PART 1: Emerging 2021 CRE Trends with PwC’s Byron Carlock

CEO Terry Montesi speaks with Byron Carlock: National Partner/Real Estate Practice Leader for PricewaterhouseCoopers. 

Byron and Terry discuss emerging trends identified for ULI that will impact commercial real estate moving into 2021, including migration from large urban areas, social issues, multi-family and office, Texas real estate markets, and several other topics.

Byron is a CPA, currently a governor of the Urban Land Institute (ULI), a member of Real Estate Roundtable, NAREIT and AFIRE. He is also a board member of Harvard Club of Dallas and a board member emeritus of Harvard Business School. 

Be sure to subscribe to hear part two of Byron and Terry’s  conversation that will be available in the coming weeks.


Terry Montesi: This is Terry Montesi, CEO of Trademark Property Company. Welcome to Trademark’s podcast, Leaning In, where we look at the future of retail and mixed use, and how we can lean into it while others are leaning out. This is part one of a two-part episode. Thanks for tuning in. On today’s episode, I speak with Byron Carlock: national partner, real estate practice leader for PricewaterhouseCoopers. 

We will talk about the most important trends going forward affecting commercial real estate that are a result of the emerging trends in real estate in 2021 that he and his company worked on for Urban Land Institute. We’ll discuss recent trends in migration from large urban areas, his thoughts on the Texas markets, and he also shares recent trends around social issues, multi-family, and office real estate – and many other things. 

So, Byron, thanks for being with us today. I’m involved in ULI and followed the emerging trends in real estate research and publication that you are instrumental in now, and why don’t you start by helping us understand a little more about PwC’s real estate consulting business, and your involvement with the ULI emerging trends in real estate. 

Byron Carlock: Thank you, Terry, it’s a pleasure to be with you today. And I’m a bit of an oddity in the accounting world. Although I have a CPA and I got an accounting degree in undergrad, I went right into industry after graduate school and began my work with the Trammell Crow family at Trammell Crow Company, and then went into Trammell Crow Ventures, and then Crow Holdings, where I spent the first half of my career. And then I was hired out of industry after running several REITs to run the National Real Estate Practice at PWC in 2012. And this publication with the ULI was well along. In fact, this is the 42nd year of the publication. It’s one of the fun things I get to do in leading the practice is to publish this in the fall. And then we’re trying to extend the shelf life of it, especially in a year like this, where it’s so unique. As we pull 1,600 to 2,000 C-suite executives in the industry to get their sentiment, we’re trying this year to update it because unlike previous years, this year’s discussion points were not so much about products and markets as they were about major themes. 

And so, I think today we’ll be talking about a lot of those, because it was really, really interesting to see what is happening, MITs, this pandemic as it relates to real estate.  

Montesi: Yes. It was a great read and a lot of really interesting things. And like you said, you had the opportunity because of timing to incorporate a lot of discussion about COVID. We will talk more about that today. So, your emerging trends in real estate talks a lot about kind of key trends. And so, I’m going to ask you to highlight some of those key trends that you see sticking post-COVID, as we look forward to the next five to seven years, whether they were trends that have been accelerated or are new trends, why don’t you highlight some of the trends you think will have the most impact on commercial real estate development and operations over the next five to 10 years? 

Carlock: Sure. Terry, so interestingly, this publication throughout most of its history has been a talk about ‘what are the great markets and what are the great products for investment and development in the coming year?’ And this year, it just flew off the page with almost every interview. This year’s concerns and discussion was not so much about products and markets, although there’s a very robust section on that and we can talk about those in a moment, it ended up being in four big buckets, four big trends of urban Exodus, accelerated transformation – especially in the retail sector. Social issues; really rich and deep around some social issues that we probably negated as an industry, but now are stepping up to take leadership. And then finally reinvisioning our post-COVID world. So, those four things really have dominated the discussion both in terms of publication and in terms of discussion with the media, post-publication.  

Montesi: Well, I might go through a couple of those and get you to elaborate a little more. So how about, we’ll just go in the order you mentioned. 

So, give us the highlights of your overarching theme regarding urban exodus.  

Carlock: Our researchers tell us that some of this had begun – because people have begun giving permission to work from home more – the shutdown, and the fear of density really sent people out to their country homes: the Hamptons, Nantucket, Maine, Martha’s Vineyard, the Northeastern has just fled the city in New York. And the two biggest were New York and San Francisco. Over 25,000 households have fled those two cities. The diaspora in San Francisco was more broad. You had in the spring CEOs of tech companies saying, “we don’t even need offices anymore, work wherever you want to, and just be accessible to us and get your job done”. 

