Think Beyond Space Podcast: Episode 11 with Sean Connors

Sean Connors, Senior Advisor with Cresa Portland

 Ep11 Connors

 

On a recent episode of Think Beyond Space | The PDX WSorkplace Insider podcast, host Blake St. Onge sat down with Sean Connors, a Senior Advisor for Cresa Portland. Sean and Blake discussed the current state of the Portland office market, and opportunities for companies in the new world of work. 

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Blake St. Onge
Hey, welcome back to the podcast. I'm really excited to have a partner of mine from the Portland office, Sean Connors, with me today. Sean, welcome to the show.

Sean Connors
Hey Blake, thanks so much for having me. Really excited to be here and participate in this these podcasts we've had.

Blake St. Onge
Yeah, been fun. I'm excited to have you on. We've had a chance to work together for the last four plus years and we'll get into some details around the real estate markets and what companies are doing, where they're moving, and why are they moving? And what are they doing from a workplace perspective? But before we get into all that, why don’t you share it a little bit about who you are and what you do for office, and then we'll get into it.

Sean Connors
Yeah, absolutely. I joined Cresa about five and a half years ago. I always, I think since I was 10 years old, knew I'd be in the commercial real estate world, just didn't know where and when. After I graduated, I looked at a couple different companies and came across Cresa and the focus on occupier representation. And I thought that was a great platform to be with. And I've loved every minute since I think we've got a great team, and do really, really good work for our clients.

Blake St. Onge
You knew you wanted to be in commercial real estate at 10?

Sean Connors
Yeah, I mean, I grew up outside New York City that explains a lot. And my Dad was an asset manager, my uncle is commercial real estate as well as many family and friends. And it's also in New York you see tall buildings every day, you don't really know how they got there or what's going on inside of them. And once you start to realize that, it's to me, it's exciting. Most people thought it was pretty boring at 10 years old, as you can imagine.

Blake St. Onge
I was building Legos and playing outside! You were an early developer (laughs)

Sean Connors
So being able to work in something that I've thought about for most of my life is, is awesome. A really awesome feeling. As you know, I can be attentive to detail. And as such, in addition to the account, work I do with you, and with other partners in the office, I do a lot of our market research, and try to provide some insightful data and turn it into something valuable, and something that we can understand how it helps companies. And that's what I'm excited to talk about today. I thought we probably should start it off with what we're seeing with our clients, and then backtrack after that as to, what the data is showing behind that?

Blake St. Onge
Yeah, I would say let's, you know, think about it in sort of broad strokes, the last 15 or 16 months from an office perspective has been very light, we've had some things start to tick up a little bit in the last few months. I think part of that is due to some of the restrictions being lifted. And I think there's a sort of a Labor Day date out there for people to potentially come back in some form or fashion, whether that's fully back hybrid or some sort of flexibility. But, lets walk through some of the things that we've seen in the last 12 months, last 15 months, on the velocity side, downtown, suburban markets and just sort of some context around what we're seeing there.

Sean Connors
Yeah, yeah, it's a very interesting environment. Anytime I tell someone I work in commercial real estate, they say, ‘Oh, no, wow, what's going on?’ Is there anything happening? Well, yeah, a lot is happening! We have seen certain submarkets stall and there are lots of subleases on the market. You're not seeing a lot of people in the office, and then you see some markets blossom. I think it's a changing dynamic that may have happened eventually anyways, to be honest.  

What we're seeing is the ability for companies to relocate within a kind of smaller market that is Portland and see what happens. It's a really interesting time in the market. I would say that we've seen some headlines of some massive companies moving to Hillsboro, or to Cruz way in Lake Oswego, but we've certainly started to see in the last couple months companies really renewing in downtown Portland and saying we're going to stick it out. Again, these leases are five. Seven, or 10 year leases, right. So this is a long period of time,  and I think a lot of people are so wrapped up in the last 12 to 16 months, they're not really looking down the road.

The conceptual idea that everyone's going to be working from home, I don't think is realistic. I think companies are starting to realize and employees are starting to realize the need to be around people and to be sharing ideas in person is really important. So, we're still in the mix of figuring out what's going to happen. The data is clear and shows that subleases have increased 100%. Vacancy has increased more than we've ever seen it in the Portland market for office buildings, and we will see where it goes from there.

