On June 17, Walker & Dunlop's CEO, Willy Walker, hosted another installment of the Walker Webcast with Brett White, the CEO of Cushman & Wakefield.
The two industry leaders discussed:
Willy Walker is Chairman and Chief Executive Officer of Walker & Dunlop. Under Mr. Walker’s leadership, Walker & Dunlop has grown from a small, family-owned business to become one of the largest commercial real estate finance companies in the United States. With a $32B transaction volume in 2019, Walker & Dunlop is ranked top three with Fannie Mae, Freddie Mac, and HUD.
Brett White has served as Executive Chairman and Chief Executive Officer of Cushman & Wakefield since 2015. Prior to joining Cushman & Wakefield, Brett had a 28-year career with CBRE, serving as Chief Executive Officer from 2005 to 2012 and President from 2001 to 2005. He was also a member of CBRE’s Board of Directors from 1998 to 2013.
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Willy Walker (WW): Thank you, Susan, and good afternoon to those of you on the east coast and good morning to everyone else across the country. If it’s Wednesday, it’s the Walker Webcast and it is a real pleasure to have my friend Brett White with me today. I’m very much looking forward to diving into what Brett and Cushman & Wakefield are seeing around the globe as it relates to the reopening of economies and people heading back to work and, more specifically, heading back into office buildings and the leadership role that Cushman & Wakefield has taken on helping corporations and owners of office and retail to open back up and get back to operating in a safe and productive environment.
As we showed on the slide as people came into the webinar today, we have some really exciting guests coming up on the webcasts in the coming weeks and I just want to tee those up for two seconds.
Next week I’ll have Leslie Hale of RLJ on to discuss the hospitality industry, the retail industry - she’s on the board of Macy’s - as well as social and racial justice in America.
The week after that we’ve got Bill Demchak, CEO of PNC coming on to discuss the banking sector and what PNC is seeing in all of their consumer, corporate and real estate lending businesses.
And then the week after that we’ve got Dr. Wayne Frederick, the President of Howard University, who will join me to discuss heading back to school in the fall, how universities and corporations can do a better job of educating and mentoring minorities in America as well as the COVID pandemic from a physician’s perspective.
I’m very much looking forward to hearing what Brett has to say today and then having those guests on over the next couple of weeks to provide some, I hope and expect, great perspective on the markets that we are all trying to navigate today.
Along those lines, the markets do seem to be holding up extremely well. I said to someone I was speaking to this morning that every data point that I continue to be concerned about seems to surprise to the upside and I’m not sure whether I’m just being overly pessimistic on things or whether at some point these numbers can’t continue to sort of defy gravity. But as we have all seen with the stock market where it is, where 10-year Treasuries are today, it’s a very healthy market.
From a financing standpoint spreads continue to be very tight with a low base rate and so there’s a significant amount of financing activity going on particularly on multifamily properties but encouragingly we are seeing a lot of capital come back to the market from life insurance companies, Wall Street conduits, banks and specialty finance companies, not only coming back to the market but more importantly coming back at higher leverage levels. There was pretty much a bid on almost any asset in the country at extremely low leverage levels. If you were looking for a 50 percent LTV loan you could pretty much find that almost throughout the crisis but if you went higher than that it was very difficult to find capital. It’s nice to see capital coming back to the market at more, if you will, market rate average levels and it’s my hope that that continues throughout the summer and into the fall.
We’ve also seen an uptick in investment sales activity on multifamily properties which is an extremely welcome sign. I have to say that when we did our earnings call in early May, I told investors in Walker & Dunlop that it would be unlikely that we would see any investment sales activity on multifamily properties in Q2. I’m thrilled to have been wrong on that. We’re actually seeing listings. We’re seeing owners put properties onto the market and we are seeing quite a healthy bidding environment. As I said previously, I think multifamily is the first one back, industrial is there as well. It will be very interesting to see what happens on retail and hospitality and I’m looking forward to hearing Brett’s thoughts on those two asset classes as we move through into Q3 and through the rest of the year.
Forbearance requests have still been exceedingly low which is great news. We put out a press release last week talking about the forbearances that we’ve received at Walker & Dunlop in our Fannie, Freddie and HUD portfolios and they still remain extremely low which is a great sign to the health and strength of the multifamily market. I would underscore something that I have said consistently which is that I do believe the stimulus that the federal government has put into the market as it relates to increased unemployment insurance proceeds or payments as well as the one-time payment under the Cares Act were extremely helpful to keeping up rent rolls in May and June. We all know that those payments are coming to an end right now at the end of July and I am getting on a phone this afternoon with Senator Crapo who is the Chairman of the Senate Banking Committee to talk about the need for some type of additional stimulus payments by the federal government or some type of renter assistance program because I think that if we have a hard stop there at the end of July we could see some significant degradation to rent rolls across the country.