So, San Franciscans took that to heart, did not renew their leases, left as quickly as they could, and showed up everywhere from Palm Springs, to Arizona – big move. 

Montesi: Napa.  

Carlock: Well, someone up to Napa, but remember the fires were making Napa not so attractive. So, Austin became a huge beneficiary and that’s only grown, so, the San Franciscans don’t have an intent to go back. In the New York Metro area many of the. suburbs quickly began selling homes to millennials that were tired of trying to raise their second child in the master bedroom closet and finally bit the bullet and decided to buy something. 

Unfortunately, interest rates have been low. So, the suburban home sales in Metro New York – all the way up into Connecticut and down to Philadelphia even – have been surging as folks now have the confidence that they still have access to the city when it’s safe to return, but they can work from home two, maybe even three days a week. 

We as a firm began allowing work from home seven years ago and we noticed that associate satisfaction going up and productivity going up. And it’s given our workforce great flexibility, especially with work that’s just head down and could be done anywhere. We’re also realizing that in our office space, we probably over densified, and so I think we’ve been learning and I think many of our clients are learning that office is still necessary, but there can be a mix between working from home and having an office, a central location. And when one goes into the office – and we’ll talk about this and post pandemic realities – when one goes into the office, it’s going to be a different situation. 

We’re going to see desks spread out again. We’re going to see a more collaborative space, because the deficiencies of work from home show up in everything from strategic planning, brainstorming meetings, team meetings and collaboration, whiteboard sessions, and especially in cultural inculcation, product demonstrations, product launches, hiring the interview process is doable remotely by Skype and Zoom, but not as effectively. 

And so, I think we’ll see ourselves using our offices differently. So, all this to say the urban exodus was the result of that permission that it’s okay to work from home. Now, the degrees of that have changed from the spring until now, we now have 51% of our survey respondents saying they may actually need more space when they return to the office and they’re still going to allow work from home.  I think the more space will be to make the office visitation more experience or more relevant, more important to the business processes, and then you’re allowed to get your drudgery work done at home or in the privacy of your own environment, without having to worry about punching a clock and being in there 8:30am to 5pm every day. 

Montesi: Thanks for that. The next one, I would like you to address this accelerated transformation you mentioned primarily in retail, and I know also in office. So why don’t you tell us a little more about what you mean about that? 

Carlock: Well e-commerce was already growing 25% per year compounded, pre-pandemic and it really took a spike upward, especially in the shutdown of the spring. And the most instructive piece was the number of people that began to become e-commerce subscribers and users for the first time. And the reality that it’s safe to pick your groceries online and have them delivered to your home, or to drive and get them delivered into your trunk curbside. Same for food, this [inaudible], you realize that an e-commerce life compliments the efficiency and productivity of your own life. But remember, that’s only 16% of sales. That’s up from 10% of sales. 84% of purchases are still done in brick-and-mortar locations. The brick-and-mortar location of our retail past is not dead, but it is transforming at a rapid, rapid rate. I know you grew up in the grocery business and so brick-and-mortar was very important, but I also, having grown up in the mid-South, appreciate it; you made a grocery shopping experience enjoyable.  

We drove in from a small town in Arkansas to buy groceries in Memphis, and it was always a treat. And your family made it very experiential. Well guess what? Experiential is going to be the list for whether or not someone visits a brick-and-mortar store going forward. Because anything that’s convenient, or accessible, or understandable online will likely be part of the e-commerce retail experience, but if you want something special or you want to learn about a new product, or see, touch, and feel new ideas or new fashion that requires a store visitation. We have seen great success among the retailers – that if someone orders online and picks up in store, the customer service interface at that fulfillment point can also turn them out onto the showroom to look for more goods and even spend more money and have a different experience than just waiting for the box to come to their home. 

I think that many of the retailers had become over levered. And so, I think we may see some of the successful retailers not repeat that mistake and have balance sheets that are a little cleaner, an ability to be a little nimbler with inventory and inventory management. And that’s good for the retail environment.  