Blake St. Onge
I think the big thing too, is, is there's been so much uncertainty in the last 12 to 15 months. I think, equally, there's going to be some uncertainty for the next 12 to 15 months, to be honest. I think that, people are still sort of trying to figure out the mire of decay. Do we go back? Do we go back hybrid? Do we go back full time? I think that some organizations have definitely put a stake in the ground of what they're doing, but I think others from a leadership standpoint are saying, you know, we're going to try this, we're going to try this. And it's just I think, if we hold this podcast 12 months from now, it could be vastly different than what it is today.

Sean Connors
Absolutely. I think the key is to be flexible and that is without a doubt what everyone is trying to do. You have, again, some companies who are moving out of the downtown area in signing a five year lease, or a seven year lease in the suburbs. And what happens two years down the road when conceptually everything opens back up in downtown and people are located there? And they say, you know what, I want to look at jobs that are closer to where I live, I want a bike to work.

Now we have more companies whose leases are eventually expiring, right? You have to call it now- 50% of companies are now deciding what they're going to do. Everyone's doing their own thing. I was before looking at the data, I would say, oh, everyone's flooding the suburbs. But no, companies are renewing in Portland. They are expanding into the Pearl District and Slab Town and in the Lloyd district. You also have companies that are going to Hillsboro and going to Cruise Way (Lake Oswego). So the key is that you have to be flexible. There's not one trend that is directing all of this, it really is not. I think leaders are trying to make decisions to accommodate their employees and to accommodate recruiting as best they can. And I would say that in talking to leaders, none of them are 100% certain in these decisions, but they're trying.

Blake St. Onge
Yeah, yeah, yeah. And I think it's, you know, you know, you stay at a stall out the last 18 months, it's almost like a duck, you know, up top, it looks sort of nice, but underneath the surface, like they're, their legs are just moving, right. So as we've seen, there's been so much content delivery on, you know, in the first part of COVID, about what that looks like. And then we thought that we were going back last summer, and then that didn't happen. And then all the changes that have gone on the last 12 months, like there's been so much sort of pent up, I would say pent up demand, but pent up decision making that's going on. And then restriction is starting to lift. And so what we're seeing too, is there now it's almost like this, there's not pressure for more demand of space, but pressure of like, what does it look like? We've been planning for 12 months, and now all of a sudden we want to implement in 60 days. And it's just that has been a challenge to that we're saying just because you know now, who knows? Who knows if Labor Day is going to be today anymore, right? Like it could be November it might be next year. It just it's still so fluid. Yeah. And trying to track that Data Wise is, you know, fairly challenging.

Sean Connors
Absolutely. I think there are two different ideas here. The first idea is location. And when I said earlier that there is not a trend in location. I do believe that's true. There are some companies going one place there's some companies staying put there's some companies expanding etc. I think the trend that people will follow is when we, when we hit a, say, 50%, of companies making a common decision. And what I mean by that is, right now you have a couple companies saying, Come back three days a week, two days a week, whatever their rules, regulations are going to be, but you don't have enough. And as a result, you have employees who say, Actually, I want to work from home, or I want to be in the office one way or the other. And they're going to try to find the company that can accommodate the lifestyle that they want, right. So until we have over 50%, I would say, companies who are saying you have to be in the office three days a week, there's still going to be uncertainty from a leadership perspective as to whether they should implement those rules, because they will be fearful of their employees and some of their top employees jumping ship, because they want another company who will accommodate their lifestyle. You know, I think that'll be a trend for a long time, I think there'll be companies on the outskirts saying, Hey, we can you know, we can support a complete remote work force, we can whatever. But then once we go to that experiment, we will start to understand what companies are which companies are being more productive, really, right, it'll be the balance.

Blake St. Onge
Well, that's, you know, Microsoft's report came out earlier in the year, you know, about 40, or 50% of the people that are in current roles or current jobs at a particular organization, in the next 12-18 months will change, you know, change their situation. And that's why I think the fluidity of the next again, told the 15-18 months is going to be really interesting to it's we're living and continue to live in this experiment. And I think in some cases, people are making decisions and other it, in some cases, people are allergic to decisions, really. So I mean, it's just it's, there's so much uncertainty. And then when you talk about from a market perspective, am I getting a good market deal? Right? And there's, there's almost, in some cases, there's, there's, there's no precedents for some for what's going on, right. So you're sort of setting where those things are. And it's, it's, it's as advisors were, our goal on our focus is to be there as fiduciary to advise our clients on how to go about, you know, their decision making, and it can be challenging at times, because there's no, there's no clear decision, or there's no clear line, even if they had expirations. In cases, it's like, Okay, well, we could extend for a year, probably because there's no one that's going to backfill our space. And so that there's that decision piece too, that comes into this.

