Podcast: Pandemic Commercial Real Estate Impact

Pete CodellaBusiness Elevated Podcast


Business Elevated Podcast (Episode 42)

This podcast series features business and government leaders discussing what it’s like to live and work in the great state of Utah. This episode includes a conversation between Ben Hart, deputy director at GOED, Lloyd Allen, managing director for the Salt Lake City office of CBRE, and Brian Anderson, vice president and retail market specialist at CBRE.

The Business Elevated podcast is also available on Apple PodcastsSpotify and Stitcher.



Welcome to the Business Elevated Podcast, where we discuss what it’s like to live and work in the great state of Utah. Did you know Utah is frequently ranked the best state for business by Forbes? This podcast is a production of the Utah Governor’s Office of Economic Development. Thanks for joining the conversation.


Ben Hart
Lloyd Allen
Brian Anderson

Ben Hart: (0:21) Welcome to the Business Elevated podcast. I’m Ben Hart, deputy director at the Governor’s Office of Economic Development. My guests today are Lloyd Allen and Brian Anderson from CBRE. Lloyd is the managing director for the Salt Lake City office of CBRE. Brian is a vice president and retail market specialist who has worked in the real estate industry since 2007.

Lloyd and Brian, welcome to the show.

Lloyd Allen: (0:48) Ben, nice to join you today. Thank you for the opportunity to talk a little bit about commercial real estate. It is something that is certainly exciting and important to Brian, and I. We appreciate the chance to be a part of your podcast.

Brian Anderson: (1:04) Seconded on all fronts. Looking forward to this Ben, it should be fun.

Ben Hart: (1:09) Absolutely. Thank you, Brian and Lloyd. We appreciate you being here, and we also appreciate your depth of knowledge through your firm as well as CBRE. Obviously, it is a nationally and internationally respected firm with an office here in Salt Lake City. We’re very fortunate to have both Lloyd and Brian working here in the Utah market. To give our listeners some background, Lloyd grew up in Salt Lake then left for a decade for school and work. We got him back. He’s been in Salt Lake now and a part of the Salt Lake business community for a couple of decades. He earned an accounting degree from the University of Utah, and then went on to get a law degree from Cal-Berkeley. Lloyd will say that the greatest morning possible is being at the lake water skiing with the family. That sounds like a pretty nice morning these days, Lloyd.

Lloyd Allen: (1:55) A morning at the lake with kids is about as good as it gets. Probably the next point is an afternoon talking about real estate. Combine the two, and you’ve got about a perfect day.

Ben Hart: (2:07) Yes, it is. Brian was born in Middleton, Idaho, and earned a BA in social studies from Eastern Washington University. He’s also a licensed real estate agent in six Western states, outside of work. He is the tight ends coach at Skyridge High School. How’s the season going so far, coach?

Brian Anderson: (2:24) The season’s going well. Everybody’s healthy. We haven’t had any COVID related issues. The team is having a good season. The record’s good, and they’re playing hard and getting better every day. So no complaints.

Ben Hart: (2:36) Well, I think those two thoughts: high school sports, but also recreation, being out with the family, those kind of define the pandemic in some ways. We’ve really had to alter our lives to keep ourselves sane and keep ourselves happy during a pandemic. But the nice part is in some ways; the economy has still started to move forward.

We’re seeing a 4.5% unemployment rate here in the state of Utah now. We know that things are kind of starting to get back to normal, but we always have gray cat clouds on the horizon of the coronavirus and case counts and things like that. We know this can impact on the economy, but really you two are preeminent in this conversation about commercial real estate

In my mind, this is one of the most crucial aspects of our economies. How is the commercial real estate market doing? Maybe if you would both just take a second from your perspectives and talk a little bit about the commercial real estate world in general, how things are moving along and where you see things going.

Lloyd Allen: (3:47) Ben, that’s a great lead-in. I’ve heard the term before that two-thirds of the world is covered by water. But that third that is covered by dirt is just critical to everything else. Every office building, every warehouse building, every retail operation, all sits on dirt. It is just foundational to what’s happening in our economy and where that economy is going.

