2022 Real Estate Economics with Spencer Levy (Part 2)

CBRE’s Senior Economic Advisor & Global Chief Client Officer, Spencer Levy joins Trademark’s Terry Montesi and Chad Colley to wrap up their conversation about multifamily trends, including the role of multifamily in walkable mixed-use environments. Spencer also talks about his predictions for the future of brick-and-mortar retail, what he sees happening to office demand, the increased need for multifamily, and the role hope plays in his thoughts for the future. Spencer also shares more about his podcast, The Weekly Take.

Leaning In is published every second and fourth Wednesday of the month. You can find the first half of Terry, Chad and Spencer’s discussion on your preferred podcast app. Tune in for our next episode with Peter Linneman, Principal of Linneman Associates.



Terry Montesi: Welcome back to Trademark Property Company’s podcast Leaning In. This is the second part of an episode, and you can find part one on the podcast page. Thank you for tuning in.

For today’s episode, our Senior VP of Multifamily Chad Colley and I are back to wrap up our conversation with CBRE’s Global Chief Client Officer and Head of Research Spencer Levy. We talk about CBRE’s research and the relationship between retail and multifamily and where mixed-use, office, retail, and multifamily are going in the future.

Chad Colley: Any new or evolved multifamily design or amenity trends you find particularly interesting? We discussed a little bit earlier about build for rent, single family for rent, but anything notable we haven’t mentioned?

Spencer Levy: Do you want to talk about dog runs? Do you want to talk about freezer coolers? I mean, I’ll tell you one thing that didn’t work. This one went over poorly as well. So, because people are getting goods delivered to their multifamily jobs, you need more places for storage. Cold storage has a mixed history within these sites because even though people need their groceries delivered, there’s some people who are, shall we say, not the most responsible tenants. And so, they’ll have their groceries in there, I don’t know, for a month while they are away in Aruba, and it causes all kinds of other issues. So, some of the things that are cool, you’ve got to manage it well. But I would say to you the following. One of the trends that we talked about a moment ago was ESG. People are now much more conscious of the amenity package, not necessarily the gym or the cafeteria or the coffee shop, but the physical plant. Is there outdoor space? Is there green space? I think those types of things are going to be the biggest attractors to people, particularly if it has a very good carbon footprint. And what is a carbon footprint? That’s a definition that’s changing. And so, carbon footprint can include not only the amount of energy you use, wastewater, it could include the building materials. Now the good news in the multi space is that for the most part, most multis are still stick-built not steel built. But stick-built is now becoming a trend in office because people want to touch and feel the wood.

Colley: Timber construction.

Levy: Cross laminated timber is the big thing. But you should also know that one foot of wood and you take that one foot equivalent of steel, that wood is like 90% more carbon efficient than the steel because of the energy. So, I would say ESG consciousness and outdoor and green is the most important amenity, more than the traditional amenities of the gym, even storage. I think storage is great, but as I mentioned, there’s a yin and yang to that one.

Montesi: Thanks. Spencer, based on what you’ve seen over the years and any research y’all have done about the relationship between retail, multifamily, office and rents and rent pressure from being in mixed-use environments, have you seen that they complement each other? Have you seen that actually rents are higher in walkable, mixed-use environments? So, have you seen what we call verifiable rent premiums in mixed-use environments?

Levy: I’ll give you two quick anecdotes, and then I’m going to answer your question. We just saw a big infrastructure bill passed, and it’s going to bring trains and other things like that. But do you know what the most important type of infrastructure is? Your own two feet. Walkability is the thing. Which brings me to my second point before I answer your question. One of our great professionals at our company, her name is Mary Anne Tighe, she may be the number one broker of all time. She was named the Most Powerful Woman in New York at least once. And I asked her once what’s the number one amenity of New York? And her answer – New York and the ability to go outside of your space and to experience it. And so, what a mixed-use does, it gives you a virtual or a real not just live, work, play environment, but the term we use, if we want to get all fancy talk here, is urban suburban environment. People want everything in that same environ so that they can live, work, play in the same place. As far as rent pressure goes, it is very much dependent upon location. You’re still going to get higher rents in CBD locations for the interim. But I think that as we go to these BBD concepts, you’re going to start to see, and you already have seen in many of these submarkets, the highest rents in cities that have these live, work, play elements in that job or the neighborhood. So, Fulton Market in Chicago, Wynwood section of Miami, the Fashion District in LA. I mean, I can go down the list and the name them all where you’re seeing some of the highest rents. Midtown Manhattan- Midtown South, I should say, in Manhattan, a place that was a sleepy little backwater, number one rents in Manhattan because it has all those elements. So, yes.

Montesi: What is Midtown South?

Levy: Wow. Okay, this is a New York question, so I love this. So, there’s Midtown which stops at Grand Central Station and ends around 75th Street, maybe it goes up to 96th Street technically, but offices really end in the high sixties. But Midtown South is 42nd Street South to maybe Houseton Street.

