The future of cities with Mark Parrell, Equity Residential and Owen Thomas, Boston Properties

If you're looking to see how the urban vs suburban and office vs virtual work debates play out, you'll want to hear what the CEOs of two leading REITs are seeing. On this week's Walker Webcast, Walker & Dunlop's CEO, Willy Walker, spoke with Equity Residential President & CEO Mark Parrell and Boston Properties CEO & Director Owen Thomas about the pandemic's impact on urban centers, the potential comeback of the office space, and the CRE trends they are tracking most closely.

A bit about each speaker:

Willy Walker
Willy Walker

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. Walker & Dunlop is listed on the New York Stock Exchange and in its first seven years as a public company has seen its shares appreciate 547%.

Owen Thomas

Owen D. Thomas is the Chief Executive Officer and a Director of Boston Properties. He is a Director of Lehman Brothers Holdings and served as its first Chairman from 2012 until 2013 when he joined Boston Properties. Prior to Lehman, Mr. Thomas was with Morgan Stanley for 24 years serving in a number of different roles, business units and locations, including Chief Executive Officer of Morgan Stanley Asia and Chairman of Mitsubishi  UFJ  Morgan Stanley Securities, while iving  in  Hong  Kong from 2008 until 2011. He also held the roles of President of Morgan Stanley Investment Management, Head of Morgan Stanley Real Estate and served on Morgan Stanley's Management Committee from 2005 until 2011.

Mr. Thomas is the Global Chairman of the Urban Land Institute, a Director of the Urban Land Institute Foundation, a Director of the Real Estate Roundtable, and a member of the Executive Board of the National Association of Real Estate Investment Trusts. He is a Director of Episcopal Charities of New York and formerly Chairman of the Pension Real Estate Association and Director of the University of Virginia Investment Management Company. He attended and is a former Trustee of Woodberry Forest School, received a B.S. in Mechanical Engineering from the University of Virginia and an M.B.A. from Harvard Business School.

Mark Parrell

Mr. Parrell is the President, Chief Executive Officer and member of the Board of Trustees of Equity Residential (NYSE: EQR), a position he has held since January 2019. Mr. Parrell was the Company’s Executive Vice President and Chief Financial Officer from October 2007 to September 2018 and Senior Vice President and Treasurer of the Company from August 2005 to October 2007, and served in various roles in the Company’s finance group since September 1999.  Mr. Parrell served as a member of the Board of Directors and the Audit and Investment Committees of Brookdale Senior Living Inc. (NYSE: BKD), a leading operator of senior living communities throughout the United States from April 2015 to July 2017.  He also served as a member of the Board of Directors and the Audit Committee of Aviv REIT, Inc. (NYSE: AVIV), a public REIT that specialized in owning post-acute and long-term care skilled nursing facilities and other healthcare properties from March 2013 until April 2015 when Aviv merged into Omega Healthcare. Mr. Parrell is also active in several business and community service organizations.  He currently serves as a member of the Board of Directors and the Audit and Finance Committees of the Greater Chicago Food Depository, as a member of the Ross School Advisory Board for the Ross Business School at the University of Michigan, his alma mater, a member of the Urban Land Institute as well as the Chicago Economic Club.  He serves on the Advisory Board of Governors of Nareit and is a member of the National Multi Housing Council and served as Chair of its Finance Committee in 2015-2016.    

Mr. Parrell holds a B.B.A. from the University of Michigan and a J.D. from the Georgetown University Law Center and is a licensed (inactive) attorney in the State of Illinois.  

If you have any comments or questions about the evolving economic landscape and how it is impacting the CRE space, our experts are available and fully operational to help. Additionally, if you have topics you would like covered during one of our future webcasts, we would be happy to take your suggestions.

Webcast Transcript

Willy Walker: Good afternoon, everyone, and welcome to the Walker Webcast. I've got two amazing guests with me today and I'm really pleased to see that we had almost 6,000 people pre-register for this discussion. 

Just a couple quick notes on upcoming Walker Webcasts, and then we'll dive into today's discussion on returning to the city. Next week, I have Kate Moore, Managing Director at BlackRock and Head of Thematic Strategy for BlackRock’s Global Allocation Investment Team, joining me to discuss the stock market: is it overpriced? And what Kate and BlackRock see ahead in 2021. 

The following week, for our final Walker Webcast of the year, I'll be joined by Aneel Bhusri, founder and CEO of Workday. I can't wait to discuss how Aneel founded and built Workday; how it has grown to be such a significant player in the financial services and HR software space; and how companies like Workday, Salesforce, and Snowflake maintain and grow their eye-popping stock market valuations. 

My two guests today are about as insightful on what's happening in America’s major cities as any two CEOs in the country. Owen Thomas is Chief Executive Officer and a Director of Boston Properties. Boston Properties is the largest publicly held developer and owner of Class A office properties in the United States, concentrated in five major markets: Boston; New York; San Francisco; Washington, DC; and Los Angeles. The company's portfolio totals 51.2 million square feet, in 196 properties, including seven properties under construction or redevelopment today. Boston Properties has been a leader in sustainability and ranks in the top 4% Most-Sustainable Real Estate companies worldwide according to the most recent GRESB Assessment. Prior to Boston Properties, Owen was with Morgan Stanley for 24 years serving in a number of different roles, including Chief Executive Officer of Morgan Stanley Asia, and Chairman of Mitsubishi UFJ Morgan Stanley Securities, while living in Hong Kong from 2008 to 2011. Owen is the Global Chairman of the Urban Land Institute and sits on a number of other boards. He received a B.S. in Mechanical Engineering from the University of Virginia, and an MBA from the Harvard Business School.

Mark Parrell is the Chief Executive Officer and a trustee of Equity Residential, an S&P 500 company focused on the acquisition, development and management of residential properties located in and around dynamic cities that attract high-quality long-term renters. Equity Residential owns or has investments in 305 properties, consisting of almost 80,000 apartment units located in Boston; New York; Washington, DC; Seattle; San Francisco; Southern California; and Denver. The company is consistently focused on sustainability in its operations and investment activity, and was recently named by GRESB as the US Residential Listed Development Sector leader for 2020. Mark was EVP and CFO of EQR from 2007 to September 2018, and joined the company in 1999. Mark has served on the boards of several public companies in the past and his leadership roles at NAREIT and the National Multifamily Housing Council. Mark received a B.B.A. from the University of Michigan, and a J.D. from the Georgetown University Law Center. 