Commercial real estate and many would remember this from 2008 or even some from 2001. When you hit economic conditions like we’re dealing with the COVID issue right now, commercial real estate comes to a screeching halt. It’s something that is driven by other aspects of the economy.

On the other aspects of the economy, be it distribution, manufacturing, retail consumption. When those things happen, commercial real estate stops, and it certainly paused in March, April and May. It’s been interesting to watch it through the summer. Commercial real estate also has a lag and rebound.

Most interesting deals can take six to 12, even 24 and 36 months. We’re kind of in that rebound period. And as we talk a little bit, we can look at a number of the specific sectors, and break it down into office, industrial and retail. Brian’s going to give great insight today because retail is kind of the best of times and the worst of times, depending on what you are. That’s kind of an introduction to talking about commercial real estate 

Brian Anderson: (5:39) To Lloyd’s point, best of times, worst of times. We see a list of retail tenants that have filed bankruptcy this year. The ones that were most affected by COVID are ones that are competing with e-commerce. We’re talking about anything that can be bought and mailed without great expense.

So the ones that fell out and died this year, we’re already on their way. Pier1, J. Crew, we’re already in dire straits. And then this pandemic situation was the death nail. Retail is such a wide variety of real estate. It can be used to accurately describe a tire shop in my hometown of 2,000 people in Idaho and Fifth Avenue in Manhattan. Retail encompasses all of that. A lot is happening within the bigger picture. Those soft goods companies and the ones that rely on you coming in and enjoying your experience and buying something that’s either cheap or exceptionally expensive, they’re all over the board and generally struggling. The superstore side, big-box grocery with clothing and toys, and, you know, the list of people who do that and home improvement projects. They’re having record years by leaps and bounds. To summarize, it is a very mixed bag. Sit down restaurants are struggling. We think they’ll come back. Movie theaters, amusement parks, anything that is an experience-based transaction, and all the commerce happens around that; we think that will come back. Until this whole situation gets handled and absorbed and we get back to a point where we can go out and sit next to each other without, you know, fear and concern. We don’t have a date or a timeline for that.

Ben Hart: (7:22) Brian, there’s been so much talk over the years in terms of the changing retail experience from brick and mortar to more online, even the tax code with regards to how you tax an online service has been much talked about much legislated over the past few years. When this does come back, do you see this as a revolution in terms of that continuing switch and continuing pendulum swing to more digital? Or is it more of a slight evolution in the way we’re continuing to go?

Brian Anderson: (7:57) It’s a gradual movement. Anytime it can be shipped and produced cheaper, it’s going to go to an online experience. Some things aren’t there just yet, and there’s likely not going to be a cheap way to ship them — anything heavy: auto parts, obviously hardware,  home improvement, food. There’s a certain amount of things that people either want to physically look and touch, or it’s just so expensive to have it delivered that there’s not a cost-effective way to do it.

That’ll continue to go that direction, but that’ll be more reliant on improvements in transit costs and just the mobility of goods and services quickly and individually that on a cost basis are a lot easier to ship to an auto parts store that is next to the grocery store in your neighborhood for you to go pick up exactly what you need and bring your house versus you order it on a website and it’s delivered. That’ll continue to happen. It’s shifted from malls to open a retail center. If it’s a really well located one, you’re still going to command the highest rents in town for any real estate type. You’re going to have a very low vacancy if you can do it right.

They’re projects that we’ve seen that have launched in the last five years, have excellent occupancy and have very high rent. Their tenants all do extremely well, but it’s because they create a sense of place and a reason to be there beyond just picking something up, putting it in a bag and walking out with it.

That needs to get back to where we can again have those restaurants and those experiences that people want to be a part of.

Ben Hart: (9:41) Brian, just to one last follow up question on that. You mentioned a couple of the retailers that have already kind of succumbed to this a little bit, the pandemic, and the lack of revenues coming in. Do you think most retailers at this point are able to hang on? They’ve kind of found a place where they can wait this out?

