May 30, 2024 • 41 mins
The urban landscape is evolving, responding to societal changes, economic pressures, and the global pandemic. Insights from leaders like Julie Whelan of CBRE are invaluable. CBRE's new report reveals the intricacies of urban transformation and growth, offering a future roadmap for U.S. cities. In this episode, we interview Whelan for a deep dive into these findings. Learn about essential elements for a thriving city, and gain a comprehensive guide for vibrant, resilient, and inclusive urban development.
Check out CBRE's report on the future of US cities here.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, Fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody fromthe peaks of the Mountain West
high up here on the WasatchFront.
We are excited to once againtalk about real estate,
especially some shifts in realestate and anything else that
may come about.
(00:46):
So thank you all for joining ustoday for this week's episode
of Peaks and Portfolios by PEGCompanies.
In this post-pandemic era, weare seeing shifts in where
people choose to live in theUnited States, With remote work
now the norm and not theexception.
Today's workers are not tetheredto their physical office spaces
as they once were, and thefactors that impact where they
(01:08):
choose to live have changed.
There is a recent study hot offthe presses by CBRE.
That have pointed out furtherthat cities now have an
opportunity to evolve into moredesirable places to live, work
and play for future generations.
Demographers are also nowpredicting that the US
population growth will slow andcities will need to compete to
(01:29):
attract an increasing share ofpeople who want to be in them.
The next generation to sustainthe success of cities will be
the children of the millennials,who contributed to the urban
renaissance of the early 21stcentury, which I'm going to tap
into Julie more about and,additionally, there is an aging
population that will play a bigrole in shaping cities as well.
So, with all these factors inmind, we wanted to hear from, I
(01:53):
believe, the mastermind behindthe recent study, and we are
delighted to have as our guesttoday Julie Whelan, Global
Occupier of Thought Leadershipfor CBRE.
Welcome, Julie.
Julie Whelan (02:03):
Thanks, rachel.
Good to be here, and there is astrong team behind me who
delivered this report alongside,so certainly not the only
mastermind.
Rachel Oh (02:11):
Okay, Well, I will tell you.
Global Occupier of ThoughtLeadership sounds like a
mastermind role to me.
Julie Whelan (02:18):
It's a very fun role.
It's a very fun role thatallows me to study the things
that I think are important andinteresting in driving the
trends that are impacting ourbuilt environment.
Rachel Oh (02:28):
Yeah, no, absolutely I, you know.
Again, I was only able to readthrough a bit of the study, so
I'm hoping that you can, youknow, glean further about it.
But I am just kind of amazed atthe volume of information you
folks have gathered and thoroughanalysis, but also the trends
that you predict.
So before we get into that, letme just tell folks a little bit
more about you, julie.
(02:48):
You mentioned a big team, soyou've got a global team of
researchers that do identify themajor trends impacting
commercial real estate occupiersacross all industries.
You are an expert on the futureof work, so we really want to
dive into that more, and Julieis particularly interested in
how the fundamental shiftstowards sustainability and
flexibility are reshaping thestrategy and utilization of
(03:10):
space, and I imagine that wasn'teven a thought a few years ago.
She's also a public speaker, soshe's appeared on the Wall
Street Journal, usa Today,forbes, business Insider,
bloomberg, cnbc and more, and sowe are so honored that you are
joining our humble podcast today, julie, excited to be here.
So, julie, let's dive right in.
(03:30):
This whole study is aroundshaping tomorrow's cities.
Tell me why your team hasdecided to approach it in this
manner.
What was the genesis of howthis report came about?
Great?
Julie Whelan (03:41):
first question, so about nine months ago now, if
we recall back, the media wasall about the urban doom loop.
It was so much of what wasdiscussed and I found that on a
daily basis.
I was trying to help tomitigate that narrative that was
out in the market, because wewholeheartedly believed at that
(04:02):
time, and obviously still do,that that is not the truth.
We are not in an urban doomloop.
And so it set us out to say,although the future of work has
been of utmost importance overthe last couple of years, now we
really need to start to shiftour thinking around how our
cities that have been thecenters of business for so long
(04:23):
need to shift to not be part ofthat urban doom loop.
And so we did that, and that'swhat we set out to do.
And we now, more so even thannine months ago, know that
cities are going to remaincenters of economic power and of
demographic growth and placesthat people want to be.
They're just on a bit of anevolution, which which, by the
(04:43):
way, they've been on for sincethe existence of cities started
right, so hundreds and hundredsof years.
Rachel Oh (04:49):
I think you guys did an excellent job of kind of
walking people through the wholeprocess.
So I want to go through eachchapter just kind of briefly and
kind of highlight, maybe delveinto deeper.
But I was so impressed the wayyou categorize the different
cities and the growth from Ibelieve it was 1970 to 2020.
Julie Whelan (05:09):
And.
Rachel Oh (05:09):
I mean, and there were super cities, mixed majors,
sprawling darlings and thedeveloping destinations.
Yes, and I, by the way, spent alot of my life in Los Angeles,
so I totally get it.
But tell me a little bit aboutthat.
It sounds like all the growthfrom that period happened all in
the urban centers.
Julie Whelan (05:27):
Well, not all of it, certainly, but a greater
share of it than than everbefore.
So, basically, the reason thatwe first of all broke our city
down into archetypes what we'recalling archetypes is because we
felt that when the generalnarrative was being discussed
around cities, everybody wasprobably thinking New York and
LA, and the reality is thatthose two cities are extremely
(05:51):
different from each other andthey're extremely different from
any other city in the US.
And so what it caused us to dowas say, all right, for the 19
cities in our study, let's firstlevel set with what type of
city they are and what largermarket they're part of.
What does the landscape of thatmarket look like?
And so LA and New York are inthere.
They are our global cities,they're our coastal cities, they
(06:13):
are our major gateway citiesand they more resemble
international cities than reallyany other place in the US.
They're different from eachother, different from all the
other cities in the US.
Then we looked at the mixedmajors, and these are,
especially from a real estateinvestment standpoint, what we
consider to be our primarygateway markets.
They're Boston, where I am from.
(06:34):
Chicago, philadelphia, sanFrancisco, seattle and
Washington DC were the ones thatwe brought in.
They are really characterizedby dense urban centers that have
really, especially in thedecade leading up to the
pandemic, had a lot of jobgrowth in them, had a lot of
millennials that were movinginto them highly educated
(06:55):
workforces.
They have very dense urbanpopulations and they have very
extensive public transitnetworks.
Usually Then we get into some ofour fastest growing markets
that we have seen especiallyover the last 30 years, and they
tended to be what we consideredsprawling darlings.
These are markets of Atlanta,dallas, houston, phoenix, denver
(07:17):
.
They are markets that reallyare able to sprawl outward with
their growth.
So, although they've been greatrecipients of population growth
, of job growth, someheadquarters moves, in some
cases they don't have just onenatural CBD that's the force of
power in their market.
They have a lot of nodes ofactivity because of the lack of
(07:38):
restriction that they have inwhere they build and how they
build.
Because there's no landrestriction, they're able to
really build as they see fit andin some cases abandon the
places that weren't working sowell and go build new, which is
introducing a whole set ofchallenges for them.
And then we broke the lastarchetype down into what we call
developing destinations.
(08:00):
These are the ones that did growalongside those sprawling
darlings, but they have almosthit like hyper acceleration mode
since the pandemic and they dotend to be smaller markets in
general, but they resemble whatmany of these markets looked
like 30 years ago.
They are the markets of Austin,nashville, tampa, miami, orlando
(08:20):
and Charlotte.
So out of those six, three ofthem in the Florida markets, a
very, very fast-growing marketright now, and these are areas
that do have more landrestrictions.
They can't necessarily in allcases sprawl outward, but they
have been huge recipients ofpopulation growth and they've
grown so fast that we feel thatthere is a need to really sit
(08:41):
back and think about theinfrastructure around that
growth in order to make surethat it can be sustained for the
next 30 years.
So that's how we identified theshape and when you look at not
just the geographic landscapebut also what we call the urban
density, so how many people livein pockets of you know square
mile radiuses and dense areas?
(09:02):
We consider to be 7,000 peopleper square mile and the reality
is sprawling darlings anddeveloping destinations are
really not as dense as the mixedmajors, which is no surprise,
but we do think that they canbuild on density and then, of
course, even the mixed majorsdon't hold a candle to the
density that exists in New Yorkand LA.
Rachel Oh (09:22):
Right.
Right, I need to point out thatthe last census count from 2010
to 2020 ranked Utah as thefastest growing state.
So I'm a little disappointedthat Salt Lake City is not on
here, but I also know that weare land constrained and I mean,
listen, we're only three and ahalf million statewide.
So I get it, but I just had topoint out to our listeners that
(09:46):
the fastest growing state wedidn't make the cut.
I'm just curious Is it justbecause because I do think post
pandemic, you're seeing an even?
But I mean, for a decade wewere the fastest growing?
I know it's hard to includeevery city, but I just kind of
had to point that out.