Obviously, very impressive backgrounds of both of you, and I'm just super, super appreciative of both of you joining me today. First, I want to start with you, Owen, and focus for a moment on what's happening to the office sector during the pandemic. As we all know, office leases are long-term; and therefore, while the vast majority of people on this webcast today are watching from their home and not their office, their employer’s still paying Boston Properties -- or some landlord -- lease payments, given that the average life of your leases at Boston Properties is just under eight years. So, what's the actual occupancy today in Boston Properties’ 196 buildings across the country? And does that metric really matter?

Owen Thomas: So, Willy thank you, first of all, for having me today. It's a pleasure to be here and a pleasure to be speaking with you and Mark. Also, I just wanted to say that my background is actually not a Zoom background, it actually is my office. I have been commuting to my office at “599 Lex” in New York Midtown since June. And to give a plug for public transportation, I've been riding it every day, commuting to Westchester, you know, since August. So, and I haven't gotten sick -- knock on wood -- so anyway, I'll start with that.

Willy Walker: Tell me you're not going to give up Boston Properties and run for Mayor, after that, a great plug for New York City!

Owen Thomas: So anyway. But to answer your question, you know, on building census. We only have turnstiles and, you know, not in all of our markets, but we do have them in Boston. We have them in New York and San Francisco. Boston census is under 10% and same in San Francisco. Although San Francisco is about the same as Boston and actually legally closed and has been throughout -- virtually throughout -- the entire pandemic. And then New York, you know, is constantly, you know, looked at with some concern, understandably so. But the census on our buildings is 15% in New York. And it actually rose fairly steadily in all the cities starting Labor Day weekend, but it has leveled off. And I think part of that was the holiday last week, and I think part of it is the higher counts that we're seeing in terms of the infection rates of COVID-19. You know, does it matter? It absolutely matters. But I don't think it matters in the way that your question implies. We can, and have been, leasing space to customers, while they're not in the office. I mean, we did, our company has done a million square feet of leasing in the last three or four months. And these are long-term, seven plus-year leases. But why it matters is that it is an indicator of the economy in our cities. The people aren’t coming into the office, you know, the local merchants are suffering; the restaurants are suffering. A lot of the small businesses are suffering. And I think that's key. You know, we've got to get people back in the office. We've got to get people coming back to the big cities for the overall economy to recover.

Willy Walker: So, if you're seeing leasing activity happening, that says that people do actually think we're all getting back to the office. So, what are your customers saying as it relates to when they'll return, and what conditions is it going to be under? In the sense of, we're all pretty much living by governmental either mandates, or just the density requirements that local governments are putting on all of us. What's it going to take to make it so that the number in your building goes from 15 up to 40, up to 80?

Owen Thomas: Yeah. It's all about the virus. So today, I do think CEOs, increasingly, are understanding the problems with “all remote” work. You know, I think that I hear this from our customers and other CEOs. Cultures are getting stretched or are in decay; difficult to do more creative and strategic work; difficult to procure new customers when all working remotely. So, I do think companies want to get their employees back to work. But I think companies are also very concerned about liability. You know, there's no liability screen for companies that require their employees to come back to work in the event they get sick. And I think CEOs, and business leaders, and boards are deciding therefore not to require employees to come back to work. And, you know, one thing you can see evidence of this interestingly is in the DNO Insurance market. It's become dislocated for companies because I think this insurance market is concerned about, you know, board liabilities in this time of COVID. So, you know, what's going to change all that around? Well, I think it's going to be again health security. And so, as we've seen with these vaccine announcements and we're -- I think we’re going to continue to get good news around these vaccines in terms of their approval -- and new vaccines getting approved, and then distribution starting later this year and in the first quarter of next year. And so, as the infection rates come down, and more and more people get vaccinated, the environment will appear to be more safe -- and it will be more safe -- and I think companies will start to switch from – again, today being an opt-out approach, excuse me: an opt-in approach -- where employees can elect to go to the office, to being one of an opt-out approach, where it's intended that you should be in the office, unless you elect to opt out for some, you know, specific reason. You know, when does that occur? We said on our last earnings call that we thought that would be summer of ’21. You know, we think it'll take the first couple of quarters of next year to have the virus [vaccine] get approved; get distributed; get -- you know -- get broadly distributed… Some of these vaccines require two jabs. You know, it's going to take some time. There may be, I don't think their biggest concern is about efficacy right now, because of the way the trials went, but there may be people don't get vaccinated. So, I think it's going to take a couple quarters for that to get worked out. Maybe there's an upside case where it's better. But that's our base case.

Willy Walker: So, before I turn to Mark for a second on the on the residential housing market, give me just a percentage number. If you're at 15% in your building today, end of Q1: what's that number? End of Q2? And then end of Q3? So, what's your projection, just as it relates to building off of that, to exactly what you just said? What do you think your building is as far as occupancy mid- next summer? And then after Q3?

Owen Thomas: You know, I think in the first quarter, we’ll start to have a lot of -- I think -- we'll have a lower infection rate. Again, this is conjecture, right? I'm not a doctor. I don't have pandemic experience. But my gut -- my guess -- is it will be better than it is now. You know, we'll have vaccinated people, have a lower infection rate, so I think -- by the way, Castle Systems has the best census data because they have turnstiles all over the country and their occupancy, their census right now is 25% broadly across the country.

Willy Walker: But that’s also including markets like Dallas, which were at 45 recently.

Owen Thomas: Yeah, actually. So, maybe for our buildings, I would say, you know, maybe it tics up to 20%, you know, by the end of the first quarter. And then maybe after Labor Day it’s at 50 and then maybe it's at 75, you know, by the end of the third quarter. Just one fact I'll give you: We have a partner who's a big landlord in China. In Shanghai and Beijing, Class A office buildings are more than 95% occupied. There's very little virus infection and very few people are working from home. So maybe China's different from the United States, but frankly, I lived there for a number of years and I'm not sure it's as different as people think it is.