I imagine retailers in areas where people have stopped coming. I think of downtown settings. Are we going to see some more casualties of this pandemic in the retail world? Or do you think most are able to hang on at this point?

Brian Anderson: (10:12) I suspect we’ll still see a few, but there’s been a glut that’s obviously given way. The ones that you’d be concerned about are sit down restaurants. They rely entirely on people in seats. During certain times of day, getting those seats as full as possible with tickets that are, you know, high sales, high margins and where they can only fill 20% of their seats right now.

People aren’t going in off times. That’s the one to be concerned about. There’s a lot of projects in Utah that are underway, name brand sit down 5-8,000 square foot places that you go with your friends and family to have dinner that have all been universally put on hold and until this gets sorted out. Those sit down restaurants are really in a pickle and don’t exactly know how to do it to your point.

The other companies that are still here have found a way to work out a business model on some level or another that allows them to either click and collect where they buy it online, and you come by the store. Or they’ve just worked out a way to have their business model kind of go into triage mode and survive until they can get back to normal.

Ben Hart: (11:33) Very interesting. Brian and Lloyd. One more question, kind of on this same track, do you see a lot of leases being renegotiated. Or a lot of landowners saying, well, I’d rather renegotiate and if this is confidential, totally understand that. Still, I don’t want to divulge anything you shouldn’t, but are we seeing a lot of leases being renegotiated, or are a lot of landlords still saying it is what it is?

Lloyd Allen: (11:56) Brian, you’d have the insight on the retail side. And then I can probably jump in on the office and industrial and the other sectors.

Brian Anderson: (12:04) It’s very case-by-case, and that’s not the cop-out on the answer. In general, we have not engaged a whole lot in those relationships and those conversations. Because there’s very little we can add. We’re not necessarily business or revenue experts per se on how these businesses operate but helping them pick sites and being there. So in general, we haven’t seen a ton of retreads. We’ve seen deals in the process be revisited, but the ones that are already signed, in general, they’re not contentious relationships, but there has not been much rent relief. 

Lloyd Allen: (12:46) Probably one of our initial positions as we talked with the owners that we represent and the occupiers that we spent a lot of time with when we were in March and April when there was just a complete unknown with respect to what was going forward, those who thought that would be done with COVID in two weeks, realized that they were wrong and it may be two months or whatever our major push was to get people communicating.

We gave them good, frank information about where their business was going to be. So both an owner-occupier could assess the future as best they could. Everything from federal stimulus dollars to current terms and balance all those out and come with good solutions. Brian’s experience on the retail side is, again probably the best of times, the worst of times. If you look at a few of the others like industrial, meaning the warehousing aspect of it, I was actually in a World Trade Center WebEx in April talking about the stall that we expected. Still, that stall didn’t happen, it kept moving, and the trucks kept rolling. The need for distribution, for warehouses, and the new retail in some ways, and Brian would have more insight there, but industrial never saw the pause.

You didn’t see issues with respect to rent relief or the like, or what you saw is new large deals with major distribution companies. You’d recognize names of them, but there are new buildings out in the Northwest quadrant and West Jordan that have, you know, new branding because deals kept going in industrial. The pause didn’t happen. It probably won’t happen. We went into this with over seven million square feet in the Utah area under construction. That could be alarming because that was twice as much as what we had at the end of 2018, but 55% of that seven million square feet was already pre-leased, and those leases kept going forward and have continued to go forward.

Although industrial has seen a bit of a rise in vacancy with the construction, we’ll still see a rise in availability. Those numbers are going from 4.9% to 5.4% availability and 3.5% to probably still under 4% with respect to vacancy. Industrial is still a very, very healthy market.

We’ll continue to be that way. Now, for office space, we could spend about three hours here? Is that what we’ve got?

Ben Hart: (15:57) That’s my next question. What is the future of offices, how does it look? What’s the future? Are people going to come back into the office anytime soon?