Julie Whelan (09:58):
That's more of a because of the sheer size we
tried to really focus on.
What we basically did is lookedat the 30 largest markets and
then identified from there whichwere the true largest and which
were the growing.
But this, the beauty of this,is that the framework exists and
now we're going to be able toput it on any market that's
interested as we go forward.
(10:18):
But we had to, you know youhave to make choices.
Rachel Oh (10:21):
I get it.
Constrain our interest, yes,that's fine, so okay.
So then from that, you identify, you sort of like identify the
different cities and categorizethem, and then you go into this
urban renaissance.
So tell me, tell us a littlebit about that.
Just, it looks like, again,this is the time period that you
guys were focusing on initiallywas 1970 to 2020.
So there's a huge urbanrenaissance.
(10:43):
It sounds like.
Julie Whelan (10:44):
Yeah, so the 70s to the 90s were really all about
suburban growth, right.
Cities were centers of business.
People communed into cities,given the extensive highway
infrastructure that had been putin place from the 1950s onward,
and that's just kind of howpeople lived place from the
1950s onward, and that's justkind of how people lived.
(11:04):
The story of the American dreamof moving outward, getting land
, getting a big house andcommuting the nine to five was a
necessity.
It's just how society was builtat that time.
However, in 1990, then thereseemed to be a shift, at least
in the data that we were lookingat, where there was a greater
preponderance of people movinginto urban areas, which was
disrupted a little bit duringthe 9-11 era because there was
(11:25):
so much of that metric that'sreally driven by New York.
But then, certainly from 2000 to2020, there was just this
really big increase especially2010 to 2020, of people living
in urban areas and the growth ofthese urban areas, which really
can be synonymous with cities.
It really was more than thesuburban areas, and when you
(11:47):
looked at who was adding to thatgrowth, it was that generation
that we talked so much about atthat time, which was the
millennial generation, thoseyoung, highly educated people
that were moving into the cities, and so it was a real thing,
and at that time, what happenedis companies saw this happening
and they then concentrated theirjobs even more so in city
(12:11):
centers, and what I findfascinating about this is this
was really all in hyperspeed inthe decade leading up to the
pandemic, so it's almost like wewere building around something
that then the pandemic.
So it's almost like we werebuilding around something that
then the pandemic disrupted.
Rachel Oh (12:22):
Just completely disrupted which is really
interesting.
Julie Whelan (12:26):
And then, as the jobs went, the development came
of more office, especially primetrophy office, and then even
more apartments.
But, as we know, themultifamily development was not
enough and, as a result, housingprices in these urban areas
have really gone sky high, whichis a detriment to the further
growth in some of these areas,which you know is one of the
(12:47):
main findings of this reportthat we need to do something
about Right.
Rachel Oh (12:51):
And then of course we know everything post-pandemic
rising costs, interest rates,all of that.
So that just added fuel to thisfire.
That was boiling Correct.
So urban renaissance I was partof that.
I moved to LA at that time, soI certainly contributed to that.
Then we now move into what'scalled the disruption in the
(13:11):
pandemic era.
So the pandemic hits and then Imean I think we all sort of
know, but it looks like there'snow that inward migration to the
urban areas is slowed downsignificantly or stopped.
Now you're seeing tell us whatwe're now seeing.
It looks like they're flowingnow back to suburban areas.
You've got remote work.
Tell us what happened, yeah.
Julie Whelan (13:32):
So, certainly, starting in 2020, in the years
following, there was a hugeexodus outside of urban areas,
right, and that was across allmarkets, whether you're talking
about the super cities of NewYork and LA, or the mixed majors
and even the sprawling darlingsand the developing destinations
.
It was just more push to getaway from people, away from
density, and so there was thisbig push.
(13:55):
Now, what I will say is, whenyou look at the numbers, they
have moderated right.
So there is still what we calldomestic out-migration of urban
areas right now, because andthat's really being driven by
the sustained trend towardsremote work.
And so now, although thatpublic health concern isn't
there anymore, obviously thereis now a whole structural shift
(14:18):
in the way that we work, so thatout migration isn't as deep as
it was, especially in the mixedmajors and super cities, and
it's not in the sprawlingdarlings and developing
destinations, but it is stillthere, and what that means is
that it's the suburban, lessdense areas that are taking a
share of the people that aremigrating right now, and we
(14:41):
believe that, in order to reallysustain the health of cities,
we need to change that.
Now, that is only domesticmigration.
That's important to note.
That really doesn't have to dowith natural change although we
know that birth rates are down,which makes natural change hard
to increase.
But it also doesn't take intoaccount immigration, and I think
that that's a really importantthing to note about, especially
(15:04):
our larger cities that we defineas New York, la and the mixed
majors, is that that immigrationstory is a big part of their
health going forward and a bigpart about really upholding
their labor force that they havein those markets.
So it's less of a story reallyin the sprawling, darlings and
developing destinations andthat's why we think that really
(15:26):
focusing on building that urbandensity is important in those
markets and furthering it isimportant in the larger markets.
Rachel Oh (15:34):
So what is the immigration trend now?
I mean, we've got differentgovernment heads and they view
immigration differently.
What is the influx recently?
I guess I should know better,but I'm just curious how open
are we to immigration?
Julie Whelan (15:50):
Yeah, so the authorized immigration is the
numbers that we looked at isback up above where it was
pre-pandemic, and so that's avery healthy thing for our labor
force in general that thatauthorized immigration in the
forms of white collar and bluecollar work are up and really
sustaining that labor forceinvolvement.
Rachel Oh (16:08):
Interesting, interesting yeah.
I mean, in Salt Lake City wehave we actually surprisingly
have quite a bit of immigration,we have a lot of refugees from
different countries and they'vedefinitely added to sort of the
landscape, so it's been reallyfun to see.
Okay, so in the report then youkind of identify the impact of
the pandemic and how things haveshifted a bit.
Then you go on to what's calledbuilding on success and I
(16:31):
believe that's what you'retrying to like help cities
understand what they need to doin order to compete, if you will
, or to attract.
So tell us a little bit aboutwhat factors that may be.
Julie Whelan (16:42):
Yeah.
So the premise of that wholesection, which is the real meat
of this argument, is that citiesare more bifurcated than ever,
just like the built environment,landscape, especially from an
office standpoint, that we talkabout all the time.
We talk about this flight toquality and this bifurcation in
the office market, and what wedid is basically take that
(17:03):
thinking and say let's reallylook at it from a location
standpoint in the cities thatwe're studying, and so what we
did was actually be able to seehow not all foot traffic in
cities is down right.
So we know at a holistic levelwhether you're talking about any
archetype that we're looking atin this study that foot traffic
in cities is down right.
So we know at a holistic levelwhether you're talking about any
archetype that we're looking atin this study that foot traffic
(17:25):
in those cities, versus what itwas before the pandemic, is
down.
That's a sliding scale withobviously the smaller cities,
less dense cities that have morefoot traffic, and the larger
cities that have less versuswhat it was pre-pandemic.
But the reality is none of themare back, and so what we tried
(17:47):
to say is but is that happeningeverywhere, or is there actually
pockets of the city that weknow are doing really well,
because we had heard thatactually some of these more
residential areas and citieswere actually thriving and doing
very well because people weredisplaced and not working as
much from those cities centralbusiness districts and moving,
you know, to spend more of theirtime in these more residential
(18:07):
areas that were then creating alot of traffic around retail and
entertainment during hours ofthe day and days of the week
that it wouldn't have typically.
And so we took that thought andwe really just expanded it a
little bit.
And we have a wonderful talentat CBRE who works for our
America's Consulting Team by thename of John Stevens, who does
(18:28):
really great locational mapping,and he was able to help us take
our research data and put itinto a tool that we were able to
look at, what we calledhexagons of districts.
So there are these littlehexagons on the map in this
report that represent five blockradiuses, and so that's about
(18:48):
five 10 minute walk within ourcities, and each of those
hexagons in cities we were ableto put a naming convention on
and we either said that theywere residential areas or they
were business areas or they weremixed use areas.
So there were three majorgroupings, but then within those
groupings you could have areasthat were residential and
(19:10):
vibrant, or areas that wereoffice and that were more
vibrant because they had reallygood trophy buildings in them,
trophy buildings in them, ormixed-use places that had great
residential, were walkable, hadprime office in them.
It sort of was the goldstandard, had everything in it.
(19:34):
And what we tried to do wasunderstand, in each of these
groupings on this map, per eachof the cities that we looked at,
were real estate fundamentals,looking differently from one
district to another, and what wewere able to find was that in
what we call the vibrantmixed-use districts, these on
the map, when you're looking atthem, are the bright, green
areas.
They actually have fundamentalsfrom an office perspective and
a multifamily perspective thatare doing, in some cases, much,
(19:59):
much better than the overallmarket that they're in.
And this is what is leading usto this thinking, to say cities
are no longer fit for thepurpose of future generations
because of the structural changethat was accelerated during the
pandemic and we need to changeit a little bit.