Sean Connors
Right. And that's, you know, that's also something that I think company should be aware of. More often, I often times if you're a company, and your lease is expiring, and the landlord says, Yeah, you have a three year option, your lease, or you have a five year option, your lease, that's all we're going to honor comes up, step back and say, Oh, we actually have a lot of leverage right now. And make a wise decision and a wise decision could be extending for a year and trying to determine what to do next,

Blake St. Onge
or not do anything and work from like, depending on the size of the organization, right, yeah, you know, 10 employees or your, you know, 1000 employees is a little bit different in terms of that decision making. But, you know, if you're up against a lease expiration, you don't necessarily know what you want to do. a landlord decides that they do. They don't want to extend your at least that's the way they posture for a year, 18 months, then the reaction is what we've been working from home for the last 12 months, we can continue to do that. And then be a free agent to the market. Right? Like, yeah, it is, maybe again, maybe not for 1000 person organization, you know, but for a good portion of companies in the metro that that could be a scenario. It is.

Sean Connors
Yeah, without a doubt. And I mean, this is a question to you, as well, as you're experiencing this a lot with your clients. But it appears to me that the need to make a decision is escalating, so to speak, it seems like companies who might still be fine in a short term, flexible solution, are now saying, you know what, we're sick and tired of not making a decision. So let's start to look. I mean, we just did a very large survey for a client doing conducting a drivetime analysis for you know, plus 60 employees in the metro area, identifying locations, cost parking, etc. Yeah. And I mean, we looked everywhere. Yeah. Because they still don't know, but they do know that they want to make a decision.

Blake St. Onge
Yeah, it's kind of looking at the full Metro.

Sean Connors
Exactly. So what do you do? Do you secure a deal in downtown Portland where you can get insane concessions, where you have a plethora of options? Or do you look in a suburban market again, that there is not a trend to look at? You do see Microsoft, you see Apple, you see some other companies who are seem to be going to, you know, suburban areas, but you also see companies staying put in, right and I know I've said that three times, but I mean it because it's an important thing, because everyone's looking for a trend as to what other companies are doing because you said the decision stalemate is occurring. Yeah. Yeah, that's not what I that's not in my opinion, what you should be doing. What you should be doing is really saying where do we want to plant our flag. We're going to be a leader with our employees in this new location in this new environment. There's also an extreme opportunity to, you know, identify very cool creative sublease space in downtown. I do believe that that is an opportunity for companies. And you know, on that to get a little bit into the, into the details and data. I wanted to pull up something we Crestor recently ran a report on some of the top metro areas just showing q1 2021. Right before pandemic hit. And then Oh, q1 2020 2020 geologies. Yes, yeah. And then q1 2021. So seeing that that year impact and you know, what, what we did the top markets, for instance, for available, sublease was or the increase in available sublease was New York, San Francisco, Boston, Atlanta. Right at the top was San Francisco and sublease space increased 135%. Right, it went from 2 million to 4.8 million. Now. These are big markets. And Portland is not that far off. Right? Portland increased 124% over that same period of time. Alright, so we're looking at San Francisco 135%. We're at 100 124%. We have about half the amount of available sublease space. But we have about a quarter of the amount of total supply. Yeah. So there's a lot out there. There's a lot of companies subleasing. Now when we when we say availability rate, which we were just referencing, keep in mind that that is companies who are still technically occupying the space. Right. And they are kind of just throwing the space out in the sublease market to determine if there's activity. Yeah, we've seen some of them take them off, right? Because they say, Hey, you know what, we're gonna actually stick it out. Yeah, right. Yeah. And I think that's, that's a fine way to go about it.

Blake St. Onge
I mean, I think part of it too, is people have thought that, you know, last again, last year, like, let's post it on the market, see what sort of activity, oh, we haven't really gotten that much activity or that much interest, especially if it's been downtown. And so I think we, you know, as you're going through our planning, we thought we were going to be this way in our occupancy for a workplace, you know, post COVID. But now, we think we're going to be this way. And let's just keep our space for a period of time. And what I've also noticed from a lot of the work that you've been doing, is a lot of those subleases. And I'll just stick with downtown specifically, have role dates or expiration dates in the next 18 months to two years. So there's not they're not like five year assemblies and seven year sub leases. So those, you know, will presumably be rolled on to the actual, you know, true vacancy from not even sublease standpoint. So we started to see the increased salaries vacancy, we still have some increased rent vacancy, that could potentially continue to start to, to balloon over the course of the next, you know, couple years. That's it, that's