At the same time, you’re seeing e-commerce retailers see the need for brick and mortar, just like Warby Parker discovered several years ago. And so those users of space will fill some of the vacant space. But let me tell you, Terry as you know, there’s a ton of vacant space. And so, as we look at the voluminous volume of especially BNC Property retail, it’s more of a realization that we failed in suburban sprawl from the 1950s to the 1990s, with the belief that we needed a shopping center on every corner when we built a new intersection. That fail probably turned a lot of property back into new land use, and as you and I work with the ULI, we know that that’s an important hallmark of the organization to think about the highest and best land use. With the current – and we’ll talk about social issues in a moment –realization that we’re over retailed at 26 feet per person, compared to Germany at three, and Canada somewhere in the middle at around 13, you realize as Sam Zell has said, we’re not over retailed, we’re under demolished and it’s time to clean up some of that. At the same time, retailers were required to furnish five parking spaces per thousand square feet. There’s a lot of paved parking space that gets to be redeployed into a higher density use, and we are under housed. And so, this is an opportunity for us to think about using a retail space for  new housing formats. So, I’m actually excited about the transformation. The capital markets are being very punitive to the space right now, but that will be a cyclical thing, and we’re seeing opportunistic funds stand on the sidelines, looking for some good deals, and I think that will allow for new investment into what was previously pure retail.  

Montesi: Great. Thank you. You mentioned our family grocery store. I don’t know if you knew it, but I learned when I moved to SMU and I met Jack Evans who at the time was running Tom Thumb. And he told me that – it never clicked – but he said, “yeah, I’ve been to Memphis to your grocery stores. Your grandfather did the first grocery Superstore in the country”. I was like, “really?” He said, “yes, my grandfather, dad, and uncle built a 63,000-foot store in 1960”. And my analog for that was that we redeveloped the Southeast corner of Preston and Royal. There was a safeway that opened in 1960 that was 29,000 feet. 

So that was what the big grocers were doing and the gold-plated suburbs in the US and the same year. So that was fun to get my start in the retail business and I ended up in retail real estate – now the mixed-use side. So, your next theme I wanted to dig in on is you mentioned the re-envisioning of our post-COVID world. 

That’s what everybody wants to know is what’s it going to be like? So, give us your thoughts.  

Carlock: Well, I think starting with what I began a moment ago, where I think work from home is going to be a continued reality for the purposes of flexibility. And then a visitation to the more formal workforce environment is going to be a special experience. 

So, I run audit tax and advisory, and our real estate consulting group in the occupier services space is absolutely sold out with folks trying to re-envision how they make their companies better, how they relate to their people better, how they use technology to get there, how they use their space and social interactions to make their culture more robust. All of these things have been brought front of mind as we’ve gone through the travails of all working from home amidst an economic shutdown. And some of it was unique, novel, and even fun in the first couple of months, and then it certainly dragged on and has dragged on to the point that now we have heightened concerns about depression, mental illness, workforce satisfaction, and those items are driving folks to rethink when the world reopens, how we want to live, behave, and interact. And to think that nothing’s going to change is sophomoric. I think there’ll be both sociological implications as well as business protocol changes. We’re borrowing protocols from the hospitality and the healthcare industry to rethink workforce environment safety, air quality, sanitation. We’ve talked about social distancing. We’ve not talked about the whole new industry that has sprung up during the pandemic in the allied health sciences about temperature checks, questionnaires, tracking, tracing, continuing to manage monitor – even vaccine and post-vaccine – how workforce health relates to workforce environment. 

And I think you’ll see a greater emphasis on safety and health, and that’s probably with us to stay. The same for convention centers and hotels as they try to make the user population more confident that it’s okay to gather. Concerts, sports venues, street retail, meetings, conferences, conventions all will come back, but at different terms of how we interact in public spaces with greater emphasis on sanitation, greater emphasis on tracking and tracing. Who would imagine having to answer a questionnaire to attend a conference at the door as you’re going into the building? But those kinds of things are probably here to stay, especially as we are on high alert for the next pandemic. Remember this isn’t the first, we learned a lot from the Spanish flu in 1918 and pulled those playbooks out to try to monitor our behavior and then enhance those. But SARS, H1N1, Ebola, we’ve had glimpses of what a pandemic can do to society. This is the most widespread we’ve seen. And we’ll learn from this and get ready for the next one. But I think it’s going to alter our behavior in public spaces. What do you think?  

Montesi: I think people will be fairly desperate to get out of their house once the vaccine is reasonably widespread and herd immunity is reasonably here. We’ll have a little bit of a rush to get back to things you just mentioned. Games, arenas, cinemas, restaurants, malls, and public spaces. But I think people will be a little more cautious. I do think I’m encouraged that we’ll have less folks miss work because of the flu and colds the next few years. 