Rachel Oh (20:15):
So just to put some context around how you apply
these hexagons and whatnot, whatis a good city that we can kind
of look at, that's more generaland doesn't have a
concentration of you know oneindustry or whatever that might
skew the results?
What's a good one like?
Julie Whelan (20:31):
Yeah.
So in the Mountain West I meanwe can talk about Denver, right,
okay?
And so across archetypes,whether we're talking about any
of the cities in this study,there are examples of this
outperformance.
In the vibrant mixed-usedistricts that exist In the
mixed majors, the differenceisn't as stark, simply because
(20:55):
of the overall challenge thatthose markets are having, mostly
due to congestion and longcommute times and the amount of
people that do commute intothese cities to work, that are
dependent on public transit todo so.
However, in the sprawlingdarlings, there is quite a
difference in vacancy betweenthe overall market and some of
(21:16):
these vibrant mixed-usedistricts that we can see.
I think Denver is a really goodexample of it, where the
overall market vacancy is in the30% range.
Yet when you look at the UnionStation area, which is a vibrant
mixed-use district that I thinkstarted to be built in the 2015
timeframe, that office vacancyis in the 14% range, and so it's
(21:39):
really a testament to this ideathat occupiers and residents
are enjoying being in these morevibrant areas that have access
to the leisure and theentertainment and the restaurant
options and, in Union Stationarea, you know example, the
sporting venues that really givethemselves or give them a
(22:03):
well-rounded experience whenthey're living and working and
playing in those areas.
Rachel Oh (22:07):
Yeah, yeah, no, no, that's true.
I think that.
So, for example, we do a lot ofmultifamily development and
when we're looking at locationsor the amenities around, I mean
we try to build amenity, richmultifamily, because that does
tend to attract tenants.
And then we're seeing, asyou've just substantiated it,
there is that having thoseamenities and being able to live
(22:31):
, work and play is what thengrows the community, and I think
that's what today's renters andtenants are really looking for,
Whereas I think in previousgenerations, like you know,
build something nice, build itsolid, you know, make sure
there's enough space, but nowyou have to think so much more
around what amenities there it'sclose to, what amenities are
within.
You know what's the access?
(22:52):
It's less about being close toan office space, but being close
to where they really want tolive, work and play Right.
I think you've mentioned thatbefore to live, work and play
Right.
I think you've mentioned thatbefore.
So I think that's sointeresting how that small, not
small the pandemic was so lifechanging, but how that blip in
time is now impacting futuregenerations and making or
changing decisions that groupslike PEG and other folks need to
(23:15):
consider when they're doingtheir developments and
investments.
So okay, so we've.
Then we've got this whole thingwhich I think cities are going
to want to focus on as they lookto build their urban centers.
Then we go into your nextsection, which is the conversion
potential, which I find reallyfascinating.
Because just a little bit aboutwhat PEG has done.
(23:37):
We've done quite a bit ofconversions.
Started off with one office tomultifamily, so we did that.
It was challenging, by the way,it was hard, but we have done
that.
It's worked out well.
It was in a suburban market,but we did take an older office
building and convert it intomultifamily, learned a lot of
lessons.
We also have done a lot ofhotel to multifamily conversions
(23:57):
, so aging former extended stayhotels branded typically at
Montgomery residence in, and wewould acquire those and convert
them into class B workforcehousing and that's been
tremendously successful.
And then I know now, with allthe vacancies going on, there's
just a tremendous opportunityand tons of conversion going on.
(24:17):
And I can't remember you'regoing to tell me which was the
number one state Texas, yeah.
Julie Whelan (24:22):
Which I thought it would be New.
Rachel Oh (24:23):
York.
But anyway, tell me aboutconversions Like what are we
seeing now?
Julie Whelan (24:27):
Yeah, so we've been studying conversions now
for a couple of years and thereality is that they are ticking
up.
In other words, conversions arebecoming more of a story across
really all of our markets.
However, they're still nothappening to the extent that
they're going to do much toimpact the landscape of our
cities.
Now, there are some marketsthat that is a different story
(24:51):
and, in terms of the 19 thatwe're studying, dallas is that
one.
Now, keep in mind that thatgraph that you're referring to
is actually a percent of officeinventory that's under
conversion.
So there still may be a greaterabsolute amount happening in
other markets, but as a percentof inventory under conversion,
dallas is the highest.
(25:12):
Now, what I find interestingabout that is part of that
reason is because, because thereis quite a bit of their
(25:39):
inventory, especially downtown,that is under conversion, that
we should start to see adifference in that market very
soon.
Now, what I think is interestingabout conversions is that there
is so much space right now thatcould be looked at for
conversion right.
So if we just look at theamount of vacancy that has been
(26:00):
added to markets, just since2020, when the pandemic hit it's
, 136 million square feet ofvacancy has been added to
markets that's the size ofdowntown DC.
So that is a lot of space, andit's still incrementally
increasing right now, and wedon't expect that vacancy is
going to hit a peak until laterthis year, early next year, when
(26:20):
it should start to come down.
But we don't think that it'sgoing to come back down in the
long range to historicalaverages, which means something
needs to be done with this space, and there's so much of it, and
it's in such disparate areas ofcities that we really do
believe that especially stateand local governments are well
(26:42):
served to be putting focus areasin place.
And so what we tried to do withthis study is actually say okay
, if we know that vibrantmixed-use districts are doing
better and they're generallyeither outperforming today or
have the potential to outperformwhen the market does turn, then
how can we use that effect toimpact office buildings that are
(27:04):
highly vacant that are eitherin or near that area?
And so what we were able to dois identify about 43 million
square feet of space.
That's either in vibrantmixed-use districts or just in
the ring outside of vibrantmixed-use districts that are
more than 50% vacant, and theidea there is not that every
single one of those could beconverted because, as you said,
(27:27):
conversion is hard.
It's dependent on thecharacteristics of the building
and the values and the zoningand the structure of the
building.
There's so much that goes intothe conversion, but at least it
gives a manageable pie to lookat to say maybe these are the
ones that we should look at,either converting to a better
(27:49):
use, something that the marketis really gonna be able to drive
its highest use of, or evencould it be upgraded in its
current form to become a betteroffice that's more attractive to
the tenants that might want to,you know, be tenanted in it.
So there are a lot of different,you know, things that these
buildings can be turned into.
(28:09):
It just doesn't have to bemultifamily.
There could be mixed use, itcould be upgraded office.
In some cases they could bedemolished and we could make
space for green areas that areso important in our cities.
But the idea is to size theprize and try to really focus
development in areas that wethink it could count most,
because there is already a bitof a movement being started.
Rachel Oh (28:35):
No, I super appreciate that, julie, because
you know I had a previousepisode with Steven Painter of
Gensler and he also pointed outso he's an architect and they
have a whole algorithm wherethey analyze a building and
they're able to determine thefeasibility of conversion into
multifamily, for example.
I think that's specificallywhat they were looking at and
(28:55):
what he pointed out is that, asmuch as it might be the right
location and the right size, andthere's a need that, even if
you wanted to, it's not a, it'snot the right office building to
convert.
So I think there's so manythings, and I know that there
was the initiative by the Bidenadministration where they
released funds to help with theconversions, but it was tied to
(29:15):
like a transportation initiativeor something, and so there is
government funding out there,but only for those office
buildings that are close to somesort of transit, and if it's
close to transit, it may notnecessarily be close to the
vibrant centers that you'retalking about.
So it is so complicated,because what I have learned, and
(29:37):
your report point out too, inorder to do the conversions,
because it's so expensive, andwe learned that there needs to
be some sort of assistance inorder for it to work, and that
assistance isn't straightforwardeither.
I will say, though, that youwere saying that it's not just
multifamily.
So, for example, we did one indowntown Phoenix.
We converted an office buildinginto a hotel.
(29:57):
That also wasn't easy, by theway, but it is in a vibrant,
it's next to the arena.
There, it's very livable,walkable, like it's.
It's amazing and the hotel isdoing awesome Right, but it
wasn't easy.
Julie Whelan (30:10):
It's not easy and you know you're hitting the nail
on the head with withincentives, and not only having
the incentive and making itavailable for the type of
conversion that you might deemto be, you know, needed, but
also it's just making it easy toengage with and even find right
, because it's just not astreamlined process.
I did talk to one developer whohad a really interesting take on
(30:32):
it.
He said I can convert anythingthat you want if it comes to me
at the right price, and I thinkwhat it speaks to is just that
this idea of incentivizing thisredevelopment is one of the
bedrocks of what our localgovernments really need to lean
into is incentivizing it, makingit easy, focusing the areas
(30:53):
that they want to see theredevelopment in, because the
only way that we're going to getprivate developers to do this
really hard work is to removeits highest and best use.
Then that is going to be a dragthat is far more expensive on
that entire city, because thisisn't about building new right.
(31:26):
We have done all the building.
This is about now converting toa better use that is going to
be fit for the new purpose.
Rachel Oh (31:33):
Yeah, it'll be.
I think this will be anevolving conversation.