And then the final thing that I would talk about before turning the call over to Brett and asking him a couple of questions that I know will be very insightful, many of you saw that Fannie and Freddie hired bankers this past week - Freddie Mac hired JP Morgan and Fannie Mae hired Morgan Stanley to work on their IPOs. It is very clear that the regulator of Fannie and Freddie, the Federal Housing Finance Administration, is very focused and desirous to get that process not only underway but deliver on freeing Fannie and Freddie from conservatorship and getting them off the books of the federal government. I would salute that effort. We’ve been a big supporter of those efforts and we’d love to see that happen. I would also say though that with 4.8 million single family loans right now in forbearance in Fannie and Freddie’s portfolios, if we get a surprise to the upside and those 4.8 million single family loans all turn back to being performing loans, I think there’s a real opportunity for Fannie and Freddie to have IPOs sometime in the next year. My assumption is that a great majority or a great percentage of those 4.8 million single family loans that are in forbearance today move into foreclosure and that there is a very significant workout process that has to happen inside of Fannie and Freddie most particularly on their single family portfolios before they can really focus on attracting new capital to them and performing IPOs. But time will tell on that and it is great to see the efforts that both Fannie and Freddie and FHFA are putting in to spinning Fannie and Freddie out.
Now to my guest, Brett. First of all, Brett thank you again for joining me today.
Brett White (BW): It’s a pleasure.
WW: Your website has a statement on it “We Are Inclusive” and I know your Executive Committee has both women and minorities on it. What’s Cushman doing right now to move the needle and be more inclusive as a company?
BW: Right. Thanks, Willy, and good morning and good afternoon everybody, it’s terrific to be here with all of you. Willy and I have talked in the past about the opportunities we had at Cushman & Wakefield the last five years to reset the table for what we thought a forward looking, best in class, commercial real estate services firm should look like. We had an advantage that is unique to us which is we blew up three companies and then put them back together and in doing that we were very careful to identify those things that we thought were broken or needed help in the industry and to try and be a leader in those areas.
For instance, in the area - again Willy and I spoke about this - in the area of technology we blew up our entire back office technology platform, accounting systems, finance systems and put in cloud-based Workday. No one was able to do that in a legacy firm, it’s very scary stuff to do, we were the first to do that.
Diversity and inclusiveness was another area that we looked at and recognized that we participate in an industry that has been a woeful laggard on diversity and inclusiveness forever. Willy and I have been doing this for probably more years than we care to admit and the progress on diversity and inclusiveness is glacial in this industry. When we put Cushman & Wakefield together, we saw this as an opportunity to really lean into the issue and make some proactive choices and decisions that we felt could begin to set us apart in that area.
For instance, if you go to our webpage, you’ll find that we have four core values at the firm and the very number one first core value is diversity and inclusiveness. It’s something that we focus on and have been leaning on very, very hard. It starts at the top, Willy. For us we have nine directors on our public company board, five are diverse, so we have a majority of our directors being diverse. That makes us unique or somewhat unique in this industry and it sends a message both to our employees and our clients that we’re very serious around these issues. And that way in which we think about trying to create an example within the firm that can then inculcate through the firm then goes into our senior team, goes into our executive team and then begins to move down the org chart.
For us we put in play some very specific programs to help us in this area. One is, for instance, any position being hired into the firm has to have a diverse executive or manager in that interview conducting the interviews along with whoever the sponsoring manager is. The last three years 40 percent of our new hires globally have been diverse which is remarkable. And again, these things come from focus and effort.
All that having been said, although I feel that Cushman & Wakefield statistics are good, there’s so much more we need to do and the events of the past I think month and a half have helped reset that conversation and that dialogue. So much of the effort on diversity the last four or five years has been on gender diversity, the Me Too movement, and it’s unfortunate but sometimes it takes these big events to remind all of us that diversity is an all-inclusive category of people who have suffered from obstacles in either being hired or promoted or trained or mentored or retained throughout our organizations. And so, with the tragedy we saw in Minneapolis with George Floyd, the tragedy we’ve seen now with video of how African Americans have been treated, we all, I think, felt and knew this existed but it’s very sad it took an event like this to put it front and center. But for us as a firm diversity and inclusiveness is a very big deal, has been from day one, but we have an enormous amount of work to do.
WW: One of the things Brett that I - first of all I salute you and I have watched what you have done at both CBRE as well as at Cushman along these lines and your leadership has been very evident over many, many years.
I wonder if you have any thoughts as it relates to, it’s one thing for Walker & Dunlop or Cushman & Wakefield to focus on these issues and try and really lean in on them, but as you and I both know the commercial real estate industry, our clients are also, if you will, lacking as it relates to diversity. On the Forbes 400 list real estate is actually ahead of tech as the number three industry as it relates to where people have made their fortunes on the Forbes 400 list. Any thoughts as it relates to what we can do as an industry to try and help transform the ownership side? I think about Goldman Sachs and about David Solomon’s statement that they won’t work on IPO’s where there’s not a diverse board and I thought that that was quite a statement for a company with Goldman Sachs’s reputation and ability to actually transform the way that public companies go public. Have you thought about anything that Cushman can do to try and make an effort, if you will, across the table?
BW: Yeah, it’s a great question Willy and, quite frankly, I had not thought about this until I got your note last night on the topic. I spoke to a few of our people this morning, specifically Brad Krieger who runs Mar/Comm for us but then spoke to some others. The initial thought on this was, the one idea I thought we had an interesting opportunity here was to try and create a forum where there’s a consortium of institutional owners who take this on as a project for them. We can think about Brookfield, we can think about all of our great clients on the institutional ownership side but if they could come together and make this a priority and provide opportunity in this area, I think that’s the easiest way to make a real difference.