And the  less that people forget about it, five to 10 years from now, that people will be a little more concerned. They’ll be more likely to stay home. And that companies will be more understanding if they stay home and they say, “I’ve got a little cough. I’d rather not come in”. I think that that’s going to be a real benefit to our system. I think it’s quite possible. People see people with all these preexisting conditions that are more vulnerable to COVID and they might actually want to be a little healthier and try to avoid some of those. And I think you mentioned in the report that some of the changes post-COVID will be at the margins, but then in real estate, if a change is 10% or 15% of the entire office subset, that’s a big change. Or a 10% or 15% on brick-and-mortar e-commerce. So those are marginal but super meaningful. I’m pretty there with you. I think we’ll have a lot of things we’ll learn. 

That’ll be good. I think we’re going to have some real benefits come from this. I mentioned on how to keep us healthy and keep us safe, and then like you mentioned, I think less commuting will be good for people’s psyche. It’ll also be good for the environment. And it’ll mean when people pay much more attention to having the office be a really interesting place to be. 

So, I see a lot of good coming out of this. Like you do.  

Carlock: So, will folks go to the office and Lulu Lemon in sweatpants?  

Montesi: I’m not sure about that. They sure are as comfortable working at home as I have been. I’m not sure we’ll change that dramatically, how we dress for the office, but it might get a little more casual. We were already business casual. So that’s an interesting question. 

Byron, you’re forth with social issues and, without getting too deeply into the social issues and why they happen, how do you see the impacts of that on real estate going forward?  

Carlock: Well, I think it was actually heartwarming Terry. 

I’m watching our industry and I think frankly, a lot led by ULI and even the real estate round table in saying we in the industry can do a lot to improve some of the social concerns, especially as it relates to real estate. Whether it is climate change effects on real estate, whether it is affordable housing, workforce housing, hotel conversions into COVID recovery centers, new ways of looking at health care real estate, racial equality in real estate ownership, home ownership, breaking down barriers, and neighborhoods, changing zoning, variances, and construction codes, the real estate industry is a net creator of emissions in the ESG concerns. And so, by reducing waste at a construction site, by looking at alternative materials, by using less concrete and more green space, our industry can make a big, big impact. 

I think some of the failures of suburban sprawl we have to admit was promulgated by real estate developers moving further out by ring roads, but also perpetuating this white flight from the urban center. And the racial inequality of real estate has reached a fever pitch that I think our industry leadership is ready to embrace and change. 

I think that’s heartwarming. It really is pretty exciting to see. And you look at what the industry is doing around opportunity zones. It’s not accelerated to the point that the Senator Scott had originally hoped, but it is a big step toward really embracing redevelopment and new development in these opportunity zones. Impact investing is very important to the millennials. 

They are about to inherit, you know, over $50 trillion, from previous generations. Allocations of their portfolio will go to causes of social good and companies that are focused on triple bottom line. So, at our age, Terry, we have no choice but to embrace some of these social issues for the good of society, and that’s pretty exciting. 

And so out of this year’s survey, ESG related issues – environmental, social, and governance – all were big discussion items. And I think that was pretty heartwarming to see.  

Montesi: That is music to my ears that we were just named one of the winners in the Grimsby rankings for real estate companies on ESG. And we’re very proud of that. But one thing you didn’t mention that is obviously at the top of people’s lists – and I’ve heard more discussions about, and energy being put forth on workplace diversity in the last 12 months than in my prior career I think – I think our industry is clearly responding. The emerging trends report still puts a lot of energy on markets strength and thinking about markets of the future. 

And obviously you had an opportunity to consider some of this urban Exodus. As we look at Texas markets, Dallas, Austin, and Houston, give us your views on those markets going forward.  

Carlock: I think the big lesson in this year’s report was business-friendly States with no to low state income tax were easy beneficiaries from the urban Exodus and Texas – especially attractive as well as Florida, Tennessee, and Utah, all very attractive as business-friendly States – but Dallas and Austin, and then San Antonio and Houston secondarily have been especially benefited – Houston somewhat tempered because of energy. But I think Dallas is now the number one corporate relocation choice among CEOs considering moves. And that’s significant. Austin of course, last week with Oracle’s announcement and Tesla’s announcements that are huge considerations for that economy and validation of that economy as a tech economy. And interestingly, as you look at the market rankings this year, the number one desirable market for investment and development is Raleigh Durham, the research triangle. 

And so, what does that tell us? The Bay area has been the center of tech and innovation. Sandhill Road has controlled the venture capital community of so much money going into the tech sector, but it’s now spreading a bit. And once companies are developed, they’re looking for lower cost places to do business with, also having educated workforce in relative affordable housing for their employees; Austin, Nashville, and Raleigh Durham fit those bills. 