Lloyd Allen: (16:05) I think downtown right now has about 22% occupancy. But I’ve heard of two new groups this week who will be opening their offices after Labor Day, that’s encouraging. Office space is certainly the unknown crystal ball, but, if you step back, most office relationships are very long term. They’re not month-to-month leases. They’re not even one to three-year leases. Offices often have, you know, seven, 10, even 12-year types of relationships for the good business. That means that it’s going to be insulated a little bit from immediate change. Although the summer, and maybe early fall, was a real pause for office, both are coming into it and a real pause for corporations looking to see what the future was like.

All of those corporations know that the office is going to be a critical part of the future. It’s kind of the silent partner with respect to how you create collaboration and cooperation among your people. It’s kind of the silent partner in how you create energy. I think everybody thoroughly enjoyed the first few hours of work in their pajamas in May and June, but, in September and October, you find that there is good energy in being in the office. In fact, let me pull my notes out. CBRE published in late July a piece called the future of the office. It doesn’t pretend to be the roadmap for the next two years, but CBRE was able to get 126 of its key clients, both on the ownership side of the office and on the occupier side to talk about what they saw in the future. 

Fifty percent of those respondents were fortune 500 firms. Another 20% were Fortune 100 firms, 60% were global, 25% were in the Americas. And they came up with four or five key findings. They said to expect more flexibility in the future. They found that the physical office was certainly going to remain important. Although 41% of those people said that the importance will decrease, 38% said that it will increase. All of those 70% said more flexibility with the fact that we’ve been able to see how well technology works for working remotely. We’re on a Zoom call as we record this. We’ve been able to find out how effective Zoom calls can be. By the way, anybody who is smart enough to invest in Zoom in January or February, I’d like to get some more investment advice from them. 

Even with that 70% of the companies and CBRE future of the office review said that they were still working on long term strategies to utilize real estate. Some of them expected a de-densification where there would be fewer people in their space, but that space would still be critical. I am still working on longterm office strategies. I could go into a whole lot more detail. Let me give you just these couple of tidbits on Salt Lake’s office. We certainly expect a rise in vacancy. We went into this with 3 million square feet under construction.

That’s a high number unless you realize that almost half of that was already pre-leased by major corporate entities who have gone on to occupy and to go forward with their office plans. You can find a Wall Street Journal that says the office is dead, and then the next Saturday morning you pick up an article that says offices are so critical to the collaboration. Even retention and recruiting that the office will continue to be a core. In Salt Lake’s office market, we have almost 50 million square feet in our major metropolitan areas; they can see it going up a little bit in that area. New construction is going to bring on some phenomenal new products, and I think people will continue to pursue that new product because it will have some valuable characteristics with respect to air quality, access, options that will work very well as we come out of the COVID-19 environment.

Ben Hart: (21:23) Lloyd, you answered two or three of my questions within your comments there. I think they were very insightful. Let me continue that thinking for a little. The office and industrial are definitely behaving differently right now which is one of the key takeaways, but then the office, and I agree, it’s not the end of the office even if the Wall Street Journal says it, I don’t agree with that at all. To me, it is an evolution. I mean, I think we’re going to see a little bit more increase in digital, but I think even within what Brian was saying about retail, the office is the same way. There are certain things, certain companies that are always, and a lot of them that are always going to want that core physical location.

Lloyd Allen: (22:09) Yes. They see that in a very different format. Somebody asked the question, what are the positives and negatives? The negatives are, I think, acquainted to change the office sector will go through some change, whether it’s, you know, a new mode for a spoke and hub, with a core office and more satellites, whether it’s, you know, we’ve gone through major densification over the last decade and putting more people in less square feet.

That may change the value of new construction with good technology and with good air filtration, those types of things. I wouldn’t call those negatives. Those are changes that are probably going to be accelerated. Even the ability to do a lot of things remotely will be a change.