Willy Walker: So, Mark, Owen was just talking about the fact that it is important that people are back in the office because of the vibrancy of urban centers across the country. You're a huge owner of multifamily properties, where lots of people on this call today are living in one of your apartment homes and are watching this webcast and working very well. And obviously, fortunately for EQR, 97% of your renters paid their rent in Q3. But more broadly, are you concerned about the return to the city and the vibrancy of America’s cities?

Mark Parrell: Yeah, thanks Willy, for first off, having me on the call. Appreciate being here with Owen, to have this interesting conversation. And you got to start when you start talking about these urban centers with acknowledging the huge tragedy that COVID has been for the country. And that tragedy has spread. I mean, it really was New York and Seattle and now it seemingly is everywhere. But when we think about our urban centers, these are places like New York who’ve been around 400 years, and they've been resilient over time. They've actually had pandemics, wars, civil unrest, all sorts of things, 150 years for San Francisco. So these places have a lot of built in flexibility. And we look at New York post-9/11 and we think: Gosh, the last two decades in New York, up to the pandemic, you know, city life got so much more vibrant. The quality of life in New York improved so much. So we think these cities are very capable of adjustment. And Owen would know this better than I, but there were pandemics in Hong Kong, and Singapore, and the Far East, you know, in the last 30 years, and those cities you know, they would dip in their GDPs, and then they recovered. So, these cities are capable of recovery, but good leadership is required. So we think it'll be very important that these cities be led by both public and private-minded individuals who -- like The Partnership for New York, for example -- that are trying to put the city back together and on its feet. And we think once the city's reenergized, our renters return. 

And our renters are folks that are, you know, the average age or the median age is 33 years-old; average household income $160,000; most of them do not have children. They want to live in an exciting, energizing urban environment. And when those environments return, and the vaccine is a huge catalyst to that, and we're hopeful that gets rolled out and appears to be, you know, so far, pretty well-organized you know, that gets out there, we think we can see real improvement in our markets and in the vibrancy. And you know, they are there because their offices there, but they're also because of culture and lifestyle reasons. So if you came ,as many of you on this call have been, to an EQR property at 2:00 in the afternoon on a Tuesday before the pandemic, you would have seen a great number of our residents working in the internet lounge. We've always had folks that work from home, that had that flexibility pre-pandemic. So even if they're going to the office four days a week, or three instead of five, we think they're still going to be very attracted to that urban lifestyle, whether it's in San Francisco, whether it's in Seattle, whether it's in New York.

Willy Walker: So Mark, you just talked about local leadership, and clearly health concerns have been at the top of the list, but so is economic vibrancy. And when Owen and I were just talking about occupancy numbers and him mentioning the Castle tracking, and the fact that Dallas had 45% occupancy, I saw Governor Abbott this morning on CNBC, crowing about the fact that Hewlett Packard is going to move from California to Dallas. When you have the combination of lower taxes as well as local leadership, does that give you pause about some of the big coastal cities and some of the movements that are taking place, from a jobs and a living standpoint, during the pandemic that might be sustained going forward?

Mark Parrell: Sure. Well, New York and San Francisco have never been low tax jurisdictions, so to say that this is the straw that broke the camel's back—I don't—what I'm more concerned about, especially in San Francisco, and we've been public about this, is what I'll call quality of life concerns. Just being in a position where these cities are exciting and safe places for people to live. And we've lost a little bit of that. And I think we need to regain that, and again, that's why my emphasis is on city leadership. I do think affluent renters are spreading out more throughout the country. They're in more places and you'll probably see EQR spread its capital out a little bit more, but there's no risk-free apartment market. If you go to Texas, you're going to walk into a ton of supply. You know, you're going to compete with single-family. So there isn't a place you can go where you look at it and go, oh, that's perfect. Because otherwise we'd all be there. And there's really advantages to these coastal markets in terms of just, the total number of affluent renters in a market like New York is so much larger than any other market in the United States, and those sort of statistics—when you're a big owner like us—matter too, Willy. But sure, we were concerned, I would say, probably a little bit more about San Francisco than we are even about New York.

Willy Walker: Owen, you want to pick up on that?

Owen Thomas: Yeah. No, I think Mark hit it very well. I mean, I think talented workers want to live in gateway cities. I mean, they want to live in other cities too, but they are definitely attracted to gateway cities. They want to be with each other. They want to network with one another. There are cultural opportunities that don't exist as broadly across the whole nation. And the employers follow this work, this talent, to the cities. So, look, there have been pandemics before and other crises of cities and they recover. You know, human beings are social animals. They want to be together and that's what our gateway cities provide, so I believe in it in the long term. And look, I acknowledge: a lot of the high growth that's occurring in lower-tax states like Texas, but as Mark said, when you're in the office business you also, you know—the key for success for us is, since we build, buy, and hold, we don't, you know—we’re not a merchant player. Or, in other words we don't sell immediately; we need rents to go up over time. And for that to happen, you need not only employment growth, but you need barriers to entry. And gateway markets are complicated. It's hard to get things in title, it's expensive. And there are much more—there are laws in San Francisco that prevent development on the office side. So, there are much more, stronger barriers to supply in the gateway markets, and we think over the long term it makes for better real estate investing on the office side.

Willy Walker: So Mark, if I take what Owen just said lock, stock and barrel, that he'll still have tenants for his urban core office buildings—what about the migration of urban dwellers to suburban dwellers and what we've seen during the pandemic? Your portfolio is about 44% suburban, 33% urban, and about 23% urban core. Talk for a moment about what you've seen in those cohorts, if you will, during the pandemic. And then I think more importantly, what do you think it is, going forward, in the sense of, do you think it's a migration back to the urban core? Or do you think people who've moved to the suburbs stay in the suburbs?

Mark Parrell: Well, let me start with just something definitionally that matters. What we did is, we split our portfolio up—said, if you have 3,500 households or more per square mile, that's urban and that's 55% or so of the portfolio and the remainder is suburban. Then we took that urban part—and again, this is more for our analysts and investors—and said, for the Manhattan, Brooklyn, Cambridge, Massachusetts, city of Boston, and city of San Francisco exposure, which is about 23%, we call that urban core. We call it that because that's the area where we have the most challenge right now. We wanted to be able to focus on the conversation on those areas where frankly we have the most issues with occupancy rate. 