Montesi: 35th?

Levy: No, it goes all the way; it goes down. And then, you know why that became the hottest sub-market in Manhattan? It’s because all the big tech firms moved there because they realized that there was conduit next to it was either the Holland or the Lincoln Tunnel that allowed them to have faster transfer of information there. And then multifamily followed, and then the cool restaurants followed. It’s called the agglomeration effect, if you want to use the fancy term again. But Midtown South went from being the sleepy backwater to the number one sub-market in Manhattan, really amazing change.

Montesi: Wow. So, let’s talk about the future and what you see as the future for we’ll start with retail; give us some predictions for the future of retail brick and mortar.

Levy: A lot brighter than people think. The numbers are already good, and we are already shrinking in the ways that we talked about. We’re shrinking in the B malls and we’re going to be having an alternative use. You’re going to see more four wallers, more hybrid retail. And by the way, a grocery store is a four waller technically. And you’re going to see these more in mixed use environments with walkability. Those are going to do quite well. You’re going to see a continued bifurcation of the high end and the low end. We call it the barbell effect. Super luxury, dollar stores will do well, but then these mixed-use environments somewhere in the industry will do well, but some of the commodity type goods still going through transition, the traditional retailers. And so, you’re going to see more experience retail, more restaurants, more things to do. Now, restaurants sound cool, they are cool. And by the way, I should say we are in Fort Worth, Texas, and we are going to the Railhead tonight, the first place I ever had barbecue in my life. I am psyched about that. But the problem with restaurants is they’re difficult tenants. They’re difficult tenants because they’re expensive to put in and they fail a lot. So, I see more experience, but people need to really balance that with the long-term viability of the center. So, more experience within the center, but not losing its total vibe, but less retail overall. But I think that the story about the US being over retailed is a little bit overdone. And the reason why-

Montesi: Tell me about that because you hear everybody say we’ve got 23 square feet of shopping center space compared to Europe. And I do know that doesn’t count streets, that is shopping centers, and in Europe, there’s a lot more streets. But give us your cut on retail supply in the US.

Levy: The UK, just to pick one place, is six times denser from a population standpoint than the United States. The United States is spread out, the land of the free. If you have ever driven 10 minutes outside of almost any major city, it is farms as far as the eye can see. But my point is that we do need more retail, A, because of less density, and B, we are a much more consumer driven culture. Do you know what the savings rate was in America prior to the COVID crisis? It was less than 5%. Now there are some negative ramifications for people with credit card debt and things like that. But you go to some other countries and their savings rate is going to approach 30 or 40%. So, it’s the consumerism of America and our less density which leads to the need for more retail. And one more thing about retail, internet versus bricks and mortar, the big debate that everybody’s having right now – everybody industrial is saying, oh, internet penetration is going to go on forever. It will not. The percentage of internet penetration already will go down this- it may go down this year because people get back to more normal use patterns, but there will be a flattening of that curve. And when the flattening of that curve occurs, who’s the beneficiary? Traditional bricks and mortar. But even the definition of what is bricks and mortar and internet, they are so melded today because you buy online, you pick up in store, all these things. I think there’s going to be so much gray between the two that the internet penetration story, I think, is not past tense but is no longer going to be eating into traditional retail nearly as much as it once did.

Montesi: And so, same question, the future of office.

Levy: The future of office is also brighter than the headlines of the papers would suggest. I’ll give you a couple of stats. KPMG came out with a study back in August of 2020, and they asked CEOs what amount of office do you need in the future? Are you going to materially reduce your footprint? Something like 70% of them said, oh, we’re out of here, don’t need as much. Fast forward to March of 2021, same CEOs, same question. 17% said they need material less. And why was there this huge delta? It was fear. It was, for you legal eagles out there, duress when they were doing these things. And so, they actually need more space than they thought. But I’ll give you some numbers and then we can go talk philosophically. So based on our numbers, we believe that the average person will be in the office 24% less, but that doesn’t mean 24% less demand for office space. It actually translates, by the time you deal with dedensification and other factors, only about a 9% drop in the overall need for office space, because you’re going to have days of peak demand, and I’m going to guess they are on Tuesday, Wednesday, Thursday based upon my real estate research acumen on that one. But the point is that the existing space that’s deemed to be A space is going to have to morph. It’s going to have to morph in many of the ways we talked about for multifamily – being greener, being well-er – I don’t even know if well-er is a word, but more focus on healthy buildings as well. Going back to something we talked about much earlier in today’s podcast, you’ve got to really dig into the demographics of the businesses that are in those buildings and who’s going to shrink the fastest. And so, businesses that are more back-office will shrink more than a more front of the house. But interesting little factoid, and here comes a shameless plug for my alma mater, I went to the Cornell School of Industrial and Labor Relations in the eighties. So, I’m a labor major, that’s what I studied. And what I’ve been saying to our real estate friends is we’re not seeing a real estate issue with office, we’re seeing a labor versus management issue. When we studied labor in the eighties, we made two key assumptions about labor that were false. One was that labor had perfect information, and the second was that labor had perfect mobility. Those were false. Those are true today. And that’s why labor is asserting itself. And one of the ways that it’s asserting itself is more hybrid, more work from home.