We as service providers, I can’t tell my clients to do anything, it works the other way around. I will say that our clients have been very good at pushing all of us on the diversity and inclusiveness issue. And this is a topic, Willy, you and I have been hearing and looking at for many, many years which is our clients want us to look like them and the institutional ownership side of real estate, you’re right, very much looks like “this” industry and I think to change the face of the commercial real estate ownership side of the industry, that’s a topic that ownerships going to need to take on. I don’t think there’s a lot we can do other than to tell them the things we’re doing to create a more diverse and inclusive environment ourselves. It’s something that they need to take on and address I think as a group.
WW: Let’s back up for a second off of topics of the day and rewind the video tape a little bit because I think your story and your perspective on the industry is so helpful and insightful.
You went to UC Santa Barbara and majored in biology. As I read that I sort of think about you on a surfboard looking down at the bottom of the ocean thinking about being a marine biologist and not necessarily calculating square footage on office towers. How did you end up entering into the commercial real estate industry? And I’m going to, after you go back to sort of your roots on this and what drew you to it, I’m going to fast forward to how you basically created CBRE. But just give listeners a little bit on sort of why Brett White is in this industry to begin with given you were a biology major at UC Santa Barbara.
BW; Willy, I would not I’m sure shock you to tell you that there were many days at Santa Barbara I was sitting on a surfboard looking at the bottom of the ocean and the waves that were coming and thinking about my life and what I wanted to do with my life. By the way it’s one of the great things about surfing, you get a lot of time alone to think. That’s actually true, Willy, part of the reason that I was attracted to biology was I grew up outdoors and doing a lot of things in the ocean and around the ocean and was intrigued by that. I also thought that the medical profession would be a place that I would end up and when I went to Santa Barbara, majored in biology and was taking those classes, I really enjoyed those classes, but came to the conclusion a couple years in that I did not want to pursue medicine as a career. The education path was so long, and I was so impatient, it wasn’t something that I thought would make me happy and so I had to reset my goals.
What I did was I went home and I talked to my dad, he was a banker, and I talked about careers that he had seen people have that made them happy, that made them successful, and we kept coming back to real estate development. The town I grew up in had a disproportionate number of very successful commercial real estate developers. So what I did was I went out and spoke to three of them – a guy named Don Sammis, a guy named Gary Wheatcroft and a guy named Doug Allred - and I asked them, gee you folks are very successful in commercial real estate development, how does it work, could I get an internship with you. I ended up interning with Allred and Sammis and when that internship was done and I asked them how does one actually get into the industry they all told me the same thing, they said we all came from Coldwell Banker commercial, that’s where we learned the business and that’s where you should go to learn the business. And so that’s how I got from Santa Barbara biology to commercial real estate to Coldwell Banker commercial.
WW: Before I fast forward, I would just underscore in your response to that question something that I want to underscore for a lot of people who are listening in. You had the great opportunity to go to your dad and ask your dad for some advice on what career to pursue. You then had access to people in your community who had experiences in an industry that you were interested in going into and they gave you incredible advice and mentoring to enter the industry and then you got an internship that gave you exposure to the industry.
All of those things are incredibly valuable to you, to me, and the way that we started our careers. Those are things that many minorities in America don’t have access to and so one of the things that we’re announcing tomorrow at W&D is a partnership with Project Destined to do a virtual internship program this summer for underrepresented youth in America to give them access and exposure to the commercial real estate industry. And I would just put forth to people that anything we can do to provide all of those touch points that you just so articulately outlined as it relates to how you got into this industry, if we can do a better job of giving that type of mentorship, and that kind of exposure to underrepresented youth, we will start to move the needle on these issues.
Let me jump ahead a little bit. Your career at CB is legendary, you created the largest commercial real estate services firm in the world and from the CB commercial you then acquired Richard Ellis, which at the time was a London based firm that brought to the CB commercial the whole international operations. You were then Chairman at North America, then President in 2001 and became CEO in 2005. I want for two seconds get you to focus on, as you stepped into that role before you did your subsequent acquisitions which grew CB dramatically, any parallels as it relates to being in that seat at that time and the seat you sit in today at Cushman as it relates to the evolving commercial real estate industry, things you are seeing as it relates to how you had to move CB at that time or how you need to move Cushman at this time to meet the evolution of the market?
BW: Great question. There are some similarities and there are some stark differences. On the similarities - and by the way the genius behind the building of CBRE was Jim Gideon who was my boss for a number of years. Willy I know you met Jim, a force of nature to say the least. I’ll never forget the pivot point for CBRE was a management meeting in St. Charles, Illinois, this would have been in 1996. We had an individual who was running a fledgling corporate services group inside the company named Bill Agnello and we were in St. Charles and we had our 105 managers in the room and I was a brand new manager in the very back row and Jim Gideon came up and he said I’m going to make an announcement which is Bill Agnello, who none of you know, but he’s been here a few years, is going to leave and go to Sun Microsystems. And Bill then got up and spoke and he said folks I’m going to tell you something, this industry is changing and what you’re going to see in this industry, and I Bill Agnello intend to lead this, is large corporations are going to begin to outsource their real estate departments to firms like, at the time, Coldwell Banker commercial. That was a moment in time where we had never thought about this before, we had very few accounts that spanned ever more than two cities. But at that moment in time Jim Gideon then next day came back up and said we are going to put in place a vision for this firm - that is we are going to be global, we’re going to be vertically integrated and we’re going to serve all food groups for our customers and the way we’re going to do that is we need to raise capital, we’re going to go public - so we’ve done that by the way at CBRE three times - we’re going to begin looking at international firms and we’re going to begin building out our corporate services group.