So I tell you, I think what we have seen of late is some stability in the marketplace, both in terms of occupancy and in terms of rental rate. We continue to see more pressure in the urban core in those markets. But again, places like New York have tremendous demand. I mean, our demand numbers are off the charts, including the number of applications and move-ins we’re having. People want to live in our apartments. Part of that, I think, Willy, is that we've got more inventory. Usually we only have about 3% vacancy, and we got about 10% in New York. So we need this demand, but boy, it's strong. It's been strong even through holiday week, so we love that. They're not paying a rate we like yet, but we think that price difference is going to start to draw people back to the city. As these offices reopen, as the vaccine is there, the restaurants reopen, when there's a reason to move back into the city, they'll move and they'll move quickly, because of price as well. As painful as price reduction is for our company, it has done things like made the peninsula and San Francisco, about the same price, which is unprecedented. So you're going to have a Stanford graduate that’s going to come out of school and she’s going to look, she has a great job, and she’s going to say, I can live in San Francisco. And if San Francisco, the city, is safe and activated, and it's the same price as living in a suburb where maybe there's considerably less activation, I feel good about my chances of capturing her as a customer. So, I do think there's going to be a migration back into the city centers based initially on price and on activation as a vaccine gets broadly distributed.

Willy Walker: You talked about San Francisco, you've got a big portfolio in Southern California, which has been one of the weaker markets in the country during the pandemic for a number of different reasons. I think the free rent movement gained a lot of momentum in Southern California; local jurisdictions shut down due to the pandemic. How has EQR managed through the challenges in the Southern California market during the pandemic?

Mark Parrell: Yeah, well, Southern Cal, just to clarify, has actually been—and by that I mean specifically San Diego, Orange County and the parts of LA outside downtown in the west side—they’ve done very well for us. They, in fact, when you look at rate right now, they're about the same or slightly higher than you were the same time last year in terms of rental rates. We’re doing well in those places. The pressure has really been in delinquency. We've had most of our portfolio delinquency is in Southern California. It's still by no means predominant, but there's—most of what we have is in that area. We created a process Willy and I’ve got to give credit to the operations team that involves the onsite people, that involves our contact center, our call center. They're just out there; if you didn't pay your rent, you’re going to hear from us. We want to know what's going on in your life, can we create an accommodation that works for you and that's acceptable to the company? In our residences they’re generally high earners, most of them didn't lose their jobs. We want to be sensitive and understand those people who have been impacted, and we want to work with those folks to get that rent paid. So, there is no free rent capability at EQR but we're happy to have conversations and try and work something out. So I'll tell you, I think being very proactive has limited our losses in that area. And it’ll help us on the way back.

Willy Walker: And Owen, Mark was just talking about signing leases and, you know, that leasing activity and applications are up in their urban core portfolio. And a lot of that is due to availability. But how is it on the office side as it relates to leasing activity? And if you could, could you just kind of back us up to just, you know, pre-crisis, we were probably at a peak as it relates to per square foot across your portfolio. We go through the first nine months of the year, or the pandemic, and I'm assuming you weren't signing a lot of leases, and then once the vaccine got announced, or the trial data came out, have you seen a pickup in leasing activity subsequent to that?

Owen Thomas: Yeah. So let's start with rents and I'll go to the vaccine. So, the rents and the leasing situation is highly variable and depends on the market. So, in areas that we have that are more tech and life science, the market is very active, particularly on the life science side. So I would tell you in East Cambridge and Waltham, Mass., where we've actually been doing a lot of leasing, I think rents are up since the pandemic started, and I don't think they're down at all. And we've done an enormous amount of leasing in Reston, Virginia with Microsoft and recently with VW and, again, VW’s not a tech company, but a lot of that has been tech driven, you know, given the fiber nodes there and what's been going on with Amazon and in Northern Virginia. And that's—I think rents have been solid in that area. You come to New York, there's a reasonable amount of activity. I think rents are a little softer. And then I would tell you in California, it's quite slow. You know, there's not actually been enough leasing activity really set where the market is. It's been particularly slow because, unlike the East Coast, California has been closed. LA, I don't think, has ever reopened, and San Francisco reopened at 25% for like a couple of weeks and then they close the market down again. Again, rents and leasing activity is definitely down in the aggregate because of the pandemic; I do not think it's as severe as it was during the global financial crisis, but there are segments of the industry that are actually more active and up. 

In terms of the vaccine, look, there's no doubt that the news was great. And by the way, I would tell you, I don't think the news was—the part of it that was great was the efficacy. I think we all knew that there were a number of vaccines that were in phase three trials, and those trial results were going to get announced sometime around Thanksgiving. So none of that was a surprise. I think the surprise was that two of the trials came back at 95% and I think that was much higher than everybody thought. It's, you know, office leasing doesn't, it's not like trading in the stock market. It just doesn't turn on a dime. So even though I think that news is terrific, and I know that customers are starting to think now more seriously about when they're going to return to the office and they're starting to prepare their plans, I could not tell you that I think it's generated any more leasing activity at this time.

Mark Parrell: Now just to build if I could on Owen’s comments—one of our markets that's been hurt the most, sub-markets, is Cambridge. I mean, we really feel it. We have 1,100 units, we have a big portfolio, we've got high end stuff, we've got middle stuff, and it's really—it was doing great guns before the pandemic. It has been really hurt. When I hear the stuff that Owen just said about his leasing activity, you know, night follows day, right? I mean, those offices will reopen, most people will come back, and we'll be waiting for them with terrific, you know, residential solutions. So, from my perspective, I feel really good about, again, that continual effort. New York's got a lot of leases, Facebook continued to lease notwithstanding the pandemic…You know, a lot of these tech companies talk about not going back to the office, but—we have a lot of information in our investor book about this—but yet when you do surveys, they're planning to. They're putting their capital into office leases. If they're planning not to go back, they’re doing it in a very sneaky way by continuing the lease. So our expectation is, they expect the predominance of their employees to be in these gateway cities where we operate, mostly, but maybe not entirely, in office space, and that, you know, we’ll build on that success in places like Cambridge when they return, and that that hopefully will be relatively soon.