I think it'll be an evolvingspace.
It will be really interestingto see what really does happen,
because I do think too, thereare those that believe that
office will come back, right.
So there are people who aregoing to hold on, to be like,
hey, we're just going to hold onto when office comes back and
we're going to I don't know.
Julie Whelan (31:54):
I think no one exactly knows, but I think
there's a lot of thought outthere.
Well, yes, and you know, I thinkthat that's a very interesting
point, because we do believethat office is going to come
back.
I think that, right now, thesoftness that we're seeing in
office is, yes, partially as aresult of this structural change
that happened that is not goingto go back to the way that it
was.
However, there's also an elementof cyclical weakness that we're
seeing right now because,although we're not in a
(32:15):
recession, we've been talkingabout one for a very long time
and nobody really does knowwhat's around the corner until
we do decidedly see inflationcoming down and interest rates
coming down.
So until then, we don't haveoccupiers that are willing to
make big leasing moves and bigrelocation moves, and when they
(32:36):
are ready and big relocationmoves, and when they are ready,
we will see the market turn backon, which is even more of a
reason to use this time toreposition our buildings to be
ready for that activity when itcomes, because we track prime
office space very closely andthat vacancy overall is in the
14% range right now and webelieve that by end of 2025,
(33:00):
even if demand just continues totrickle as it has been, that
space will be depleted and sothat means that that demand is
going to go to that next levelof space.
And so really looking closelyin this 12-month period of what
needs to be upgraded to meetthat prime office standard, I
think is a really prudent thingfor some of these owners to do.
Rachel Oh (33:23):
Yeah, yeah.
What is a healthy overalloffice occupancy rate?
Pre-pandemic maybe, or I don'tknow if you want to, where you
want to gauge it, but what is agood target that we should be?
When we hit it, we're like,okay, office is back.
Julie Whelan (33:37):
I mean that's very dependent on market.
What I would say is before thepandemic we were at like a 12%
vacancy nationally.
Now that's with some marketslike the Texas markets that were
still doing well but had veryhigh vacancy in other markets
like San Francisco, that youcouldn't even find contiguous
large blocks of space becausetheir vacancy was so low.
Now that isn't healthy either,right.
(33:59):
So that kind of 12% range feltokay.
But important to note that evenwith those markets that had
high vacancy that were stilldoing okay before the pandemic,
like some of the Texas markets,it's because their market had
adjusted to it.
There was a certain amount ofspace that just was totally
discounted and was never reallylooked at as being viable and in
(34:20):
some cases probably should havebeen taken out of inventory.
So the market as a whole reallywasn't competing with that
space.
The question is, how much spaceare we competing on together
and what's the vacancy withinthat space?
And we would argue thatprobably in the 10%, know 10 to
15 percent range is healthy.
Rachel Oh (34:40):
So if we're at 14, we're not so terrible?
Julie Whelan (34:43):
Well, that's just in the high quality space, which
is only 10 percent of themarket.
The overall market is around 20percent right now.
Oh, OK.
Rachel Oh (34:51):
Thank you for clarifying that.
Yeah, ok, ok, yeah, and we, weconverted some non high quality
office space to get where we are, but it was, you know, ideally
located, so it worked out well,okay.
So then the next piece of thereport then I think you set it
up really well is then what areyou have identified the keys to
(35:12):
a thriving city, and I thinkyou've kind of hit on that.
But can you summarize what arethe keys to a thriving city?
What have you guys identifiedas, like these things in place,
then the city is going to bethriving.
Julie Whelan (35:19):
Yeah, and the reason that we went back to this
kind of macro level is becausewe really did want to be clear
about a lot of what we justtalked about, which is that this
is not necessarily a build itand they will come discussion,
because you started out thediscussion saying that
demographers do believe thatoverall population growth is
slowing, which means that thereis a market share gain and game
(35:43):
that a lot of these cities aregoing to be playing, where you
are going to want to take themarket share, especially of the
younger demographic, and sustainand retain them in your market
to ensure that you're going tothrive over the next 20 years.
Rachel Oh (35:56):
So the young people are the key.
Is that what you're saying?
Julie Whelan (35:59):
The young people are the key, because there's a
huge generation of the olderpeople.
They do make up a lot of themix in some of our larger cities
and many of them are workinglonger, staying healthier later
in life and really enjoyingliving in those expensive, large
(36:19):
, mixed major cities, and theyare making up a large percentage
of the growth of that as theyage.
Right now, whereas some ofthese sprawling, darlings and
developing destinations aretaking a greater share, there is
still an absolute numbers rightin the mixed majors and in the
super cities, larger cohorts ofthe younger, but a share of them
are certainly increasing inthese smaller and higher growing
(36:42):
cities.
And so what our belief is isthat there are six what we call
keys that really have to be inplace and strived for in order
for those vibrant urbanneighborhoods to really sing and
to really operate at theirfullest potential.
The first one is economicdynamism.
Right, it's this idea of whatmakes up your city's economy.
(37:04):
Do you have a diverse industrymix or do you have a culture of
innovation?
Do you have capital inflows orpeople wanting to invest in your
market, and do you have a largetalent pool that's diverse?
The second one is thedemographic potential right, and
it's what we just talked about.
So what's the age distributionof who's living in your city,
what are their education levels,what are their skill sets?
(37:25):
All of that that reallycontributes to the development
and the competitiveness of thesecities.
The third is lifestyle vibrancy,of which you have a lot of it,
right.
It's that quality of life, it'sthose recreational
opportunities, it's how muchgreen space markets have that we
know, like cities like Londoneven are really making a big
push for right now and just thegeneral active lifestyle.
(37:47):
It doesn't mean that it alwayshas to be warm, right, but it's
just these recreationalopportunities and active
lifestyles of which I know yourmarket well can provide.
The fourth is resilientinfrastructure.
So it's this idea that not justfrom a transportation
perspective, although that isvery important to connect our
cities and to make sure that,especially in our mixed majors
(38:10):
and our larger cities, that it'sstaying young and clean and
it's progressing, which is, Iknow, a challenge in those
cities young and clean and it'sprogressing, which is, I know, a
challenge in those cities butit's also infrastructure around
social things like education andmedical facilities, because in
some of our fastest growingareas and our developing
destinations, that could be whatis their Achilles heel that
(38:32):
challenges people from stayingand growing their families and
aging in those markets?
The fifth is what we calldistinctive identity.
So this is really what is thehistory of your market?
What are the natural resources?
What is the culture?
This is what the super citiesdo so unbelievably well that
nobody can even come close toit's.
(38:53):
What is the identity that'sassociated with those cities,
and especially from a SmarlingDarling standpoint, there are
some that struggle with thatidentity that they're going to
need to really focus on.
And then, lastly, it'sresponsive governance, which we
just talked about, which is doyou have the right zoning and
permitting and incentive andimmigration policies in place?
(39:13):
Are you worried about safetyand cleanliness and are we
figuring out how to make theperception of our cities better?
And what are the tax structures?
Are they business friendly?
Are you drawing or pushingbusiness away from your city?
So our belief is that if thosesix things are in place, that
then you will have really thosevibrant areas that are truly
(39:37):
going to outperform in thefuture.
Now we don't have metrics tothose yet, but we are working in
our next iteration of thisstudy to really identify metrics
behind each of those and beable to track the resilience of
how these cities perform goingforward.
Rachel Oh (39:51):
Yeah, no, I love it.
I printed this out because Iwas going to ask you about it
and then you launched into it,which is awesome.
And I live in Salt Lake Cityand I feel like Salt Lake hits
all six of these, even down tothe distinctive identity, as you
mentioned, because we've gotthe Olympics here at one point,
We've got incredible naturalresources.
I think there's a really funand it's a very young state.
(40:13):
I also grew up in Seattle and Ifeel like Seattle hits all of
these as well.
So I do think that these arekey to these vibrant cities,
these thriving cities, as youmentioned, and both, I believe,
are quite thriving.
I am so privileged to havelived in both and have made Salt
Lake City my home right now.
So, of course, you know, we'llsee, We'll see in the future,
(40:34):
but all of these things aresuper helpful.
Okay so, Julie, the report.
We're going to have the linkhere at the bottom of the
podcast so people can vote, butI feel like this report has been
incredibly insightful.
I love the way you folks haveidentified, you know, the key
driving factors, kind of givenus some history.
I know you've done a SWOTanalysis of both Los Angeles and
(40:54):
New York.
I think that was fascinating.
I love both cities and then youknow, just some thoughts moving
forward.
So encourage everyone that'slistening to this to download a
copy to read it.
It's incredibly insightful andI think that city leaders also
will need to do that.
So, Julie, super appreciate youtaking time out of your day to
(41:16):
join our humble podcast.
You know we really appreciateit and we're hoping that maybe
in as you, you mentioned somemetrics that you're going to be
publishing later on.
Maybe once that's done, you canjoin us again and we can put
some some numbers to this.
So anyway, Julie, thank you somuch for joining us today.