So that was a moment in time where the world began to change very quickly and all the firms in the industry had to make choices. And by the way, the winners and the losers in our industry can almost all be defined by the way they responded to those issues, both in the mid and late 90’s, in the early 2000 period. Some firms went in the bunker and did nothing and decided that they were going to be who they are, focus on what they do, think of Grubb & Ellis. When I interviewed in this industry, they were one of the top three firms in the industry. They were gone before my retirement date sometime in the future, they don’t exist anymore. They made certain decisions that were really not great decisions. Other firms, Jones Lang LaSalle, CBRE, what you created with Walker & Dunlop, these are firms that made very strategic decisions about a changing environment.
Today’s environment is a rapidly changing environment and firms have decisions to make right now that are fundamental decisions and I think these environments create the best decisions and the best companies. They also create the tide going out that identifies companies that have been able to ride the tide and aren’t going to be able to ride it anymore and I think we’re going to see that for the next three years, another separation of winners and losers.
WW: Does the current protectionist policies of the United States and what is kind of rolling around the globe put the brakes on that need to be global at this time, Brett?
BW: No, I don’t think it does, it has an impact but it’s not there. The reason that it’s not there is, again, the reasons that for full service commercial real estate firms to win have had to be first full service and had to be global is that the largest customers we work with require that. So as long as our customers say, listen, I’ve got footprint in the UK, I’ve got footprint in China, I’ve got footprint in the States and if you’re going to do my work you’re going to have to show me that you’re capable of doing that work in all those places. As long as that’s the case, you’re going to have to have firms that can say yes. That trend of big corporate users consolidating their vendors and requiring even more and more services, underpin those contracts, is a growing trend not a decreasing trend.
The protectionist policies and the tariff issues and the things that we as a country have been doing in this area are generally not helpful to our business because what happens is the countries on whom we put tariffs then retaliate.
So far there hasn’t been a jurisdiction, including China, that has taken the retaliation to the point of saying we’re not going to allow our SOE’s to work with a U.S. based company but I think it’s possible that it could get there and that would be then damaging to the business but so far that is not the case and, in fact, our largest clients in China are the SOE’s, the Chinese state- owned enterprises.
WW: After building CBRE into the largest commercial real estate services firm in the world you left and I’ll quote you, “with the intent of slowing down a bit after almost 30 years in the industry but found that fully engaged in full speed are really all I know.” You said that in 2015. Given at that time when you left CB all the opportunities to either be an investor, to go into PropTech or FinTech, why did you jump at the opportunity to sort of recreate the wheel that you’d already created?
BW: Yeah, I fell into it and it was absolutely not my plan. I will tell you Willy, I tell a lot of my friends who are - I’m at that age now where I have friends that are retiring - and I tell them this story which is I remember a week after I left CBRE and I was living in Malibu and I used to go to Starbucks at 5:45 every morning to get my coffee and go to the office - and I went in at 8:30 in the morning, I got my coffee, I had my Wall street Journal, I sat down and started to read it and I had this horrific feeling, oh my god, I’m one of “them”.
WW: Careful, careful there might be some retired people on this call.
BW: All of a sudden you feel irrelevant, you feel like, wait is this really what I want to do, can I be happy doing this? It was very clear to me very fast that I was not in a place in my life where I could be happy at half speed and so what I did was - my intent had been leaving CBRE was to move to the principal side of the business. I had watched as our private equity partners at CBRE, to be blunt about it, made billions of dollars on the flip of CBRE from public to private and public again and I saw that the principal side of the business, private equity, was very interesting to me.
So, what I did was, I began partnering with private equity firms to do roll ups in commercial real estate services outside of things like our business, so landscape, I got very involved in a commercial landscape roll up. Guarding and security, got very involved with what is now Allied Universal on that role up and those were a lot of fun.
While doing that the divestiture of DTZ from an engineering company in Australia called UGL began to germinate and the CEO of that business called me up and said listen, we’re going to likely sell this business, we think that if you could put together an investor group to buy the business we’re going to have a better chance of convincing the employees in the business to stay because they know who you are, you’ve got relevant credibility in the industry. And so I thought about it, I thought okay, I’m not really in a place where I want to run a big business again but I’ll go in as Executive Chairman so I partnered up with TPG, we bought DTZ. And then what happened was other deals that I had been watching - some raising money for, some just watching - Cushman & Wakefield and Cassidy Turley both came to market. So we sat down with TPG and we had a very long conversation in Melbourne, Australia about do we want to be passive investors in DTZ and help it grow a little bit or do we want to actually do something big and bold. And that landed on me and my partners and we made a decision that this industry has never been comfortable with a duopoly on full-service firms and I know that having run CBRE. Many times running CBRE we would go in, make a global pitch for the client – a good example would be Bank of America - they would hire Jones Lang, they would hire us, and then they would say we cannot have just two vendors so we’re going to go hire another firm and we know you’re going to tell us they’re not qualified, and we know they’re not qualified, but you’re going to have to help them because we don’t have a choice.
There’s always been this need I think for more firms at the top. We saw that need and, as I mentioned earlier, we felt we could build something a little bit differentiated to not just fill that need for a more diverse set of choices at the top but also provide a different value proposition than perhaps some of the legacy firms provided.