Willy Walker: Mark, is some of that softness in Cambridge due to the universities and MIT and Harvard? I mean, is a bunch of that student housing or is all of that just, if you will, market rate, employment housing, and you're seeing a direct correlation there? Because I would think that in that market, some of those units are being rented by students, and some of them have either not gone back or are working somewhere else.

Mark Parrell: Some, but not all. I mean, we don't have any student properties that are ostensibly all or mostly students. And we do have a handful. And I think it's probably 6% of the market that is students, so that disappeared. International students, all that's gone. But that isn't the main suffering; the main suffering is just people working remote, deciding that the city isn’t inactivated, isn't worth it right now, and doubling up, going back to stay with Mom and Dad, or going out to a suburban solution for a while and maybe Airbnb, and then they’re hopefully coming back in the relative near term.

Willy Walker: Right. Owen mentioned the softness, if you will, in Southern California. And we touched on this briefly previously, Mark, but you know, a lot of people haven't been paying their rent, yet there's been an eviction moratorium in place. And as a result of that, EQR and other landlords have been working very hard with tenants to make sure that there are plans in place for them, a), to get back to paying rent when they get a job, but b), that they're not out of their property. We're now less than a month away from the end of the eviction moratorium; we are waiting on a new stimulus bill that—the one that I just saw yesterday, on this smaller group of senators working on, had, I think it was, $25 billion for rental assistance. Two questions. One, how is EQR working with your tenants to keep them in their property—in your properties? And then the second one is, how badly is a new stimulus bill needed from a rental assistance standpoint?

Mark Parrell: Yeah, I'm going to kind of start, and pardon me with the second half. I mean, we've been working through the Real Estate Roundtable, through the folks in National Multihousing, you know, through our trade associations. There is a connected ecosystem here. When you pay your rent, that allows the landlord, of course, to pay their employees, to pay their real estate taxes. Our biggest single expense is real estate taxes, not interest, not anything—those real estate taxes are supporting $400 million worth of local government. That's badly needed. You know, we maintain our properties, we pay our lenders—that’s close to your heart, Willy, you know—

Willy Walker: I appreciate that.

Mark Parrell: Yeah. So, I think for that ecosystem to get wrecked is something that's in no one's best interests. So we're big advocates of, you know, aid to residents, so they can make their rental payments. And so this, I think, very good system of rental housing can continue to operate well. 

In terms of us I gave a little bit of a preview of that. EQR, I guess, again, we've been to this. This is for most of us, our third recession that we've gotten to enjoy and we're, you know, we're accustomed to managing through these types of situations, though this is admittedly very severe. But we have a process where we contact you with letters. We understand in each jurisdiction specifically what we're allowed to do and what we're not. A lot of our residents again our high earners who value their credit. You know, a lot of high earners did not lose their jobs. A lot of that loss was in hospitality and other areas. People really suffered. But it's not our residents who lost their jobs. So again, we think the amount of delinquency, we have is relatively low. And though the aggregate amount of $27 million is certainly not nothing, we have a $21 billion balance sheet, and I'd expect next year as those moratoriums you referred to Willy roll off and, more importantly, as people who've been stressed get jobs again, or some folks might be husbanding some of that cash out of concern for what's going to happen next. But as the vaccine rolls out, as people get inoculated, as markets reopen, as people get jobs, I bet you we’ll collect a fair bit of that. So we've been very proactive landlord. If you didn't pay, you're going to hear from us multiple channels. We're going to try and work something out. But I think the government's got a really important role to play here and it's just too bad we can't seem to reach agreement on something that is just so badly needed.

Willy Walker: Owen, Mark was just talking about stimulus. And we were also talking about California. There were two ballot initiatives that were on the ballot on November 3 out in California. One of them was rent control which Mark and his team worked exceedingly well to make it so that that didn't get passed. But then there was also Prop 15 which focused on the commercial side of the world, if you will. Can you explain what Prop 15 was and why many people in the office sector and the commercial sector are pleased that it didn't get passed?

Owen Thomas: Yeah, well in California there was a previously passed proposition decades ago that basically restricted property tax increases, I believe, to, you know, inflation, or if you sold the property, it was “mark to market”. So if you owned a property for a very long period of time, you know, your assessed value was you know well below the market value. But that was the system. So, there was a ballot initiative to try to just by the way for commercial properties, not for residential properties, which is interesting. There was an initiative to bring all commercial property values, you know, to “market”. And, you know, bill for taxes accordingly. So, you know, and by the way this tax yes is negative for commercial landlords, but it's actually negative for business in general because many of our leases in California, are net leases. Meaning that operating expenses get passed through and even if they're gross leases the increase in operating expenses get passed through. So, who ends up footing this bill are actually all of the tenants and customers that we have in our buildings. You know, many of them are small businesses that wouldn't have been able to survive, paying a higher tax bill. So, it was on the ballot and it was defeated. 

Willy Walker: Yeah. So Mark on that, you know, you mentioned a moment ago $400 million in property taxes. Rent control measure was fortunately not passed in California. Oregon has one in place, New York has one in place, and we talked previously, a little bit about the migration going on in the country to lower tax states. Is there a sort of a downward spiral that somehow can't be stopped in these higher tax states where, because people are moving out, because their rent base is coming… because their tax basis coming down, they have to turn to measures like rent control or increasing property taxes which only make it that much harder for big operators like yourself to continue to, you know, invest and build those cities.

Mark Parrell: Yeah, I'm gonna start though by just reprising Prop 21 which was the proposition in California that the industry beat. And you know we beat it resoundingly by 19 percentage points. We won every county except San Francisco. The people of the state of California gave a very strong message that they weren't interested in additional rent control. They gave that same message on Prop 15 as Owen just, you know, described so well. The real estate tax measure on gig drivers, the whole… it was a pretty significant statement from I think one of the most liberal states in the country about business regulation. So, I think there is a balance. And I think these that people feel that balance, and even in progressive jurisdictions they want growth, they want responsible Government. So, I think that the soak the rich thought process is maybe not quite as popular as people might have thought it was before the election. I mean, it failed here in Illinois, a big tax measure as well in a state that's very progressive. 