In the meantime, thank you toall who have listened in today.
From the peaks of the MountainWest, I am Rachel oh, your host
(41:40):
for Peaks and Portfoliospresented by PEG Companies as we
continue to dig into all thingsreal estate.
Have a fabulous day, everybody.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, Fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:26):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, welcome everybody fromthe peaks of the Mountain West
high up here on the WasatchFront.
We are excited to once againtalk about real estate,
especially some shifts in realestate and anything else that
may come about.
(00:46):
So thank you all for joining ustoday for this week's episode
of Peaks and Portfolios by PEGCompanies.
In this post-pandemic era, weare seeing shifts in where
people choose to live in theUnited States, With remote work
now the norm and not theexception.
Today's workers are not tetheredto their physical office spaces
as they once were, and thefactors that impact where they
(01:08):
choose to live have changed.
There is a recent study hot offthe presses by CBRE.
That have pointed out furtherthat cities now have an
opportunity to evolve into moredesirable places to live, work
and play for future generations.
Demographers are also nowpredicting that the US
population growth will slow andcities will need to compete to
(01:29):
attract an increasing share ofpeople who want to be in them.
The next generation to sustainthe success of cities will be
the children of the millennials,who contributed to the urban
renaissance of the early 21stcentury, which I'm going to tap
into Julie more about and,additionally, there is an aging
population that will play a bigrole in shaping cities as well.
So, with all these factors inmind, we wanted to hear from, I
(01:53):
believe, the mastermind behindthe recent study, and we are
delighted to have as our guesttoday Julie Whelan, Global
Occupier of Thought Leadershipfor CBRE.
Welcome, Julie.
Julie Whelan (02:03):
Thanks, rachel.
Good to be here, and there is astrong team behind me who
delivered this report alongside,so certainly not the only
mastermind.
Rachel Oh (02:11):
Okay, Well, I will tell you.
Global Occupier of ThoughtLeadership sounds like a
mastermind role to me.
Julie Whelan (02:18):
It's a very fun role.
It's a very fun role thatallows me to study the things
that I think are important andinteresting in driving the
trends that are impacting ourbuilt environment.
Rachel Oh (02:28):
Yeah, no, absolutely I, you know.
Again, I was only able to readthrough a bit of the study, so
I'm hoping that you can, youknow, glean further about it.
But I am just kind of amazed atthe volume of information you
folks have gathered and thoroughanalysis, but also the trends
that you predict.
So before we get into that, letme just tell folks a little bit
more about you, julie.
(02:48):
You mentioned a big team, soyou've got a global team of
researchers that do identify themajor trends impacting
commercial real estate occupiersacross all industries.
You are an expert on the futureof work, so we really want to
dive into that more, and Julieis particularly interested in
how the fundamental shiftstowards sustainability and
flexibility are reshaping thestrategy and utilization of
(03:10):
space, and I imagine that wasn'teven a thought a few years ago.
She's also a public speaker, soshe's appeared on the Wall
Street Journal, usa Today,forbes, business Insider,
bloomberg, cnbc and more, and sowe are so honored that you are
joining our humble podcast today, julie, excited to be here.
So, julie, let's dive right in.
(03:30):
This whole study is aroundshaping tomorrow's cities.
Tell me why your team hasdecided to approach it in this
manner.
What was the genesis of howthis report came about?
Great?
Julie Whelan (03:41):
first question, so about nine months ago now, if
we recall back, the media wasall about the urban doom loop.
It was so much of what wasdiscussed and I found that on a
daily basis.
I was trying to help tomitigate that narrative that was
out in the market, because wewholeheartedly believed at that
(04:02):
time, and obviously still do,that that is not the truth.
We are not in an urban doomloop.
And so it set us out to say,although the future of work has
been of utmost importance overthe last couple of years, now we
really need to start to shiftour thinking around how our
cities that have been thecenters of business for so long
(04:23):
need to shift to not be part ofthat urban doom loop.
And so we did that, and that'swhat we set out to do.
And we now, more so even thannine months ago, know that
cities are going to remaincenters of economic power and of
demographic growth and placesthat people want to be.
They're just on a bit of anevolution, which which, by the
(04:43):
way, they've been on for sincethe existence of cities started
right, so hundreds and hundredsof years.
Rachel Oh (04:49):
I think you guys did an excellent job of kind of
walking people through the wholeprocess.
So I want to go through eachchapter just kind of briefly and
kind of highlight, maybe delveinto deeper.
But I was so impressed the wayyou categorize the different
cities and the growth from Ibelieve it was 1970 to 2020.
Julie Whelan (05:09):
And.
Rachel Oh (05:09):
I mean, and there were super cities, mixed majors,
sprawling darlings and thedeveloping destinations.
Yes, and I, by the way, spent alot of my life in Los Angeles,
so I totally get it.
But tell me a little bit aboutthat.
It sounds like all the growthfrom that period happened all in
the urban centers.
Julie Whelan (05:27):
Well, not all of it, certainly, but a greater
share of it than than everbefore.
So, basically, the reason thatwe first of all broke our city
down into archetypes what we'recalling archetypes is because we
felt that when the generalnarrative was being discussed
around cities, everybody wasprobably thinking New York and
LA, and the reality is thatthose two cities are extremely
(05:51):
different from each other andthey're extremely different from
any other city in the US.
And so what it caused us to dowas say, all right, for the 19
cities in our study, let's firstlevel set with what type of
city they are and what largermarket they're part of.
What does the landscape of thatmarket look like?
And so LA and New York are inthere.
They are our global cities,they're our coastal cities, they
(06:13):
are our major gateway citiesand they more resemble
international cities than reallyany other place in the US.
They're different from eachother, different from all the
other cities in the US.
Then we looked at the mixedmajors, and these are,
especially from a real estateinvestment standpoint, what we
consider to be our primarygateway markets.
They're Boston, where I am from.
(06:34):
Chicago, philadelphia, sanFrancisco, seattle and
Washington DC were the ones thatwe brought in.
They are really characterizedby dense urban centers that have
really, especially in thedecade leading up to the
pandemic, had a lot of jobgrowth in them, had a lot of
millennials that were movinginto them highly educated
(06:55):
workforces.
They have very dense urbanpopulations and they have very
extensive public transitnetworks.
Usually Then we get into some ofour fastest growing markets
that we have seen especiallyover the last 30 years, and they
tended to be what we consideredsprawling darlings.
These are markets of Atlanta,dallas, houston, phoenix, denver
(07:17):
.
They are markets that reallyare able to sprawl outward with
their growth.
So, although they've been greatrecipients of population growth
, of job growth, someheadquarters moves, in some
cases they don't have just onenatural CBD that's the force of
power in their market.
They have a lot of nodes ofactivity because of the lack of
(07:38):
restriction that they have inwhere they build and how they
build.
Because there's no landrestriction, they're able to
really build as they see fit andin some cases abandon the
places that weren't working sowell and go build new, which is
introducing a whole set ofchallenges for them.
And then we broke the lastarchetype down into what we call
developing destinations.
(08:00):
These are the ones that did growalongside those sprawling
darlings, but they have almosthit like hyper acceleration mode
since the pandemic and they dotend to be smaller markets in
general, but they resemble whatmany of these markets looked
like 30 years ago.
They are the markets of Austin,nashville, tampa, miami, orlando
(08:20):
and Charlotte.
So out of those six, three ofthem in the Florida markets, a
very, very fast-growing marketright now, and these are areas
that do have more landrestrictions.
They can't necessarily in allcases sprawl outward, but they
have been huge recipients ofpopulation growth and they've
grown so fast that we feel thatthere is a need to really sit
(08:41):
back and think about theinfrastructure around that
growth in order to make surethat it can be sustained for the
next 30 years.
So that's how we identified theshape and when you look at not
just the geographic landscapebut also what we call the urban
density, so how many people livein pockets of you know square
mile radiuses and dense areas?
(09:02):
We consider to be 7,000 peopleper square mile and the reality
is sprawling darlings anddeveloping destinations are
really not as dense as the mixedmajors, which is no surprise,
but we do think that they canbuild on density and then, of
course, even the mixed majorsdon't hold a candle to the
density that exists in New Yorkand LA.
Rachel Oh (09:22):
Right.
Right, I need to point out thatthe last census count from 2010
to 2020 ranked Utah as thefastest growing state.
So I'm a little disappointedthat Salt Lake City is not on
here, but I also know that weare land constrained and I mean,
listen, we're only three and ahalf million statewide.
So I get it, but I just had topoint out to our listeners that
(09:46):
the fastest growing state wedidn't make the cut.
I'm just curious Is it justbecause because I do think post
pandemic, you're seeing an even?
But I mean, for a decade wewere the fastest growing?
I know it's hard to includeevery city, but I just kind of
had to point that out.
Julie Whelan (09:58):
That's more of a because of the sheer size we
tried to really focus on.
What we basically did is lookedat the 30 largest markets and
then identified from there whichwere the true largest and which
were the growing.