Sean Connors
a great point, because we, you know, we look at vacancy rate and availability rate all the time, and I don't think many people understand the difference, purely because it's not explained very often, you know, vacancy is this space is a vacant, you know, they can right now or within the next 30 days, and you know that that is a very important metric. However, decisions take 90 days take, you know, 180 days left,

Blake St. Onge 
in some case, right,

Sean Connors
yeah, once you identify a space, so it's almost not a very logical way to look at the market. Right? It does make it seem like the market is less available than, than it otherwise might be. But what really, the availability rate is a very key indicator, because it's showing all the space that is available that's under construction, that will be available, you know, within a 30 to 90 day time frame, or that's out in the sublease market. So the point that you just said is, you know, we've seen the trend of vacancy kind of going up, but once those sublease spaces do roll, they will be vacant spaces. And that's going to be in the next two to two to three years. And right now we have, you know, across the market, we are at 12%. But in select some markets, I mean, in CBD, we're at 24%.

Blake St. Onge
That's central business district, CBD,

Sean Connors
central Portland, and in in closing Northwest, which is slab town, it's very high as well, it's 24 Lloyd district, Lloyd district is still actually pretty, pretty low as a surrounding market. But the point is that there's going to be a lot of space, I think as a company, you'll have the opportunity to really identify the best space for you and your employees. Get it built out how you want it just take some time because there's not going to be one or two options, there's going to be 20 or 30 options.

Blake St. Onge
I think that's sometimes the challenging part is there's you know, a plethora of options but then as you as you know, every company's gonna be different. So as you're getting into the details around Okay, there might be broad strokes, 35 options for you know, a large footprint to floor footprint, and then you're going to actually have that 35, there's really going to be probably 15 that make a whole lot of sense. And then about 15, you're really going to focus on probably five of that list, right. So now you're at, you know, probably 15% of the total or even last 10% of the total market that that actually makes sense for, again, depending upon what it is that you're looking to accomplish with your, you know, with your space.

Sean Connors 
Yeah, and this actually goes to an important point that I did want to bring up, which is related to workplace planning strategy and the tenant improvements. And I think what's going to happen with this trend of, you know, mass availability, so to speak, it will allow companies to not only identify the location, they want to be in what the floor plan they want, and they will not have to spend so much money on tenant improvements, right? I mean, we, we can talk about this all day, but sometimes it almost seems absurd that you end up spending $100 per square foot, building out a space exactly how you want. And I think that's going to kind of go away, because what you'll have is so many options, you'll be able to do the workplace strategy, before you actually start looking, identify what and how you might want to build out your space. And as a result, you'll see and find the options that are nearly there, right? So the money that you'd otherwise be spending on all of that ti is going to go down, and that's going to be a great benefit to tenants. Right? Yeah,

Blake St. Onge
it'll be interesting to see how that, how that plays out. Because, you know, with the construction industry, the way that it has been, with the cost of materials that it has been starting to see some, you know, reduction in lumber costs, which have been an all time high, record high. So we're seeing that sort of come down. But it's, you know, when people, if I'm, if I'm an organization, and I want to go into doesn't matter the size of the space, 510 1520 100,000 feet, what doesn't matter the size, like, if I'm going to commit to something, I want that space to reflect my brand, my culture, my people. And so there's, there's, you know, you do you've got to eat, you have to there's, that's sometimes when you think about sublease spaces, that's the challenge of sublease space, because somebody else built out that space to reflect their brand, their culture, their recruitment, all that. And then for some other, someone else to come in and just take it as it is. That's the challenging part, right? Because you know, big subleases are challenging to fill, smaller ones are a little bit, you know, could be a little bit easier to fill, just because the size and the scale of these sorts of endeavors is so I don't know, I don't know, if the if the construction costs are going to be lower, you might have, you know, maybe overall cost might be lower, because, you know, you might take less space, but we're also seeing some companies decided to take a little bit more footage. Right. You know, yes, i think that i think that's still yet to be determined. But the interesting thing that I'm seeing is, with all this vacancy, or some lease or whatever, there's still a delta between what our clients and what we to a certain degree to believe should be sort of face rents versus what's actual, you know, actually there. And I think part of that is just lack of lawsuits too hard to create demand. And so when you're actually getting into the deal, you're seeing some of that lower, but face rates aren't really, they haven't really come off much from, you know, pre COVID numbers.