WW: COVID hits in January, February. Cushman, I believe, manages something like 80 million square feet of office space in China. What can you tell us as it relates to the virus moving through Asia and what your team has seen on the ground as it relates to the Chinese economy getting back up and going, and I’ll go from this to the Safe Six. So if you could start talking now not as specific about the Safe Six because we’ll go to that next but as it relates to just what you’ve seen on the ground as it relates to the reopening, most specifically in office and retail, and where we stand today in Asia vis-à-vis the United States.
BW: Right, so actually we manage, if you can imagine, 800 million square feet in China which is a hard number for me to get my head around.
WW: My bad, my bad, you know, I’m just off one digit.
BW: I do the same thing, I always ask my folks, are you sure that’s right? But it’s right. That 800 million square feet had in it 10,000 tenants and a million people working in those buildings. We had the advantage of sitting in the middle of a mass exodus and a mass re-entry to these buildings in China before these issues were prevalent in Europe and the United States. And so, what we saw there was, we had to very quickly put together a playbook for how to handle the re-entry to the buildings. The exit was easy, you just shut up shop and you go home and that’s done.
How to think about for our ownership clients and our tenant clients, giving them advice on how to go back was daunting and so we had to put together, as I mentioned, this extensive 300-page technical playbook on how to do that. Now China is a different place than almost anywhere else in the world because the way in which surveillance and tracking and your ability to ask questions and to force procedures is unique in China. In China what we saw was a very quick development, really by the government, around technology to track people in a way that would never be accepted in the United States or Western Europe, but because of that, the protocols that were developed in China around re-entry are different in some cases than what we have here.
WW: Let me jump in for a second, let me push you on that because I’ve heard you say that pre 9/11 we didn’t have body scanners at airports and if you kind of put out there hey you’re going to walk into some glass tube and have a body scanner basically show your entire profile on a screen most people would say thanks but no thanks. But then 9/11 happens and we actually instituted it and now everyone walks through it like it’s, I think the term you used was “dial tone”, we just don’t listen to it, we just do it. So why is it that China right now, and this is everyone’s health, why can’t we set standards like that and have people adhere to them if they want to play ball, if they want to go back into an office?
BW: We can to some extent but let me give you an example. There’s a question as to whether it is legal in the U.S. to force an employee to take their temperature, there’s a question around that. There’s a liability question in the U.S. and I’ll give you a specific example. Steve Jones, who runs Allied Universal, the largest man guarding company in the country, so when you walk into an office building in New York those people in the lobby are usually Steve’s employees. Many, many owners have said to Steve we would like your lobby concierges to do the temperature check. Steve was excited to do that. He immediately ran into an issue which is what his lawyer said - Steve, let’s imagine that the building owner sets the temperature limit at 100.4 degrees. You’re told to screen out at 100.4 and you let someone in at 100.2 and that person’s infected and that person infects the building. Who’s liable?
This issue, and I know you want to talk about this, this issue of liability between owners and tenants and the tenant’s employees is a huge issue. And in China that doesn’t exist, you can do, the government can require anything they want to require. I’ll give you a real-life example Willy. In China office utilization is right now right about 95 percent, not 20, not 25, 95 percent. Now how do they do that? Because they don’t social distance. Why don’t they social distance? Because they have a level of knowledge around where infection is that we just can’t get to because they force people to be tested regularly. In China, when we have an employee that is going to work in the morning, they are temperature and health checked when they leave their apartment building. They are temperature and health checked when they get to the lobby of the building. They are temperature and health checked when they get to their floor. They have to constantly be monitored around these issues and the tracing around if they’ve ever been near someone who’s infected, if they are the government moves them to quarantine quarters, it’s not a choice.
These are the things we can’t do. We do need to do as much as we can within the limits of the law to have as much information as we can gain around where infection is and where it isn’t and if we can’t do that, Willy, it’s going to be very difficult for us to tell our employees that our workplace is a safe environment and at the end of the day that’s what we have to do, we have to be able to tell our employees you’re safe here.
WW: Given that stat as it relates to 95 percent occupancy back in office in China and then the fact that they aren’t social distancing, there really isn’t, you can’t answer the question as it relates to square footage usage based off of the China model. What’s your thought as it relates to square footage usage in the United States given how people are re-entering the office space? Is it that people keep the same amount of square footage and just have less density in it because they’re going to do you work Monday, Wednesday, Friday and someone else works Tuesday, Thursday, and Saturday. What’s your thought as it relates to aggregate usage of office space in America as we move through this crisis?
BW: So that is the multi-billion-dollar question. As you know, you’re in the middle of it, Willy. There is no topic hotter than this topic and there is no topic I’m dealing with right now that has a more diverse set of missionary opinions. Depending on who you speak to, I won’t use names, but I’ll give industry - the CEO of a world class, world leading bank based in New York has said…
WW: Careful, careful, you’re going to give it away pretty quickly if you keep - on Park Avenue.
BW: Okay, but there’s two of them, right? One of them downtown has said I want everybody back in the office. One of them has said I think we can do without a lot of people back in the office. These are firms in exactly the same industry, doing exactly the same business, who are, at least at the top, articulating a very different strategy. The one that says I want everyone back in the office tells me, we live on our culture, it is the single most important differentiator we have in our industry, it’s everything, and I as CEO struggle to understand how I can inculcate this powerful culture virtually so that’s a challenge to me. And then you have the equally bright CEO saying, hey look, I’m watching my employees right now and they’re very productive at home and I think that a lot of them could be productive at home a lot more.