But this, the beauty of this,is that the framework exists and
now we're going to be able toput it on any market that's
interested as we go forward.
(10:18):
But we had to, you know youhave to make choices.
Rachel Oh (10:21):
I get it.
Constrain our interest, yes,that's fine, so okay.
So then from that, you identify, you sort of like identify the
different cities and categorizethem, and then you go into this
urban renaissance.
So tell me, tell us a littlebit about that.
Just, it looks like, again,this is the time period that you
guys were focusing on initiallywas 1970 to 2020.
So there's a huge urbanrenaissance.
(10:43):
It sounds like.
Julie Whelan (10:44):
Yeah, so the 70s to the 90s were really all about
suburban growth, right.
Cities were centers of business.
People communed into cities,given the extensive highway
infrastructure that had been putin place from the 1950s onward,
and that's just kind of howpeople lived place from the
1950s onward, and that's justkind of how people lived.
(11:04):
The story of the American dreamof moving outward, getting land
, getting a big house andcommuting the nine to five was a
necessity.
It's just how society was builtat that time.
However, in 1990, then thereseemed to be a shift, at least
in the data that we were lookingat, where there was a greater
preponderance of people movinginto urban areas, which was
disrupted a little bit duringthe 9-11 era because there was
(11:25):
so much of that metric that'sreally driven by New York.
But then, certainly from 2000 to2020, there was just this
really big increase especially2010 to 2020, of people living
in urban areas and the growth ofthese urban areas, which really
can be synonymous with cities.
It really was more than thesuburban areas, and when you
(11:47):
looked at who was adding to thatgrowth, it was that generation
that we talked so much about atthat time, which was the
millennial generation, thoseyoung, highly educated people
that were moving into the cities, and so it was a real thing,
and at that time, what happenedis companies saw this happening
and they then concentrated theirjobs even more so in city
(12:11):
centers, and what I findfascinating about this is this
was really all in hyperspeed inthe decade leading up to the
pandemic, so it's almost like wewere building around something
that then the pandemic.
So it's almost like we werebuilding around something that
then the pandemic disrupted.
Rachel Oh (12:22):
Just completely disrupted which is really
interesting.
Julie Whelan (12:26):
And then, as the jobs went, the development came
of more office, especially primetrophy office, and then even
more apartments.
But, as we know, themultifamily development was not
enough and, as a result, housingprices in these urban areas
have really gone sky high, whichis a detriment to the further
growth in some of these areas,which you know is one of the
(12:47):
main findings of this reportthat we need to do something
about Right.
Rachel Oh (12:51):
And then of course we know everything post-pandemic
rising costs, interest rates,all of that.
So that just added fuel to thisfire.
That was boiling Correct.
So urban renaissance I was partof that.
I moved to LA at that time, soI certainly contributed to that.
Then we now move into what'scalled the disruption in the
(13:11):
pandemic era.
So the pandemic hits and then Imean I think we all sort of
know, but it looks like there'snow that inward migration to the
urban areas is slowed downsignificantly or stopped.
Now you're seeing tell us whatwe're now seeing.
It looks like they're flowingnow back to suburban areas.
You've got remote work.
Tell us what happened, yeah.
Julie Whelan (13:32):
So, certainly, starting in 2020, in the years
following, there was a hugeexodus outside of urban areas,
right, and that was across allmarkets, whether you're talking
about the super cities of NewYork and LA, or the mixed majors
and even the sprawling darlingsand the developing destinations
.
It was just more push to getaway from people, away from
density, and so there was thisbig push.
(13:55):
Now, what I will say is, whenyou look at the numbers, they
have moderated right.
So there is still what we calldomestic out-migration of urban
areas right now, because andthat's really being driven by
the sustained trend towardsremote work.
And so now, although thatpublic health concern isn't
there anymore, obviously thereis now a whole structural shift
(14:18):
in the way that we work, so thatout migration isn't as deep as
it was, especially in the mixedmajors and super cities, and
it's not in the sprawlingdarlings and developing
destinations, but it is stillthere, and what that means is
that it's the suburban, lessdense areas that are taking a
share of the people that aremigrating right now, and we
(14:41):
believe that, in order to reallysustain the health of cities,
we need to change that.
Now, that is only domesticmigration.
That's important to note.
That really doesn't have to dowith natural change although we
know that birth rates are down,which makes natural change hard
to increase.
But it also doesn't take intoaccount immigration, and I think
that that's a really importantthing to note about, especially
(15:04):
our larger cities that we defineas New York, la and the mixed
majors, is that that immigrationstory is a big part of their
health going forward and a bigpart about really upholding
their labor force that they havein those markets.
So it's less of a story reallyin the sprawling, darlings and
developing destinations andthat's why we think that really
(15:26):
focusing on building that urbandensity is important in those
markets and furthering it isimportant in the larger markets.
Rachel Oh (15:34):
So what is the immigration trend now?
I mean, we've got differentgovernment heads and they view
immigration differently.
What is the influx recently?
I guess I should know better,but I'm just curious how open
are we to immigration?
Julie Whelan (15:50):
Yeah, so the authorized immigration is the
numbers that we looked at isback up above where it was
pre-pandemic, and so that's avery healthy thing for our labor
force in general that thatauthorized immigration in the
forms of white collar and bluecollar work are up and really
sustaining that labor forceinvolvement.
Rachel Oh (16:08):
Interesting, interesting yeah.
I mean, in Salt Lake City wehave we actually surprisingly
have quite a bit of immigration,we have a lot of refugees from
different countries and they'vedefinitely added to sort of the
landscape, so it's been reallyfun to see.
Okay, so in the report then youkind of identify the impact of
the pandemic and how things haveshifted a bit.
Then you go on to what's calledbuilding on success and I
(16:31):
believe that's what you'retrying to like help cities
understand what they need to doin order to compete, if you will
, or to attract.
So tell us a little bit aboutwhat factors that may be.
Julie Whelan (16:42):
Yeah.
So the premise of that wholesection, which is the real meat
of this argument, is that citiesare more bifurcated than ever,
just like the built environment,landscape, especially from an
office standpoint, that we talkabout all the time.
We talk about this flight toquality and this bifurcation in
the office market, and what wedid is basically take that
(17:03):
thinking and say let's reallylook at it from a location
standpoint in the cities thatwe're studying, and so what we
did was actually be able to seehow not all foot traffic in
cities is down right.
So we know at a holistic levelwhether you're talking about any
archetype that we're looking atin this study that foot traffic
in cities is down right.
So we know at a holistic levelwhether you're talking about any
archetype that we're looking atin this study that foot traffic
(17:25):
in those cities, versus what itwas before the pandemic, is
down.
That's a sliding scale withobviously the smaller cities,
less dense cities that have morefoot traffic, and the larger
cities that have less versuswhat it was pre-pandemic.
But the reality is none of themare back, and so what we tried
(17:47):
to say is but is that happeningeverywhere, or is there actually
pockets of the city that weknow are doing really well,
because we had heard thatactually some of these more
residential areas and citieswere actually thriving and doing
very well because people weredisplaced and not working as
much from those cities centralbusiness districts and moving,
you know, to spend more of theirtime in these more residential
(18:07):
areas that were then creating alot of traffic around retail and
entertainment during hours ofthe day and days of the week
that it wouldn't have typically.
And so we took that thought andwe really just expanded it a
little bit.
And we have a wonderful talentat CBRE who works for our
America's Consulting Team by thename of John Stevens, who does
(18:28):
really great locational mapping,and he was able to help us take
our research data and put itinto a tool that we were able to
look at, what we calledhexagons of districts.
So there are these littlehexagons on the map in this
report that represent five blockradiuses, and so that's about
(18:48):
five 10 minute walk within ourcities, and each of those
hexagons in cities we were ableto put a naming convention on
and we either said that theywere residential areas or they
were business areas or they weremixed use areas.
So there were three majorgroupings, but then within those
groupings you could have areasthat were residential and
(19:10):
vibrant, or areas that wereoffice and that were more
vibrant because they had reallygood trophy buildings in them,
trophy buildings in them, ormixed-use places that had great
residential, were walkable, hadprime office in them.
It sort of was the goldstandard, had everything in it.
(19:34):
And what we tried to do wasunderstand, in each of these
groupings on this map, per eachof the cities that we looked at,
were real estate fundamentals,looking differently from one
district to another, and what wewere able to find was that in
what we call the vibrantmixed-use districts, these on
the map, when you're looking atthem, are the bright, green
areas.
They actually have fundamentalsfrom an office perspective and
a multifamily perspective thatare doing, in some cases, much,
(19:59):
much better than the overallmarket that they're in.
And this is what is leading usto this thinking, to say cities
are no longer fit for thepurpose of future generations
because of the structural changethat was accelerated during the
pandemic and we need to changeit a little bit.
Rachel Oh (20:15):
So just to put some context around how you apply
these hexagons and whatnot, whatis a good city that we can kind
of look at, that's more generaland doesn't have a
concentration of you know oneindustry or whatever that might
skew the results?
What's a good one like?
