office expenses for supplies, food and even taking clients to lunch declined dramatically during the pandemic. But to lure employees back, Kramer said, employers and landlords may have some unexpected costs – like major remodeling. “I think everybody’s looking for flexibility. One of the issues with flexibility is what a company is to do about office space,” he said. “Do you assume that you’re going to have 50 percent occupancy from where you are today?
“And then there’s one school of thought that even though they’re going to let people in the office, the type of space that they have might have to be different.
“Instead of people being in cubicles or in small offices, they’re going to want a lot more open spaces, more immersive – what I call Zoom rooms.”
Landlords also may face some tough bargaining positions from their office tenants over “the typical legal issues in terms of lease negotiations,” Kramer said, noting employers likely will seek to cut lease expenses for parking and maintenance if they have fewer employees on site.
“We spend a ton of money on parking but when there’s no reason to have a parking space for every employee, maybe you ask to take 50 percent or 40 percent of your spaces and save a lot of money,” he said. Overall, Kramer said, “companies are not going to want to give back some of those savings they saw in the pandemic.”
What all this means for the Valley’s pre-pandemic office building boom depends somewhat on geography and the tenant, Kramer said, though he predicted, “There’s going to be a glut over some period of time.”
While more companies move to the Valley and those that are already here continue to grow, that will hopefully reduce the inventory of available office space, he said.
But absent the large employers like State Farm and Nationwide that are moving hundreds and even thousands of employees into a large complex, Kramer said, “I think you’re going to see a lot of problem office development.” seeCOMMERCIAL page 23
“I think maybe real estate brokers and commercial real estate people want to tell you that everything is going to be rosy and what have you, but it just seems that short term, everything I’m seeing is – all the discussion is about – how much space do we really need?” he said.
“I don’t think there are going to be a lot of new projects that are going to start in the planning stage – ones that aren’t really saying they’re kind of ready to go. … We’re absolutely going to see a slowdown in office development.”
He said Gilbert and Chandler may see modest office development as Intel ramps up its $20 billion Ocotillo campus expansion.
“If you’re just looking at kind of speculative office construction for office workers – I don’t think you’re going to see much of that,” Kramer said.
“But now, Scottsdale’s a good market, Tempe is a good market.”
“I think the Camelback Corridor is still an area where people want to be, but even there, I think the rents are going to start dropping – the vacancy rates are going to go up there.”
The bottom line, Kramer said: “When their leases are up, companies are going to downsize space and so that means we’ll have a lot of space available.”
And downtown Phoenix, especially as a 4-year major overhaul of the Broadway Curve is looming in the near future?
“I don’t know if people still want to be downtown,” Kramer replied.
Information: fennemorelaw.com/ people/attorneys/k-n/ kramer-jay-s
Intel’s massive $20 billion expansion of its Ocotillo campus likely will keep many existing office complexes in the area busy, Kramer said. (Arizonan file photo)
Real estate investment trusts have pitfalls
BY DR. HAROLD WONG
Guest Writer
My column last month on the importance of knowing Social Security rules included a case study of how a long-term federal employee could have $75,680 total Social Security (SS) and federal pension income by knowing the rules instead of $47,760, or $27,920 less.
You can read this by going to drharoldwong.com and clicking the “Articles” link at the top of the home page. Ever since the 2008 financial panic and stock market collapse, normal investment alternatives for retirement income are terrible. Here are the yields as of 5/24/2021: .10 percent to .50 percent for bank interest; 1.60 percent yield for US 10-year Treasury Bonds; 2.30 percent yield for US 30-year Treasury Bonds; and 2.02 percent average dividends for S&P 500 companies since Jan. 1, 2000.
Because of ridiculously low levels of interest rates, most people are taking way too much risk in the stock market.
When I see folks that qualify for their free strategy session, it’s not unusual that they have 80-95 percent of their life savings exposed to stock market risk. If the stock market has another major crash, they may never recover. Note that during the 2000-2002 DotCom Crash and the 2008-2009 financial panic and real estate crash, the stock market dropped by about 50 percent.
In order to double or triple these terrible returns listed above, one has no choice but to explore alternative investments. These would include real estate investment formulas, private pensions, and solar business equipment leasing.
One could consider Real Estate Investment Trusts (REITs), which often specialize in different types of real estate. To maintain favorable tax status, they have to distribute 90 percent of earnings via a dividend to the securities owners.
Typically, investors purchase REITs for their dividends, which currently average more than double the dividends on S&P 500 companies and the 30-year Treasury bond. Warning: The purchase of REITS is a security, much like owning a stock or mutual fund and you can lose principal. On April 15, 2020, vs. one year previous, there were major losses in the REIT property indices due to the coronavirus pandemic. The sectors that declined were -15 percent for multifamily; -17 percent for office; -25 percent for health care; -48 percent for retail; and -53 percent for hotel. In contrast, it was +34 percent for data centers; +31 percent for cell towers; and +14 percent for industrial. Source: Nareit.com.
Note that one can often obtain higher and more stable returns by owning private real estate directly and not through a REIT.
Private pension funds operate like Social Security or any other pension. The longer you wait to trigger your retirement income, the more you get.
A nurse was age 62 in 2014 and deposited $270,000 in a private pension. When she triggers her retirement income at age 70, she will receive $27,000 per year guaranteed for life. That’s a 10 percent rate of cash flow.
Solar business equipment leasing, allows investors to be part of the massive push by government for “The New Green Deal” and a cleaner environment. Cash flows can average 5-7 percent annually.
However, one must also add the tax savings. If one buys $100,000 of solar equipment that is leased to businesses, there’s a 26 percent tax credit and a potential $87,000 immediate deduction by using Section 179 of the tax code.
It’s not unusual that high-income taxpayers will save $50,000 in tax, which doubles the tax-adjusted rate of return and reduces their total personal tax bill. Free live seminars and lunch: 10:45 a.m. June 12 at The Old Spaghetti Factory, 3155 W. Chandler Blvd. #9, Chandler; and 10:30 a.m. June 13 at The Hyatt Place 3535 W. Chandler Blvd. Topic is “Double Your Social Security & Other Retirement Income and Pay No Tax!” To RSVP, please contact Dr. Harold Wong at 480-706-0177 or harold_wong@hotmail.com. His website is drharoldwong.com.