So, you know, there's always been people moving out of places like New York, it depends who's the mover. Again, our demographic in their late 20s or 30s, early 40s, the people that occupy Owen’s towers, that live in our buildings, those people want to live in that city. They are not unconcerned about taxes, but I think they're not the ones that are making a decision based on small changes in marginal rates. 

The quality of life part of your question is really important though. If the subway systems don't work. If you know the city's dirty, if the city isn't operating well and efficiently, then I think that can scare away business. So I think that's upon all of us to be more involved in the business world. Again, Partnership for New York is a good venture. There's others and just really lean in here and get our voices heard because good leadership will matter coming out of a pandemic. We need these cities to be run well. 

So our focus in 21 to turn to your exact question is more the City of New York. Because there'll be a mayoral election, there will be a city council election. Those are really important. And just to get our voices heard that, you know, responsible landlords, responsible business people, want to be part of the solution. But the idea of just chasing everybody out of town with a higher income is not a great idea. And so we're going to keep making that argument. Feel like the wind in California has given us a lot of strength and we can make Willy, I think, a pretty effective argument. And we have with policymakers. I think people understand that rent control just doesn't work. If you want more affordable housing rent control is not your answer. And I think people hear that and understand that and then you just got to try and figure out, the industry needs to do more work here. What is the solution? How do we get more affordable housing in San Francisco, in Los Angeles, in New York? There's definitely a need. There's plenty of market rate housing I can tell you, we compete with it. 

The question there is simply how do we get more affordable housing. We think changing zoning. We use a lot of government regulation and makes it hard and expensive. The tower we're building in Boston across from North Station took us 10 years to get entitled. There's a huge amount of cost attended to that and they wonder why there isn't enough affordable housing. Well, let's work together to change some of those zoning rules. Let's talk about some public-private partnerships like for 21A was in New York. Let's figure out some ways to do that. I think there's capabilities and ways and places like Minneapolis, who have shown the way. So we're hopeful.

Willy Walker: Owen, you've got a big development pipeline, 4.3 million square feet, 80% of it pre leased as an aside, which is amazing. Are there bargains out there right now on the office space that Boston Properties is looking at, as you know, some operators are, you know, not getting renewals on leases or what have you? What your view right now as it relates to either… is it just continue to build to your return expectations or is your team pretty actively going out and looking for some opportunities right now, given some of the displacement in the market?

Owen Thomas: Well, I think we're in the part... We're always investing in new real estate and great real estate. And for the last, you know, since the GFC, and certainly two or three years after the GFC, it's been primarily in development. And then generally when we have a recession, like we're experiencing now, the development slows down in terms of new starts because it's harder to get pre-leasing. And generally moves the acquisitions, because their deals that are available at a discount. 

But in terms of the private capital market for office today, there's not a lot of discounted deals, at least in the Class A space and gateway markets that we're seeing. And generally, there are deals that are happening but it's all for assets that have long weighted average lease terms. Because those deals don't require you to underwrite current market rents. And the cap rates have stayed the same as pre-Covid. So in a sense, the buyer is getting a discount because they can finance cheaper. And the seller’s happy because I feel like they're not taking a discount from pre-Covid. But if you have a building with typical rollover 5-10-15% rollover per year, you know the buyer is going underwrite some discounted rents, they're going to underwrite slower lease up and that property is going to end up getting value five to 15% lower and the owners today are generally saying, look, why should I take that discount. This is all going to come roaring back in 21, and my lenders will lend me money at cheap rates, I can just refinance and hold on. So it's harder to find things. 

You know that being said, the longer this goes on I do think things will come out. You know, owners of assets that aren’t leased or sites will come out and those, those will be discounted. And I would also say there's lots of opportunities in the life science sector. So you know we just signed 120,000 square foot lease with Translate Bio in Waltham for redevelopment that we did on one of our office building speculatively, we started last year. And we're looking at a handful of new projects in South San Francisco, in Waltham, and in East Cambridge and some of those we would start speculatively in this market.

Willy Walker: So Owen you talked about, you know, some stuff will come out. As the crisis, you know, weathers on if you will. Do you think it's acutely sensitive down to like a quarter? So in other words, right now, I think most people to what you said at the top of the call think that, you know, we're getting back to something of a normalized world in Q2 as the vaccine gets widely distributed. In Q3, we're kind of getting there. And by the end of next year we're kind of back to business as usual and lots of owners are thinking exactly what you just said, which is a year from now, they're back in the office, we're getting new leases going, we're good. Do you think that… How sensitive is if we have a problem, distributing the vaccine. If there's a backup on the vaccine, where instead of being out widely distributed in Q2 it moves into Q3. Do you think that that you know kind of a quarterly move is going to make more come to market or is it not that sensitive right now?

Owen Thomas: Yeah, I think it could. I think it could. Look, I think when I say things will come out... You know, real estate, I don't need to tell you is just a broad business right, I mean even if you're a major landlord, you still own a small percentage of the total market. They're all kinds of different owners that need to do things for different reasons. So there may be owners of real estate that are in other businesses that are suffering and they need to use their real estate to fund the rest of their business. Or they’re a corporation, you know, that's, you know, having difficult financial problems and they own real estate and they want to get out of it. There's just something, you know, you just don't have a zero-sale pipeline in property for 12 months at a time, because people need to do things, need to move on. And I think some will end up taking the discount required to get liquidity in this kind of market.

Willy Walker: Right. So Mark, EQR acquired an asset and Q3, only acquisition of the year, I believe, and you've dispositioned five assets this year, so your net seller, but given the size of your portfolio I don't think that's really indicative of whether you're a net buyer or seller. What we have seen is Owen’s comment that office cap rates have basically stayed static through the pandemic, multifamily cap rates have dropped. What's EQRs view on the overall market and are you all actively looking for acquisitions now, or have prices gotten to a point where you're much better off just continuing to develop and build new product?

Mark Parrell: So, we're in this good position of not needing to do either. We are happy to be a developer, by the way, and we're happy to be a buyer of existing assets, but we don't feel compelled. Some our competitors are one or the other. We will do either. And like, Owen, we'll just switch in between whatever creates opportunity. 