Sean Connors
That's, that's true. And, you know, give a few examples for the central business district. You know, we've talked about this before, but over the last four years, we have over 80% of the buildings, trading hands, right. And those buildings, trading hands going to an institutional investor or read, they are trying to get those face rates, and they'll do it at whatever cost they can, they'll give you a free a year of free rent, yeah, they'll give you a lot of tea, eyes, etc. But they want to keep the face rates to keep the value. Now we have a select few buildings in downtown. And I'd say more so in the suburbs that are owned outright, right by long term landlord who's not planning to sell. And those buildings are dropping their rates. And they're getting very competitive. And these are not poor buildings. These are well managed buildings, they are Class B class A buildings in some cases. And that this is the example playing out right in front of us, you have an institutional investor who needs to keep a face rate. So that's what they're going to push. You have a landlord who has owned the building for many years, is now planning to sell it and as 100% equity or close to it, and they don't need to reach those face rates, you know, so, as a tenant, I don't think that's something that you're generally considering, but it's actually an important component to these decisions, right? Because Do you want do you want to get a lot of concessions and do you want to kind of battle with this face rate discussion, or do you want to go in and say, okay, you have 100% equity, we can actually negotiate really well here and get these rates. down for a long term, five year lease, yeah. So to speak. So the financial decisions, right. And that's what we're talking about cost of 10 improvements, cost of rent costs, you know, the concessions, etc. Right? There are so many ways to go about it right now that I think it's really important to kind of dial in what your goal is, as far as the financial wealth goes as a company for the next five years, as it relates to real estate, as far as location, build out, environment, etc. That's a whole different conversation. And that is what we're still working through. Right. But we have so many really great resources, certainly at Cresa. But all around, yeah, from furniture providers, to workplace strategists to, you know, even contractors who are helping trying to reframe how best will space flow? Do you want it more open? Do you want more huddle rooms, etc, that it's a matter of just taking the time sitting down and doing your homework? You know, and you'll get there.

Blake St. Onge
So how do we what do we take from all this? Like, what's the, you know, what's the cliff notes version?

Sean Connors
The cliff notes are that over the next two to three years, certainly central Portland real estate, is going to be hit hard from a landlord perspective, what that means for the tenant is that there's going to be a lot of opportunities. vacancy will maintain it's not going to start dropping overnight by no means. The second Cliff note, I would say is the decision to move to the suburbs by some major companies within the Portland area, we have yet to see how that plays out. Right. And not important is a close knit.

Blake St. Onge
Yeah, area. Right.

Sean Connors
But in the long run, is that the wisest decision to make right now? We have yet to see ya. Right. Yeah. And lastly, you know, I would say that we are all still working to figure out what is the best strategy. That's the end of the day, you know, and I think if you're uncomfortable about what decision to make and how to make it, and you feel pressure at all, on your real estate decisions, you should not you need to step back and really try to understand try to take in all the information that's being provided. And let yourself make a decision that you feel comfortable with, don't let pressure push you because you do have options for flexibility right now. And I think if you feel the need to do that, take advantage of

Blake St. Onge
Yeah, I think that's a good point. And I think, you know, that we've had several discussions and and we've taken deals to the finish line. In some cases, you can sort of see the apprehension on, you know, on clients faces and at the end of the day, the answer is, if you like, you do not have to move this thing forward. from a business standpoint, unless you feel that you're like that you absolutely have to do this. Like, yes, we've been working 369 months on a project and back and forth, back and forth. And now it's time to sign if you're not comfortable signing, and you're not coming on, move that forward. take a pause. Yeah, take a pause. Yeah, that's if that's the right decision, then then do it. Yeah. No, and, and that I think is for us is it's important to, to keep that in mind that, you know, these are big decisions. And it's important to, you know, allow clients and others just to take some time and think and then they're looking at us to be advisors of vision sort of counselors, there's and so it's our job to suggest, look, here's the realities of this, if you do pause, there could be you know, here's some things that can happen. Or, like, you know, what, we don't feel that you're at risk. If you pause to go back. Yeah, so yeah, well, uh, john, just thanks for coming on. You know, give us some good anecdotes and some good data. You're always on top of that stuff. And always appreciate, you know, sharing the conversation with you and looking forward to doing some more. Thanks, Blake. I appreciate it. 

 

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