I am curious to hear your take on the remote working paradigm (or hype?).
If remote working prevails on a broad basis, clearly this would dampen the outlook in the office space. But also residential (and by extension retail) could suffer because (a) no need to be close to the "workplace" and (b) the apartments in CLPR's portfolio are rather small - at least for standards I am used to. How are people supposed to pack a family and one or two office desks into a 600-700sf (~60-70m²) apartment (many apartments are even smaller)? If given a choice, I would prefer having a multi-screen setup instead of working from my kitchen table with a tiny notebook.
I am just wondering: Remote work mostly affects white collars, people who are usually in higher income brackets, i.e. exactly the type of clientele you want as tenants. If they get more bang for their buck elsewhere while retaining their nice salaries, why stay? For example, I am based in Vienna but living costs are much lower in my hometown, which is still large enough to be printed on maps and offers a high living standard including entertainment. If remote positions were ubiquitous, I would be very tempted to leave Vienna for good.
Or - grosso modo - office live will be back once this pandemic is over because
- cities are still attractive and people don't have enough space at home (circular with the above)
- lack of trust/oversight/power when not co-located
- failings to adopt efficient remote work culture/values
My opinion is that this "work from home (WFH)" trend is real but its magnitude is overstated by the market, as is often the case with new market trends.
But in the end, it doesn't matter all that much for CLPR because [1] all the office space is long-term leased to the City of New York, not affected by WFH, and in my valuation I considered [2] retail spaces as permanently impaired and [3] NOI declines of 30% or more from the residential portion of the portfolio; after all of this, CLPR comes out as attractive.
Yeah, yeah, the valuation is attractive indeed, especially because CLPR's current rents are below market.
New trends are (almost) always overhyped for sure, and I would suspect government agencies to remain in physical offices the longest. However, if office demand ceases nontheless, what is to stop the City of New York to pull its early termination option and move to a cheaper complex (or renegotiate the rent)? Not to mention the drain of high-wage jobs?
On the other hand, (big) tech is gobbling up office space. If any companies, they should be the ones most advanced and experienced in remote settings.
The early termination option is in 2025 to 2028 for the office properties (if I'm not mistaken), and by that time the office properties alone will have produced enough NOI to cover all the current market cap. And that is, excluding all other properties.
In the end I believe that cities will remain important, maybe a little less than prior to the pandemic.
I am curious to hear your take on the remote working paradigm (or hype?).
If remote working prevails on a broad basis, clearly this would dampen the outlook in the office space. But also residential (and by extension retail) could suffer because (a) no need to be close to the "workplace" and (b) the apartments in CLPR's portfolio are rather small - at least for standards I am used to. How are people supposed to pack a family and one or two office desks into a 600-700sf (~60-70m²) apartment (many apartments are even smaller)? If given a choice, I would prefer having a multi-screen setup instead of working from my kitchen table with a tiny notebook.
I am just wondering: Remote work mostly affects white collars, people who are usually in higher income brackets, i.e. exactly the type of clientele you want as tenants. If they get more bang for their buck elsewhere while retaining their nice salaries, why stay? For example, I am based in Vienna but living costs are much lower in my hometown, which is still large enough to be printed on maps and offers a high living standard including entertainment. If remote positions were ubiquitous, I would be very tempted to leave Vienna for good.
Or - grosso modo - office live will be back once this pandemic is over because
- cities are still attractive and people don't have enough space at home (circular with the above)
- lack of trust/oversight/power when not co-located
- failings to adopt efficient remote work culture/values
- hidden traps we don't (want to) see yet
- ...?
So, what do you think this means for city REITs?
My opinion is that this "work from home (WFH)" trend is real but its magnitude is overstated by the market, as is often the case with new market trends.
But in the end, it doesn't matter all that much for CLPR because [1] all the office space is long-term leased to the City of New York, not affected by WFH, and in my valuation I considered [2] retail spaces as permanently impaired and [3] NOI declines of 30% or more from the residential portion of the portfolio; after all of this, CLPR comes out as attractive.
Yeah, yeah, the valuation is attractive indeed, especially because CLPR's current rents are below market.
New trends are (almost) always overhyped for sure, and I would suspect government agencies to remain in physical offices the longest. However, if office demand ceases nontheless, what is to stop the City of New York to pull its early termination option and move to a cheaper complex (or renegotiate the rent)? Not to mention the drain of high-wage jobs?
On the other hand, (big) tech is gobbling up office space. If any companies, they should be the ones most advanced and experienced in remote settings.
https://www.nytimes.com/2020/10/13/nyregion/big-tech-nyc-office-space.html
https://www.wsj.com/articles/new-york-city-tech-startups-rethink-their-office-space-and-culture-11604250000
My guess is humans are humans and will be attracted to the powerful ecosystems cities can provide.
The early termination option is in 2025 to 2028 for the office properties (if I'm not mistaken), and by that time the office properties alone will have produced enough NOI to cover all the current market cap. And that is, excluding all other properties.
In the end I believe that cities will remain important, maybe a little less than prior to the pandemic.
Thanks for this well-written article! I'd be grateful if you could provide an excel version of the valuation table as well.
Hi Michael, thanks for your feedback.
Substack doesn't allow me to share files on the site, if you want to get access to the excel model, please contact me at riccardo.formenti@outlook.it