Now to answer your question specifically, Willy, and we’ve done an enormous amount of survey work on this, we’ve now surveyed over 50,000 people who are employees of our clients around the world, these are not our employees these are IBM and Google and all these employees around the world. We’ve asked a whole series of questions about productivity at home, productivity at work, what’s working, what isn’t working, do you want to go back, do you not want to go back, and these survey results are very interesting.
A couple of points that I’ll call out. The people that most want to be back in the office is defined by two things - age and the culture they live in. Age, the younger you are, the more you want to be back in the office. By the way, that was shocking to me. I thought the younger folks will see the office as an antiquated dinosaur environment, they won’t want to go back, the older folks will want to go back. It’s the opposite.
Gen X, Gen Y, Gen Z, they are not happy at home and they want to be in the office around the people that are their friends and that they work with and that is a very high percentage of those people. As you get into older employees, and let’s call that 50 and older, that flips, and those people do not want to go back in the office. Now part of that is they’re probably more senior, and so they have more freedom in what they do for their work. Part of it is they are probably more worried about COVID, but age is a very big deal there.
The other big deal is culture and, again, things that opened my eyes. When you talk to employees in Italy and you ask them if they want to stay home or go back to work, a very high percentage say it is impossible for me to work at home. Why is that? Because we live differently than you live, Brett, we live in a communal environment here. It is very common that we have our moms and dads living with us or multi generations living with us and we have no place to work, it’s crazy here. India, same thing.
What does this mean then to how office space is going to be used? In the short term all companies are going to have to figure out two things. What percent, if any, of their employees can be sent permanently home. My guess on that Willy is less than 10 percent. When you really go through companies and ask them how many people will you send home permanently, it’s a very low percentage. When you then ask them how many people are you going to allow to work remotely and use the office, it’s a very high percentage, maybe 75-80 percent.
In the short term, companies to accommodate the people that want to be in the office, companies are going to have to rotate. You mentioned this Willy, you’ll have the A team, the B Team and most companies will figure out some way to rotate people through the office to get people that office experience and allow them to work remotely.
Post COVID, that’s the big question. I do think over the last two months consensus thinking on this has gone back and forth twice. The early days of COVID, everyone had this adrenaline rush of wow, working at home is working, I’m very productive, I’m collaborating, the technology we have is terrific, I think a lot of people in my company should work from home. Then people began dealing with the issue of well now I’m worried about culture. I’m worried about mentoring and training. I’m worrying about what do we do with our new hires, how does that work, and so people began talking a lot more about I don’t think I’m going to have many people at home permanently.
As this has evolved now, we’re coming back I think to a bit of a middle spot. I think most large companies right now believe that over the next three to five years they can reduce their footprint and I believe that most large companies today are going to try hard to do that. Now reduced footprint could be 5 percent, it could be 10 percent, maybe as much as 20 percent. I don’t think in general you’re going to see anything more than that. But there’s no doubt in my mind now, that CEOs of large occupiers believe now that there’s a way to more efficiently use their space, even though in the short term they’ve got to deal with social distancing. I think when the vaccine is widely available and we are a vaccinated population, the workplace is likely to go back to a build out not a lot different than what we had pre-COVID. However, there will be fundamental differences in the way air handling is handled, how hygiene is handled - kind of the dial tone I was talking about with the TSA - hygiene is going to be different, temperature checking may be prevalent, a lot of things will be different but I do think the density is probably going to come back, close to what it was pre-COVID.
WW: If I listen to what you just said as it relates to sort of the pendulum shifting from kind of we’re never going back to the office to we’ve got to get back to the office to something in between, what’s your thought on shared workspace because clearly we all know the story around WeWork. If you start thinking about shared workspace at the beginning of the crisis everyone says, whoa that’s DOA, no one’s going to want to go into an office environment where you don’t know everybody, you don’t have the checks, it’s not the same team so shared workspace is going to just evaporate.
And then all of a sudden you get to the other end of it, to your point about flexibility and about companies wanting that flexibility to have people come in for a couple days, teams coming in and out. What’s your thought as it relates to the shared workspace model as we move through the next year to two years and have you all seen anything from your leasing business that would say that there’s either a real pain coming in the shared workspace or landlords who have shared work operators defaulting on their leases or walking away from their leases yet the landlord says I still like the concept I’ll just take it over and run it myself.
BW: All of the above.
WW: I wasn’t trying to answer my own question. I actually want to hear your point on this.
BW: It is all of the above. First of all, I think the fundamental value add that WeWork brought to the market, I think it’s misunderstood. It isn’t the technology they develop, I don’t believe. It isn’t the cool furniture and the ping pong table and the beer keg, that to me is nonsense. What WeWork brought to the market was, because of how big they became and how high profile they were, they brought to the market both on the ownership side and the occupier side an understanding that there has forever been a fundamental mismatch between what owners want out of their tenants, in lease term, and what tenants want from their owners in lease term. And what WeWork said is, we don’t believe that companies should have to sign 10-year leases for their operations because, and we know this, there’s no company on the planet who knows what things are going to look like in 10 years. I think what WeWork did was they finally ripped off the band aid to say hey owners, hey tenants, this mismatch is real and we’re going to fix it. To me that’s the biggest lesson learned and I think in an environment like we’re in right now that concept of a variable term lease could be very attractive.