Julie Whelan (20:31):
Yeah.
So in the Mountain West I meanwe can talk about Denver, right,
okay?
And so across archetypes,whether we're talking about any
of the cities in this study,there are examples of this
outperformance.
In the vibrant mixed-usedistricts that exist In the
mixed majors, the differenceisn't as stark, simply because
(20:55):
of the overall challenge thatthose markets are having, mostly
due to congestion and longcommute times and the amount of
people that do commute intothese cities to work, that are
dependent on public transit todo so.
However, in the sprawlingdarlings, there is quite a
difference in vacancy betweenthe overall market and some of
(21:16):
these vibrant mixed-usedistricts that we can see.
I think Denver is a really goodexample of it, where the
overall market vacancy is in the30% range.
Yet when you look at the UnionStation area, which is a vibrant
mixed-use district that I thinkstarted to be built in the 2015
timeframe, that office vacancyis in the 14% range, and so it's
(21:39):
really a testament to this ideathat occupiers and residents
are enjoying being in these morevibrant areas that have access
to the leisure and theentertainment and the restaurant
options and, in Union Stationarea, you know example, the
sporting venues that really givethemselves or give them a
(22:03):
well-rounded experience whenthey're living and working and
playing in those areas.
Rachel Oh (22:07):
Yeah, yeah, no, no, that's true.
I think that.
So, for example, we do a lot ofmultifamily development and
when we're looking at locationsor the amenities around, I mean
we try to build amenity, richmultifamily, because that does
tend to attract tenants.
And then we're seeing, asyou've just substantiated it,
there is that having thoseamenities and being able to live
(22:31):
, work and play is what thengrows the community, and I think
that's what today's renters andtenants are really looking for,
Whereas I think in previousgenerations, like you know,
build something nice, build itsolid, you know, make sure
there's enough space, but nowyou have to think so much more
around what amenities there it'sclose to, what amenities are
within.
You know what's the access?
(22:52):
It's less about being close toan office space, but being close
to where they really want tolive, work and play Right.
I think you've mentioned thatbefore to live, work and play
Right.
I think you've mentioned thatbefore.
So I think that's sointeresting how that small, not
small the pandemic was so lifechanging, but how that blip in
time is now impacting futuregenerations and making or
changing decisions that groupslike PEG and other folks need to
(23:15):
consider when they're doingtheir developments and
investments.
So okay, so we've.
Then we've got this whole thingwhich I think cities are going
to want to focus on as they lookto build their urban centers.
Then we go into your nextsection, which is the conversion
potential, which I find reallyfascinating.
Because just a little bit aboutwhat PEG has done.
(23:37):
We've done quite a bit ofconversions.
Started off with one office tomultifamily, so we did that.
It was challenging, by the way,it was hard, but we have done
that.
It's worked out well.
It was in a suburban market,but we did take an older office
building and convert it intomultifamily, learned a lot of
lessons.
We also have done a lot ofhotel to multifamily conversions
(23:57):
, so aging former extended stayhotels branded typically at
Montgomery residence in, and wewould acquire those and convert
them into class B workforcehousing and that's been
tremendously successful.
And then I know now, with allthe vacancies going on, there's
just a tremendous opportunityand tons of conversion going on.
(24:17):
And I can't remember you'regoing to tell me which was the
number one state Texas, yeah.
Julie Whelan (24:22):
Which I thought it would be New.
Rachel Oh (24:23):
York.
But anyway, tell me aboutconversions Like what are we
seeing now?
Julie Whelan (24:27):
Yeah, so we've been studying conversions now
for a couple of years and thereality is that they are ticking
up.
In other words, conversions arebecoming more of a story across
really all of our markets.
However, they're still nothappening to the extent that
they're going to do much toimpact the landscape of our
cities.
Now, there are some marketsthat that is a different story
(24:51):
and, in terms of the 19 thatwe're studying, dallas is that
one.
Now, keep in mind that thatgraph that you're referring to
is actually a percent of officeinventory that's under
conversion.
So there still may be a greaterabsolute amount happening in
other markets, but as a percentof inventory under conversion,
dallas is the highest.
(25:12):
Now, what I find interestingabout that is part of that
reason is because, because thereis quite a bit of their
(25:39):
inventory, especially downtown,that is under conversion, that
we should start to see adifference in that market very
soon.
Now, what I think is interestingabout conversions is that there
is so much space right now thatcould be looked at for
conversion right.
So if we just look at theamount of vacancy that has been
(26:00):
added to markets, just since2020, when the pandemic hit it's
, 136 million square feet ofvacancy has been added to
markets that's the size ofdowntown DC.
So that is a lot of space, andit's still incrementally
increasing right now, and wedon't expect that vacancy is
going to hit a peak until laterthis year, early next year, when
(26:20):
it should start to come down.
But we don't think that it'sgoing to come back down in the
long range to historicalaverages, which means something
needs to be done with this space, and there's so much of it, and
it's in such disparate areas ofcities that we really do
believe that especially stateand local governments are well
(26:42):
served to be putting focus areasin place.
And so what we tried to do withthis study is actually say okay
, if we know that vibrantmixed-use districts are doing
better and they're generallyeither outperforming today or
have the potential to outperformwhen the market does turn, then
how can we use that effect toimpact office buildings that are
(27:04):
highly vacant that are eitherin or near that area?
And so what we were able to dois identify about 43 million
square feet of space.
That's either in vibrantmixed-use districts or just in
the ring outside of vibrantmixed-use districts that are
more than 50% vacant, and theidea there is not that every
single one of those could beconverted because, as you said,
(27:27):
conversion is hard.
It's dependent on thecharacteristics of the building
and the values and the zoningand the structure of the
building.
There's so much that goes intothe conversion, but at least it
gives a manageable pie to lookat to say maybe these are the
ones that we should look at,either converting to a better
(27:49):
use, something that the marketis really gonna be able to drive
its highest use of, or evencould it be upgraded in its
current form to become a betteroffice that's more attractive to
the tenants that might want to,you know, be tenanted in it.
So there are a lot of different,you know, things that these
buildings can be turned into.
(28:09):
It just doesn't have to bemultifamily.
There could be mixed use, itcould be upgraded office.
In some cases they could bedemolished and we could make
space for green areas that areso important in our cities.
But the idea is to size theprize and try to really focus
development in areas that wethink it could count most,
because there is already a bitof a movement being started.
Rachel Oh (28:35):
No, I super appreciate that, julie, because
you know I had a previousepisode with Steven Painter of
Gensler and he also pointed outso he's an architect and they
have a whole algorithm wherethey analyze a building and
they're able to determine thefeasibility of conversion into
multifamily, for example.
I think that's specificallywhat they were looking at and
(28:55):
what he pointed out is that, asmuch as it might be the right
location and the right size, andthere's a need that, even if
you wanted to, it's not a, it'snot the right office building to
convert.
So I think there's so manythings, and I know that there
was the initiative by the Bidenadministration where they
released funds to help with theconversions, but it was tied to
(29:15):
like a transportation initiativeor something, and so there is
government funding out there,but only for those office
buildings that are close to somesort of transit, and if it's
close to transit, it may notnecessarily be close to the
vibrant centers that you'retalking about.
So it is so complicated,because what I have learned, and
(29:37):
your report point out too, inorder to do the conversions,
because it's so expensive, andwe learned that there needs to
be some sort of assistance inorder for it to work, and that
assistance isn't straightforwardeither.
I will say, though, that youwere saying that it's not just
multifamily.
So, for example, we did one indowntown Phoenix.
We converted an office buildinginto a hotel.
(29:57):
That also wasn't easy, by theway, but it is in a vibrant,
it's next to the arena.
There, it's very livable,walkable, like it's.
It's amazing and the hotel isdoing awesome Right, but it
wasn't easy.
Julie Whelan (30:10):
It's not easy and you know you're hitting the nail
on the head with withincentives, and not only having
the incentive and making itavailable for the type of
conversion that you might deemto be, you know, needed, but
also it's just making it easy toengage with and even find right
, because it's just not astreamlined process.
I did talk to one developer whohad a really interesting take on
(30:32):
it.
He said I can convert anythingthat you want if it comes to me
at the right price, and I thinkwhat it speaks to is just that
this idea of incentivizing thisredevelopment is one of the
bedrocks of what our localgovernments really need to lean
into is incentivizing it, makingit easy, focusing the areas
(30:53):
that they want to see theredevelopment in, because the
only way that we're going to getprivate developers to do this
really hard work is to removeits highest and best use.
Then that is going to be a dragthat is far more expensive on
that entire city, because thisisn't about building new right.
(31:26):
We have done all the building.
This is about now converting toa better use that is going to
be fit for the new purpose.
Rachel Oh (31:33):
Yeah, it'll be.
I think this will be anevolving conversation.
I think it'll be an evolvingspace.
It will be really interestingto see what really does happen,
because I do think too, thereare those that believe that
office will come back, right.
So there are people who aregoing to hold on, to be like,
hey, we're just going to hold onto when office comes back and
we're going to I don't know.