One thing that I do think might create opportunity is how hard rents have gone down, particularly in San Francisco. So you're down 25-30% in rents as that rolls through your rent roll, and Willy you underwrote loans in that market at a 120 coverage, there's going to be landlords feeding deals in the second and third quarter I suggest in San Francisco. And that may be an opportunity for guys like us who are out there and have teams in these markets and are always looking for opportunities. So yes, I think cap rates have declined. I think in the suburban markets, particularly where rents are about the same so your rent roll looks about the same. Maybe it's a little lower, cap rates have declined enough, values are modestly up. 

I think where you don't have good price discovery is the city of San Francisco and Manhattan, Brooklyn, New York. I think I can't tell you what cap rates. I don't think anyone can tell you what cap rates are in those two places right now. Volume is so low, or effectively non-existent, that I can actually name, the one or two trades that occurred, and they all occurred for very idiosyncratic reasons. They traded well, but I don't think I can say to you, my NAV hasn't changed in New York. I just don't know that because there's not been enough that's traded. But I do think multifamily buyers are looking through the pandemic saying, in a year things will be getting a lot better. I can own New York at a discount to replacement cost. I can just get someone to sell me a property in New York at some kind of discount. It's going to be a great trade. So I think there's support in the market even in New York and San Francisco. Folks like us probably our sellers of small amounts of our New York portfolio, but I'm not in any hurry to do that. And as the market improves will think about that a little more.

Willy Walker: Yeah. Owen, we're focusing on new developments and Mark was just saying he's happy to be both a buyer, as well as a developer. On your developments, you've got an incredible pipeline of a bunch of build the suits. You've got a building up in Boston for Verizon. You've got one in in Bethesda for Marriott. And you've got the Wilmer Hale headquarters in downtown DC. You've also got a couple, I dare call them spec office buildings, but they are not built to suit for one major tenant, one of them being Doc 72 in New York, where we work is your primary tenant. Two questions, one, does the pandemic make you focus more on build a suit then just broad office development, and then second, I want to get into shared office and your thought on the future of WeWork or shared office when we all come back to going to the office.

Owen Thomas: Yeah. So okay, so two questions there. One is speculative office development. Second is shared workspace. So, on speculative office, absolutely. We have slowed down, not stopped you know our “office development” pipeline unless we have a significant prelease. We have two amazing projects in the Bay Area -- Forth and Harrison and Central Soma. We've got full PropM, it's a half a million foot building. We were going to launch that this year speculatively and we put it on pause given the pandemic. And then we also have Platform 16 in San Jose near the Diridon Station. It’s the closest site of Diridon station that Google doesn't own, and we were going to launch the first phase of that this year and we also put that on pause. 

That being said, and we have a 15 million square foot land bank, including those projects and others, you know, that are “waiting for tenants”. That all being said, we are taking more risks in life science. You know, as I mentioned earlier, we will probably launch a speculative project in Waltham. You know, probably, maybe two to 400,000 foot building, we will definitely do another redevelopment of an office building in Waltham because we just pre-let the project that we started speculatively last year. So we want to keep our pipeline going. And we also have a joint venture with Alexandria in South San Francisco where we will either or/and start a new project or do a significant redevelopment of one of the existing office buildings. So we're going to take speculative risk, it will be in the life science segment of our business. 

And then on shared workspace. Look, we feel that the shared workspace business has a place in the commercial office world long term. You know, we saw all the segments of our customer base be interested in the product, you know, individuals clearly, small companies. We have our own product called FLEX by BXP that's geared towards small tenants. You know, these are tenants that just want space, you know, they don't want to deal with, you know, build out, leases, all the complexity of doing a traditional lease. They're interested, you know, and just getting space quickly. And then even major corporations. I think they will increasingly want to procure a single digit percentage of their space on a flexible basis and they'll pay a significant premium for it. So long term you know we have confidence in the segment. 

The issue is, there couldn't be a worse environment for shared workspace than a pandemic. Because not only do you have an economic recession, which slows down leasing demand, but you got to space out. I mean, one of the key economic drivers of shared workspace is density because the product is sold by the seat, and if you can’t put as many seats in as many square feet, you’ve got a problem. So, it's a really tough environment for all the existing operators and you know we have, WeWork. We're home to one of their headquarters buildings in New York. And, you know, look, they have new leadership, it’s very strong. They have the backing of SoftBank which the other operators don't have. And I think they have a great shot at being successful. And they have a 50% market share and they've got the name brand. So I think they have a great shot of being successful given the market dynamics that I described.

Willy Walker: Mark when we think about where we are and what the pandemic has done, urban/suburban but then also single-family, multifamily, single-family rental. What's your take on this big surge in single-family home sales? The starts on single-family homes are sort of off the charts right now. Are we in for another sort of half decade, like we had at the beginning of the 2000s, where there was a lot more focus and money going towards single-family than there was multifamily? Or do you have confidence that the wonderful trends that have been in the multifamily market from 2010 to 2020 continue forward?

Mark Parrell: Just with the specific as it relates to EQR, we designed the whole portfolio, not to compete with single-family. I mean, 11 or 12% of our residents leave us to buy a home. It's just not very significant. So for us, changes in the single-family market aren't particularly meaningful and even during the pandemic that hasn't changed for us. You know, you think of the broader demographics people talk about the aging millennial moving to the suburbs and there's certainly something to be said for that. Again, our demographic is predominantly folks without kids. It doesn't mean -- there's 10% of our residents have a child in their home. Most don't, so again there is a demographic that wants that urban lifestyle that wants to age in it that isn't as interested in moving to the suburbs and I think will capture that. I'm also lucky at home to have two Generation Z folks living. The college student I can't currently get rid of her again. But we're trying, because the school is closed back down, but we look at that and I wonder what their preferences are. We thought a lot about those Gen Z folks again coming through college now the front wave of them being born in 2000 they're ending up and heading into the work world. Well, they want the urban lifestyle as well. That's a very large demographic group, I think, Willy. And just as meaningful as the as the millennials. I also think that the new administration may be more hospitable to immigration. We have a lot of residents that are immigrants in our properties, often working for technology firms. To the extent that improves, from their perspective, from the immigrants perspective, that can be helpful. Immigration has always been good for apartments. So, I think overall single-family can do just fine while multifamily does fine. I think there's definitely a demographic interested in each of those areas.