For instance, there are companies, I can think of a few in New York right now, who during COVID needed to open satellite offices in the suburbs because they do not want their employees on mass transit from eight to ten in the morning or from three to six in the afternoon and so they’ll open - I’m going to make this up- they’ll open a satellite in Rye, a satellite in Morristown, perhaps one on Long Island, and allow their employees to use those satellite locations on and off, or maybe for a few days a week and then they come into the office the other few days a week. Variable workplace providers are best suited to solve that need because these tenants don’t need that lease for 10 years, they need it for a year and a half or two years.
I think that the variable space providers are going to have some activity from these companies that are looking at short term variable space leases. I think the fundamental problem with the coworking model is, generally speaking, large companies, established companies, are not comfortable and will not allow their employees to work in a communal environment with employees from other companies. It’s fraught with legal issues, it’s fraught with compliance issues. and frankly, it’s fraught with cultural issues. And so that was I think what was fundamentally wrong with the model. I don’t think the model works if you’re just housing one and two person companies, but where this model could work and where it should work, is to allow established companies to have a place to go for a one year or a two year lease and have a nice space to work in - it has to be secure, has to be their floor, no one else on it, but that’s something that WeWork was doing with their Enterprise clients that I thought was getting real traction.
WW: As we move off of office, and I want to go to technology next, I would just give two quick data points from W&D’s own experience. One is that we just signed a lease for our new corporate headquarters, not moving far, literally down the street in Bethesda, but we started that process a year ago and we had a spec in there for the number of square feet that we needed and lo and behold a week ago we signed an LOI for exactly the same amount of square footage. Sort of underscoring what you said, Brett, as it relates to companies have a conviction that you need to be back in your space, with your team, and defining your culture.
The other thing is that we opened up yesterday or day before yesterday 24 of our 40 offices across the United States and had around 120 employees who voluntarily said they want to go back into the office. To your point, it was predominantly younger employees. And I would also say that it took us one day to shut down one of those offices because an employee came in contact with someone with COVID and we had to shut it down and deep clean the office and send those people back home and say wait another two weeks until everyone has cooled off and we can come back into it.
So I think there is going to be a lot of stopping and starting here but the one thing that I do go to is if you look at the dollars and cents, the real bottom line, we ended up signing an LOI for exactly the same amount of square footage as we had thought about pre crisis. And so that’s really, at the end of the day, where the rubber hits the road is whether I’m signing a lease that stays where it is, scaling it back by 5 percent, 10 percent or 20 percent, as you said, and my assumption is that many companies do exactly what you’ve talked about in the interim which is using these satellite offices, having people come back in, but long term the sort of core office market continues to move forward. And the real question is can landlords survive in the sense of obviously you have leases in office that are much longer than any other asset class, and I want to get your thoughts on other asset classes in a second, but office is lucky because it does have these long leases in it. Our existing landlord still has our lease until we move to our new building and so that does make a difference as it relates to the ownership of these assets versus some other assets that have shorter leases on them.
BW: Yeah, absolutely.
WW: Let me switch to technology for two seconds because I did set this up as asking you in the early 2000’s what you were seeing at CB and the very clear conviction that global was the way to go and big emphasis on that and you obviously executed incredibly on that. Do you think now, we’re 15 years later, everyone’s talking about technology and technology coming in and disrupting industries, disrupting commercial real estate, etc. etc. I had Andy Florence on the webcast a couple weeks ago and, as you know, he just bought Ten-X. And my question to Andy on the webcast was, “Andy, do I have to look over my shoulder as it relates to CoStar getting into the investment sales space?” And Andy’s comment to me was, “Oh no, it’ll be a tool for your brokers.” One, do believe what Andy said as it relates to it being a tool rather than a competitor to us and, second, what’s your thinking as it relates to technology transforming our industry right now?
BW: Well as it pertains to CoStar there’s a very short ironic story which is CoStar began when Andy went to a very young Coldwell Banker commercial manager in Washington D.C. named Chris Ludeman and said you have your data banks, you hire these summer kids to go out and do property surveying, and I can do it better - give me all your property data, I’m going to clean it up, I’m going to put it in a really user-friendly format, save you money, and then you can subscribe to the data. At CBRE we always felt like we created in a sense CoStar by contributing our national data bank to Andy.
But from the earliest days of CoStar, what I’ve always told Andy is, so long as you are a non-competitive utility for the industry, we are going to be fervent supporters. If you cross the line either to go to non-utility pricing or be competitive, you need to know that the industry at some point will respond to that in one form or another. And I think with the recent purchase CoStar has made, it feels like we may be getting closer to that inflection point. Time will tell, but I feel like we’re getting closer.
Every firm in the industry is always thinking about, you have to have an alternative to any product you’re subscribing to. I think it’s, I’m not speaking for the industry but I wouldn’t be surprised if every major player in the industry isn’t either working on or considering working on some sort of alternative should that relationship get to a place that they feel is untenable - at the moment it’s not, but who knows, so I think that’s CoStar. But CoStar has massive value to the business right now and I hope that it remains that way, utility with utility pricing, non- competitive. The Ten-X purchase is worrying to me.
Technology in the industry - so every firm has a different strategy around technology. For us at Cushman & Wakefield we think of technology in a couple different buckets. First and foremost, technology allows us to be more efficient and I mentioned earlier on the call this blow up we did of the technology platform and then implemented cloud-based Workday for our finance and HR systems. We did that with every system in the company. We went to Salesforce for CRM, Workday and many others and what that gave us was a technology infrastructure that not only saved us money but allowed us to have a very scalable technology platform. We could continue to merge with companies, very large companies for a long time and that platform is built to suit, it’s ready to go. That’s important to us. In an environment like we’re in right now - this is an amazing thing to me, Willy - we have 52,000 plus or minus employees around the world, as far as I know we didn’t have a single issue with work from home as it pertains to technology, not a single issue, which speaks to the quality of the platform. So, technology has allowed us to be much more efficient, allows us to do our business in different ways.