Montesi: What about multifamily? What are some interesting things you see being different in the future?

Levy: I’ll give you the good and the bad. The good is we need a lot more of it. The bad is that certain forms of multifamily that we really need a lot more of are going to get more challenging. When you talk about multifamily, there’s everything from for rent class A to affordable to senior housing, anything that is heavily dependent upon the labor within the facility. So, like senior housing, you could still get great senior housing today with a cap rate that’s 3 to 400 basis points higher than you can traditional multifamily. But is that really your stabilized cap rate? Because the cost of labor is skyrocketing. And by the way, we need a lot more senior housing because of an aging demographic. What are we going to do? We’re going to need more automation and things like that. The other thing you should be looking at is the home ownership rate. Now the home ownership rate peaked before the GFC, fell and started to rise again. I see that as falling over time for a couple of reasons. One is that your average home buyer today still does not have the capital to buy a home, number one. Number two, people want more flexibility in their lifestyles.

Colley: Commitment.

Levy: Yeah, and being able to say, here’s the keys, I’m out of here is a lot better. And then you need to think about what is going to happen to family formation. And family formation is slowing in the US, and that’s a key component to multifamily demand of the stickiness of that multifamily demand – how long will people be there? One of the ramifications of the COVID crisis is that the birth rate in America fell below replacement rate; it fell to like 1.8%- 1.8 a person. And so given the fact that family formation is not just delayed but some of it destroyed, that increases multifamily demand over the long-term and will keep the home ownership rate low indefinitely and it may in fact get lower.

Montesi: That makes sense. Any other trends affecting real estate in the future that we haven’t talked about?

Levy: Well, I just did a presentation a few minutes ago, and I said the five mega trends were serendipity, distortion, data, ESG plus R plus W, and then hope itself. If this is towards the end, I’m going to end with the last one, with hope. Why am I hopeful? Notwithstanding a lot of the challenges we have in America today, and I’m not diminishing any of them, well, there were four reasons why I said I was hopeful and I’ll say it right here on air. Number one was during the depths of the crisis, I saw more cooperation between landlords and tenants than I’d ever seen before. And I think that’s durable because I think you’re going to see a changing relationship between landlords and tenants, not so much of a long-term lease, there will still be plenty of those, but there’ll be some more partnership type of arrangements, particularly in retail and will landlords get a piece of internet sales is an example. The second is I see regionalism on the rise, meaning that you’ll see more manufacturing, more jobs come back to America, and I’m not alone in that one. There’s a terrific author named Parag Khanna, who, shameless plug, will be a guest on my podcast in a few months, talks about that. Number three, the rise of ESG or diversity, equity, and inclusion. It’s unfortunate it took some terrible social upheaval last year to make it front and center, but I think that’s going to make us a stronger place overall. But the one thing that really sold me were the vaccines. A lot of people say the vaccines were a medical miracle. No, they weren’t. They were America. They were innovation. The spirit in this country to be able to do something that spectacular in such a short period of time gives me hope that notwithstanding all of our challenges and our differences, we can overcome them if we use that same spirit of innovation to some of our other problems.

Montesi: Great. So, Spencer, any good question that we haven’t asked?

Levy: I would just say that I think the future, notwithstanding how dark it is right now, I hate to use a trite expression, it’s darkest before the dawn. I think that people were scared in 2020. People are still a little scared, but that fear is coming off. Once people get past that fear factor, I think their outlook towards the future is going to be a whole lot brighter, not just towards real estate, but towards the future overall.

Montesi: Consumerism, just everything. I do agree with that. Hey, thanks for your time today, Spencer. And I know I want to start listening to your podcast. Tell us a little about it so my listeners can join you.

Levy: Well, thank you for giving the opportunity to shamelessly plug the Weekly Take, but no, thank you for that. And I’ve been very fortunate, I have a terrific team of people at CBRE. We have a weekly podcast called The Weekly Take where we’ve probably had 30 or 40 CEOs on the show. We had Sam Zell. We had Matt James, who was the bachelor from the show The Bachelor. But what we talk about are nuts and bolts real estate issues across all asset types, all markets. I encourage you to listen to the podcast you’re listening to right now, which is terrific, but also listen to The Weekly Take.

Montesi: Great, thanks, Spencer. Well, thank you for your time today, Spencer, this has been a lot of fun.

Levy: Thank you and go Fort Worth. I say this, and hopefully this makes the air, my uncle Howard Bernstein standing right in front of me, Fort Worth resident, and we’re heading to the Railhead.

Montesi: Yes, enjoy the barbecue. Thank you very much.

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