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Larry Antonatos, managing director and portfolio manager for Brookfield Asset Management.
The lockdowns designed to slow the spread of Covid-19 dramatically impacted office, as businesses shifted workforces to remote work. Now, in the fall of 2020, as lockdowns ease, the short-term impacts are reversing. However, we should look more closely at the office sector to understand the long-term impacts of long-term behavioural changes resulting from the Covid-19 lockdowns.
The lockdowns spurred many companies to quickly leverage technology to shift their workforces to remote work. This has prompted a big question among industry observers. Will the quick fix of widespread working from home become a fixture over the longer term, leading to a drop in demand for office space? We believe the answer is no. In our view, successful companies value the power of in-person collaboration in shaping a dynamic corporate culture and their employees do, too.
While remote work can be effective in the short and even medium term, it cannot replace human interaction forever. Ultimately, a company’s culture needs in-person connection and the physical workspaces that support it to thrive. Our outlook is based on our experience through many challenging periods, including the dot-com bubble, when technological advances such as telecommuting were expected to render physical offices obsolete, the September 11th, 2001, terrorist attacks in New York City, when fear was expected to render high-rise offices and dense urban areas like New York City obsolete, and the global financial crisis.
Office buildings endured these and other shocks, and we expect this resilience to continue through and after the Covid-19 pandemic. An important distinction is that Brookfield’s view focuses on the area in which we focus our investments: top-quality office buildings in major urban centres. We expect these assets will fare much better than lower-quality office properties in less desirable locations.
We anticipate three trends emerging over the longer term. First, working from home will ultimately become a supplement to, rather than a substitute for, the office. While remote work can provide flexibility for employees, office work allows for collaboration, connection and culture — essential ingredients for enterprise growth, risk management and control, and employee development. The second trend is that Covid-19 will likely reverse the office densification trend. With certain social distancing norms and health and safety protocols likely to endure, office square footage per employee will need to increase. This is counter to the historical trend where office square footage per employee has decreased from 425 square feet in 1990 to 225 square feet in 2010, and now in 2020, 150 square feet.
A third trend is that major cities will continue to serve as magnets for talent. The death knell has been sounded for many cities many times in the past. For example, the future of New York City was questioned by many during the fiscal crisis of the 1970s, the crime wave of the 1980s and 1990s, and the aftermath of September 11, 2001, as well as the global financial crisis. Of course, New York City not only weathered these storms but emerged stronger for one simple reason: people young and old want to enjoy the vibrancy of a great city.
We believe that these three trends will continue to support the investment performance of Class A office buildings in major gateway markets, which is where we focus our investments.
We believe that contrarian views can drive excess returns. In fall 2020, our optimistic long-term view on Class A office space in major markets is contrarian. Public real estate companies with outstanding office portfolios in major global cities are trading at significant discounts to real estate asset value. This is a compelling investment opportunity, but it’s not without risk. In the short run, we could have increases in Covid-19 infections and renewed lockdowns. In the medium run, the return of the workforce to the office may be slow. But in the long run, we believe office space is essential to business and will be resilient.
The information in this podcast is not, and is not intended, as investment advice, an indication of trading intent, or holdings or the prediction of investment performance. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and or information. Any outlets or forecasts presented herein are as of the date appearing on this material only, and are also subject to change without notice.