Julie Whelan (31:54):
I think no one exactly knows, but I think
there's a lot of thought outthere.
Well, yes, and you know, I thinkthat that's a very interesting
point, because we do believethat office is going to come
back.
I think that, right now, thesoftness that we're seeing in
office is, yes, partially as aresult of this structural change
that happened that is not goingto go back to the way that it
was.
However, there's also an elementof cyclical weakness that we're
seeing right now because,although we're not in a
(32:15):
recession, we've been talkingabout one for a very long time
and nobody really does knowwhat's around the corner until
we do decidedly see inflationcoming down and interest rates
coming down.
So until then, we don't haveoccupiers that are willing to
make big leasing moves and bigrelocation moves, and when they
(32:36):
are ready and big relocationmoves, and when they are ready,
we will see the market turn backon, which is even more of a
reason to use this time toreposition our buildings to be
ready for that activity when itcomes, because we track prime
office space very closely andthat vacancy overall is in the
14% range right now and webelieve that by end of 2025,
(33:00):
even if demand just continues totrickle as it has been, that
space will be depleted and sothat means that that demand is
going to go to that next levelof space.
And so really looking closelyin this 12-month period of what
needs to be upgraded to meetthat prime office standard, I
think is a really prudent thingfor some of these owners to do.
Rachel Oh (33:23):
Yeah, yeah.
What is a healthy overalloffice occupancy rate?
Pre-pandemic maybe, or I don'tknow if you want to, where you
want to gauge it, but what is agood target that we should be?
When we hit it, we're like,okay, office is back.
Julie Whelan (33:37):
I mean that's very dependent on market.
What I would say is before thepandemic we were at like a 12%
vacancy nationally.
Now that's with some marketslike the Texas markets that were
still doing well but had veryhigh vacancy in other markets
like San Francisco, that youcouldn't even find contiguous
large blocks of space becausetheir vacancy was so low.
Now that isn't healthy either,right.
(33:59):
So that kind of 12% range feltokay.
But important to note that evenwith those markets that had
high vacancy that were stilldoing okay before the pandemic,
like some of the Texas markets,it's because their market had
adjusted to it.
There was a certain amount ofspace that just was totally
discounted and was never reallylooked at as being viable and in
(34:20):
some cases probably should havebeen taken out of inventory.
So the market as a whole reallywasn't competing with that
space.
The question is, how much spaceare we competing on together
and what's the vacancy withinthat space?
And we would argue thatprobably in the 10%, know 10 to
15 percent range is healthy.
Rachel Oh (34:40):
So if we're at 14, we're not so terrible?
Julie Whelan (34:43):
Well, that's just in the high quality space, which
is only 10 percent of themarket.
The overall market is around 20percent right now.
Oh, OK.
Rachel Oh (34:51):
Thank you for clarifying that.
Yeah, ok, ok, yeah, and we, weconverted some non high quality
office space to get where we are, but it was, you know, ideally
located, so it worked out well,okay.
So then the next piece of thereport then I think you set it
up really well is then what areyou have identified the keys to
(35:12):
a thriving city, and I thinkyou've kind of hit on that.
But can you summarize what arethe keys to a thriving city?
What have you guys identifiedas, like these things in place,
then the city is going to bethriving.
Julie Whelan (35:19):
Yeah, and the reason that we went back to this
kind of macro level is becausewe really did want to be clear
about a lot of what we justtalked about, which is that this
is not necessarily a build itand they will come discussion,
because you started out thediscussion saying that
demographers do believe thatoverall population growth is
slowing, which means that thereis a market share gain and game
(35:43):
that a lot of these cities aregoing to be playing, where you
are going to want to take themarket share, especially of the
younger demographic, and sustainand retain them in your market
to ensure that you're going tothrive over the next 20 years.
Rachel Oh (35:56):
So the young people are the key.
Is that what you're saying?
Julie Whelan (35:59):
The young people are the key, because there's a
huge generation of the olderpeople.
They do make up a lot of themix in some of our larger cities
and many of them are workinglonger, staying healthier later
in life and really enjoyingliving in those expensive, large
(36:19):
, mixed major cities, and theyare making up a large percentage
of the growth of that as theyage.
Right now, whereas some ofthese sprawling, darlings and
developing destinations aretaking a greater share, there is
still an absolute numbers rightin the mixed majors and in the
super cities, larger cohorts ofthe younger, but a share of them
are certainly increasing inthese smaller and higher growing
(36:42):
cities.
And so what our belief is isthat there are six what we call
keys that really have to be inplace and strived for in order
for those vibrant urbanneighborhoods to really sing and
to really operate at theirfullest potential.
The first one is economicdynamism.
Right, it's this idea of whatmakes up your city's economy.
(37:04):
Do you have a diverse industrymix or do you have a culture of
innovation?
Do you have capital inflows orpeople wanting to invest in your
market, and do you have a largetalent pool that's diverse?
The second one is thedemographic potential right, and
it's what we just talked about.
So what's the age distributionof who's living in your city,
what are their education levels,what are their skill sets?
(37:25):
All of that that reallycontributes to the development
and the competitiveness of thesecities.
The third is lifestyle vibrancy,of which you have a lot of it,
right.
It's that quality of life, it'sthose recreational
opportunities, it's how muchgreen space markets have that we
know, like cities like Londoneven are really making a big
push for right now and just thegeneral active lifestyle.
(37:47):
It doesn't mean that it alwayshas to be warm, right, but it's
just these recreationalopportunities and active
lifestyles of which I know yourmarket well can provide.
The fourth is resilientinfrastructure.
So it's this idea that not justfrom a transportation
perspective, although that isvery important to connect our
cities and to make sure that,especially in our mixed majors
(38:10):
and our larger cities, that it'sstaying young and clean and
it's progressing, which is, Iknow, a challenge in those
cities young and clean and it'sprogressing, which is, I know, a
challenge in those cities butit's also infrastructure around
social things like education andmedical facilities, because in
some of our fastest growingareas and our developing
destinations, that could be whatis their Achilles heel that
(38:32):
challenges people from stayingand growing their families and
aging in those markets?
The fifth is what we calldistinctive identity.
So this is really what is thehistory of your market?
What are the natural resources?
What is the culture?
This is what the super citiesdo so unbelievably well that
nobody can even come close toit's.
(38:53):
What is the identity that'sassociated with those cities,
and especially from a SmarlingDarling standpoint, there are
some that struggle with thatidentity that they're going to
need to really focus on.
And then, lastly, it'sresponsive governance, which we
just talked about, which is doyou have the right zoning and
permitting and incentive andimmigration policies in place?
(39:13):
Are you worried about safetyand cleanliness and are we
figuring out how to make theperception of our cities better?
And what are the tax structures?
Are they business friendly?
Are you drawing or pushingbusiness away from your city?
So our belief is that if thosesix things are in place, that
then you will have really thosevibrant areas that are truly
(39:37):
going to outperform in thefuture.
Now we don't have metrics tothose yet, but we are working in
our next iteration of thisstudy to really identify metrics
behind each of those and beable to track the resilience of
how these cities perform goingforward.
Rachel Oh (39:51):
Yeah, no, I love it.
I printed this out because Iwas going to ask you about it
and then you launched into it,which is awesome.
And I live in Salt Lake Cityand I feel like Salt Lake hits
all six of these, even down tothe distinctive identity, as you
mentioned, because we've gotthe Olympics here at one point,
We've got incredible naturalresources.
I think there's a really funand it's a very young state.
(40:13):
I also grew up in Seattle and Ifeel like Seattle hits all of
these as well.
So I do think that these arekey to these vibrant cities,
these thriving cities, as youmentioned, and both, I believe,
are quite thriving.
I am so privileged to havelived in both and have made Salt
Lake City my home right now.
So, of course, you know, we'llsee, We'll see in the future,
(40:34):
but all of these things aresuper helpful.
Okay so, Julie, the report.
We're going to have the linkhere at the bottom of the
podcast so people can vote, butI feel like this report has been
incredibly insightful.
I love the way you folks haveidentified, you know, the key
driving factors, kind of givenus some history.
I know you've done a SWOTanalysis of both Los Angeles and
(40:54):
New York.
I think that was fascinating.
I love both cities and then youknow, just some thoughts moving
forward.
So encourage everyone that'slistening to this to download a
copy to read it.
It's incredibly insightful andI think that city leaders also
will need to do that.
So, Julie, super appreciate youtaking time out of your day to
(41:16):
join our humble podcast.
You know we really appreciateit and we're hoping that maybe
in as you, you mentioned somemetrics that you're going to be
publishing later on.
Maybe once that's done, you canjoin us again and we can put
some some numbers to this.
So anyway, Julie, thank you somuch for joining us today.
In the meantime, thank you toall who have listened in today.
From the peaks of the MountainWest, I am Rachel oh, your host
(41:40):
for Peaks and Portfoliospresented by PEG Companies as we
continue to dig into all thingsreal estate.
Have a fabulous day, everybody.
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