And so, you’re seeing the growth. Now, life sciences are still highly concentrated in Boston, which is also in the top 10. But you look at the attractiveness of markets outside of their previous concentrations, and Texas has been a clear winner, but there are other places to watch as we look at 2021 and beyond. 

Montesi: A lot of people are down on Houston right now. And it clearly seems to be affected more by energy cycles obviously than other places. Give us your long-term view on Houston.  

Carlock: So, Houston has gotten a bad rap because of its energy concentration, but there’s so much more to the Houston story and it is probably the most international and diverse of our major cities in Texas. It is spread out. It doesn’t have the urban concentration that some of our other cities have, but it’s got a lot of business attributes, especially the growth in medical and the importance of the port. So, don’t count Houston out. 

It’s in one of its downward cycles because of fear about fossil fuel energy and fracking, and it’s such an important service economy to the energy industry, but it’s also a very innovative business community, and they’re not going to be held back by concerns about energy dominance. It’s going to continue to see growth and diversification through the port and distribution, as well as medical technology, cancer research, and growth as an important medical center.  

Montesi: Hewlett Packard just moved there. It may become a tech hub, who knows? 

 Well, thank you very much, Byron. Give us your views on malls going forward, and department stores going forward. We hear a lot of people predict that there’ll only be three or four malls surviving, and half or more of the department stores will go away. What is the UNP and PWCs view? 

Carlock: Well, if you read our holiday report, we’re still not giving up on brick-and-mortar, but we’re drawing an important line around experience, and it is an important omni-channel experience that connects directly with the consumer and the consumer’s preferences.  

What is it that makes a store visit special? And what would your grandfather say if he was still here? And I think we’re really going back to reasons to go into a store, find a parking space, go through the inconvenience of going into the mall and making the rounds. What is your experience like? And I think that these ideas we’re hearing about enhancing the omni-channel experience to encourage ordering online and in-store visitation seems to be that important intersection. 

So, if you only want convenience, if you’re reordering something, you go online, and the box is at your doorstep within a matter of time. But if you have questions about what you ordered, or if you want to try on a different color or see a new product for something that you didn’t quite understand or recognize when you were online, that store becomes very important. 

We’re seeing a continued growth of showrooming with retailers trying to do more with less space, and then get your goods to you as quickly as possible after you’ve had your demonstration and chosen a particular model, size, or color of something. And so, we’re really seeing those retailers that have invested in technology and the omni-channel experience with the store experience being special have an opportunity to prevail. 

Would you agree with that?  

Montesi: There’s no question that online shopping has gotten so good at offering such a wide variety and such convenience that if all you need is a commodity product and you want to shop for price and shop for a variety of options, that’s the place to do it. They can’t compete with it. But if you want to touch it, smell it, you know, see it, try it on, experience it, learn about it, be a part of a community of users of that product, be connected to a brand, hangout with folks and just shop, just learn, just experience different things and see what’s new, clearly brick-and-mortar is still going to be very relevant. Like you said, though, there’s too much of it. 

I’m excited about a transition period where we deconstruct some of this BNC(?) supply and it becomes, like you said, new land uses, multifamily, industrial, single family, et cetera. So, I very much agree. At Trademark we’ve been focused on experience and mixed-use since we opened our Market Street Woodlands project in 2004. And that’s why we’re focused on mixed-use because so much of why ULI and users like mixed-use is because it’s not only efficient, but also good for the environment. But it’s also more interesting, there’s just more to energy interaction between people that are above stores and one use is going away. The office folks are leaving at 5.30pm and that’s when the people in the apartments are getting there and it’s more efficient land use, but it’s also more interesting. It’s a mixed-use project just as a microcosm of what people like about urban environments and big cities. I agree with you as well. 

Carlock: Have you ever read the book Pattern Language?  

Montesi: I have. That’s a good one. 

Carlock: It’s one of my favorites I think that mixed-use concept you were just sharing hearkens us all back to the kind of development that seems to resonate with us emotionally, whether it’s a European village or a Cotswold Hamlet, or a new urbanism community like you’re building, there’s something that creates emotional attachment. 

I worry about Mom and Pop credits in those communities, having the financial sustenance to open and stay open. I’m really worried about our restaurants. I think the National Restaurant Association is saying that perhaps over 50% of Mom and Pop restaurants may not have the working capital to reopen, and that concerns me because that, that really adds to the vibrance of the neighborhoods you were just talking about. And we need those businesses.  

Montesi: Hopefully Congress and Senate will get together and do something that’s needed. Not more than is needed but do something that’s needed to get us through these next few months until the vaccine is further rolled out.  

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