Willy Walker: So Mark, you just talked about the diversity of the tenant base at EQR. EQR has also been very much a leader as it relates to diversity, both on your Board as well as throughout your management team. And in August, you join the CEO Action for Diversity & Inclusion and similarly on Boston Properties both gender as well as racial diversity at the Board level and being a leader on these issues. Can you talk for a moment Mark about, in our industry, the commercial real estate industry, the three of us sit around a lot of fancy meetings and it's a bunch of people who look like the three of us, and yet also the three of us have also been very committed to changing the industry. What's EQR doing beyond having a very strong Board representation from a diversity standpoint to really drive these issues home.

Mark Parrell: Sure. So, we've been very focused on diversity inclusion for a while. And I think what I'm going to talk about with the company, to me is just as applicable to the industry. So first you hire experts. We hired someone who's just as much of an expert in diversity inclusion as our expert in elevator repair. I mean she just knows everything about it. She can push change through the organization. She understands best practices. And we've really added a diversity and inclusion lens and we did this, about a year and a half ago, and added a diversity inclusion lens to all our personnel decisions. When you think about promotions, raises, acknowledgments you make of people in your organization for service, are you thinking about that? Is there implicit bias there? How you're thinking about those things. 

We also instituted this Rooney Rule which comes from the concept in the NFL of the always interviewing a black person for a role as a head coach. But the way we apply it is for our mid-level and up management positions. We make sure we always have at least two candidates that are minority or women or better. And we have that conversation and we just broaden our net. Makes us look harder. By having that rule it slows us down so we don't just hire people that look like us that we're comfortable with. And again, I think that's a good lesson for the real estate industry as a whole and it's benefited us usually. We continue to hire highly qualified people of all types. It has definitely opened up channels that we haven't had, and we make ourselves accountable. We publish a report on this, we put it in our ESG report that we put out publicly about a month ago. We report it to our Board. We have information we report out to all of our employees. I think that's really important to have accountability. So you're showing progress. It's not just words. It's deeds and actions that lead to something. And we make ourselves accountable as executives. So, for me and for all the other folks that report to me, we have an express D&I goal in our annual bonus plan. And our comp committee rates us on it and thinks about it. So, performance follows compensation and you know that's a tenant. 

You mentioned the Board, you know, they're the top of the heap at the company, they run it. We're fortunate to have and we've won awards for this, three women on the board who are very talented. Two of whom chair committees and are just very knowledgeable. So very senior in the company. Our company employee base is a majority-minority base. So, 60% of our employees are non-white. We think our board should reflect that input as well. And so three of our board members are diverse. And they bring perspectives from business and from life that are very helpful and making decisions. So we kind of put all that together. And I guess I tell you my personal goal. Our company likes to promote from within and when it's time for them to pick the next set of leaders at the company, all that work we've done mentoring and putting folks in the positions at the mid-level and they've risen up to the top, the Board will have a much more diverse slate to choose from. And I hope that's true whether again Owen would know better at ULI, but I hope that's true everywhere. In real estate, where you're putting people in positions to succeed, giving them the resources to succeed, looking more broadly. Then you're going to reap the benefits of that in, you know, half a generation or generation is this group of folks kind of works through. So that's what we've been doing. We recognize there's a long way to go though. We’ve made some steps, but we recognize it's a journey as someone has said to me, and it isn't done in a day, and we've got we've got a ways to go yet.

Willy Walker: Owen do you want to jump in on that?

Owen Thomas: Yeah, maybe just a couple things I’d add to what Mark said. Willy, as you said, we have a diverse Board. We have a reasonably diverse workforce, particularly from a gender perspective. I do think the thing we're focused on is the seniority of the diverse workforce that we have. And I think that's an area -- look, we can do better on all of it -- but I think particular from a seniority standpoint, we want to do better. All of the senior management as Mark described have diversity as part of their goals and their paid partially on that basis. 

The other thing that we did at Boston Properties is we set up a diversity and inclusion committee internally and it is a group of younger, less senior employees, and a more diverse group of employees to give advice to senior management on what they think we should be doing. And there are three areas of focus. One is the diversity of our company. And so, establishing specific goals, not just saying we want to be more diverse. But what does that mean, you know, with actual numbers next to it. So, we've been working on that. The other thing is very interesting, we're a very large company by assets but not by number of employees. We outsource a tremendous amount of our work. We have a multi-billion dollar vendor spend every year. So that's the other thing that we're starting to spend more time on is our vendors because there's probably more people that work on our collective business that don't work for Boston Properties and actually work for us. So how do we articulate our vision and our ambition to all of those vendors to try to get them to practice the same, have the same level of concern and care for this topic that we do. And then the third area that we're looking at is actually outreach. So how can -- we've talked a lot about our cities and communities on this call, so what we've been focused on is how can Boston Properties help the diversity in our communities in a manner that's unique to us and authentic to us. So we've been exploring with ideas like setting up office incubators in our Class A buildings that we would provide to minority owned businesses to help them get off the ground. If we're going to spend, you know, a lot of money, putting a retailer in one of our buildings with tenant work, couldn't some of those be minority owned businesses. So we're spending time, you know, on that, on that part of this. That would be part of our agenda, as well as it relates to D&I.

Willy Walker: Well, I'm a) deeply appreciative of all the things that the two of you have put in place on this issue. I think it's a super important issue and I think it's a great issue for us to end our conversation on because of its importance to our industry. And also to have two very significant CEOs, of very large corporations who are so focused on it and it's so evident in all the actions that you have both taken and you've both articulated is just fantastic. And I take my hats off to both of you and your Boards. And then I'm also just very thankful that you both took the time, spent an hour and give our viewers, an update on both the office market, as well as the multifamily market in which you are both seeing.

It's a real honor to have both of you with me. Thank you both for your time and I wish, both of you a very happy holiday season and good luck from here to the end of the year and into 2021.

Owen Thomas: Great, thank you. Well, thanks for having us.

Mark Parrell: This is great. Thank you.

Willy Walker: Take care.

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