Technology also is super important into how we face up against clients. When we are working with clients what are the technologies that we can bring to bear for that client opportunity that gives them a superior outcome. And, so, the second area of technology that we’re always interested in are those technologies. What technologies can we use that provide a differentiated and superior outcome experience for our clients.
We occasionally will make small investments in technology businesses and we would only do that if it’s a technology that we think is going to become the utility technology for a piece of our business. But what we don’t do at Cushman & Wakefield is spend billions of dollars buying technology businesses and for a very fundamental reason - we don’t believe, and I certainly don’t believe, that the commercial real estate industry is a natural home for technology companies. Different culture, different work style, different needs. And what I’ve seen in my time in the industry is example after example of really well-heeled well-intentioned large services firms buy technology companies and two or three years later take a write-down for the entire purchase price because it didn’t adopt. So, we don’t do that. What we believe is that the technology industry, the PropTech industry, is far better suited to bring to market every day better and better technologies that we can use to serve our client. What we tell our clients is we’re not going to bring you a custom home-built technology platform because we don’t believe that platform will be relevant in six months. There will be other technologies that are better. What we’re going to do is we’re your integrator, we’re going to spend all our time surveying these property technologies and bringing to you the very best technologies that are available today but we’re going to be able to switch those technologies out tomorrow with better technologies when they become available.
WW: Super helpful and insightful. We’re tight on time. I’d keep talking to you for another hour and I know we’d cover a lot of landscape in that hour but unfortunately I’ve got to ask you one final question which is, if you think out a year Brett, and sort of everything that’s going on in the markets today, everything that’s going on in our own country as it relates to cultural issues, racial issues, we’ve got a very obviously important presidential election coming up in November. Fast forward a year, it’s June of 2021, where are we? Is the Dow somewhere around 24,000 or is it materially higher or lower? Are interest rates at 70 basis points on the 10-year or is it materially higher or lower.? And is the world as we know it today still sort of as it is or has there been some major shift during that period of time given all that we’re going to face in either the prolonging of the COVID crisis or we’re going to find the vaccine to it, everything’s going to start coming back together and the economy is going to have some tailwinds behind it?
BW: You know there’s a group of friends that I have that get together every January, we go away for two days and one of the things we do is - a fellow named Frank Herringer used to run TransAmerica and Frank is a data wonk - Frank puts together a 50-60 question survey on everything from the spot price of oil in 12 months to who’s going to win the Super Bowl, to who’s going to win the Oscars, what are interest rates going to be. What I can tell you is that in seven years I’ve never won that survey and I can also tell you that the last guy that won it was an agent from CIA who I think knows what GDP stands for but I’m not sure, so it’s, I can’t predict.
Here’s what we know, what you and I know. The data points we’re looking at right now are resoundingly, surprisingly positive. When I look at the amount of stimulus that has gone into the Chinese, the Western European and the U.S. economy, it is of unprecedented levels and is absolutely having and will have an impact on recovery.
When I look at the job numbers we saw, when I look at retail sales numbers that we saw yesterday, the data points that are coming out so far are surprisingly positive.
There are over 100 vaccines under development right now and I think it’s highly likely there will be effective vaccines developed this year. Now whether or not the supply chain is properly built to accommodate the production of billions of doses is an entirely different question. By the way, I do think there’s going to be a real issue around vaccines with the issue of privilege and who gets them and who doesn’t and that has to be addressed so that it’s not an issue of privilege.
I think a year from now, Willy, we’ll be sitting here, we will have vaccines, probably more than one, that are effective. They will have begun some sort of distribution. I think that once that’s identified and known, I think that the uncertainty around the marketplace goes away. It doesn’t mean that everyone’s been inoculated, it means that there’s a path to everyone being inoculated. I think that’s a major additional boost to the economy. I think we’ll be feeling a lot better June of next year.
I will say for the property markets, there’s a lag here and the property markets - it’s great we had great retail numbers yesterday and we saw job numbers - but property markets are still in a downturn. We saw RCA data, you saw investment property sales down 60 percent, I think in April, down 81 percent in May. Those are coming down hard as they should because we’re working through the deals that were underway pre-COVID. That’ll bottom out, I think it’ll bottom out very soon, and then we’ll begin to see incremental improvement.
But we’re not going to be, you and I aren’t going to be back to pre-COVID levels of business I don’t think for a year and a half, two years, but I do think that because of the changes we’ve made to our businesses we can be back to pre-COVID levels of profitability well before that. I think for our investors, and our shareholders, and our employees, things are going to feel a lot better at that moment in time you just referenced in June of 2021.
WW: Well it’s no surprise to me that you’ve shared some really great insight on the markets and I’m greatly appreciative of you spending this hour with me and thank you for taking the time; really fun to catch up with you and thank you for all you shared. To everyone who joined us again today, thank you. Great to see as many people has joined us as we’ve been getting on a very consistent basis week in and week out. As I said, Leslie Hale next week on the Walker Webcast.
Many thanks to Brett for joining me today and I hope everyone has a terrific rest of their Wednesday and rest of this week. Take care.