That is going to play out well. In the office sector overall, that’s going to be very true for Salt Lake. Salt Lake has two beautiful brand new buildings under construction that will have phenomenal technology. We also have a core of previous construction. The office buildings on main street, whether it’s 222 or One Utah Center or Wells Fargo, those buildings will fare well and adapt well to the change that you’ll see in the office.

Ben Hart: (23:42) Lloyd, fantastic points all the way around. I wish we did have three hours. That leads to my last question for you both. I would love to hear from Brian first and then Lloyd to give us a wrap. Your time’s valuable. We’ve got a lot of deals that need to be done.

If you think about this pandemic and the economy in terms of an infection, and try and contain the infection you try and make sure that there’s no peripheral damage. One of the things from my standpoint that I see as having the most adverse multiplier negative impact from the pandemic is the commercial rent sector.

Brian, perhaps first you and then Lloyd, give us your thoughts. Has the damage been contained? Can we come out of the commercial rent situation in a way that isn’t going to damage the rest of the economy? Or do you think they’re darker days ahead? Or do you think we can weather through this? I know that’s a loaded question and I’m sorry for that, but it’s one on a lot of people’s minds. 

Brian Anderson: (24:58) I’ll address that first. With retail tenants, particularly ones that we work with, they’re generally the particular ones that are the corporate retail users. They have relationships with most of the parties involved. If it’s a landlord, they’re going to be very aware of the cost to build any building they’re going to do with the cost to improve any structure that they want. They’re effectively always aware of how the deal works on the other side of the table. They base their rent negotiations on an understanding of what the landlord’s likely cash position on the deal is.

On the retail side, with construction costs quite a lot, construction materials have not gone down. Construction and labor have slightly dropped for a bit, at least. We have seen some costs come down on newer or major retrofits on the bigger picture of retail. It continues to turn into haves and have nots.

If you are a class A center, which we have a few of in Utah, where the center is so large and so robust and has so many offerings, and people just enjoy being there. City Creek is an obvious one to pick one out, but places like that are unlikely to see a big drop off in long term occupancy or rent. More class B class C, state street highways, mid-block Redwood road, standalone buildings that don’t necessarily have gravity or other tenants around them that would attract you to be near them. Those are going to continue to become less and less desirable. You see particularly in mid-county, in Salt Lake, on state street, 20 years ago could have a vacuum cleaner repair place or a small shop or a pet store. Those places that you used to just go to on main street have all now moved into one concentric area to work together and help each other. Those buildings are being replaced with mostly apartments and multifamily housing.

I don’t think you’ll see an enormous change. We don’t expect a big occupancy difference. We don’t expect rents to slide back, at least in the short term. In the long-term, there’s been a lot of correction already. The malls that are going to make it have already figured out how to make it. The malls that aren’t are unlikely to see a change there. I don’t think a one-year hiatus from the norm will have a lasting, enormous impact, at least in our day-to-day work.

Ben Hart: (27:50) Very good insight. Thank you, Brian. Lloyd?

Lloyd Allen: (27:53) Ben, loaded question. But maybe that’s a good way for us to wrap up. Let me do it by sector a little bit. I’m hearing some of the deals having industrial land probably took a 20% increase over the last sector in industrial. Very surprising and with almost nothing in the middle. Just to jump on with respect to the value of industrial land, which is probably a function of how things will change in the future and how things will be distributed.

Office space has not seen a change from pre-COVID to post-COVID, and I think the future is just going to be taken a step at a time with respect to the office. But there’s some good reason to say that the value of good office space will continue at a good level. Let’s talk about multifamily for a moment. I had a group send out a note a while ago saying if you want to sell your apartment building for the same price, you would have sold it for pre-COVID, give me a call.  You still have to have a place to live. The government stimulus has helped keep multifamily stable. Now we’re back to 4.5% unemployment, which many would say as a full employment type of condition, maybe not as exciting of a job, but that sector is probably going to go forward. When you break it up like that, combine that with the fact that unlike in 2008, when there was an absolute freeze or stop on lending, our lending markets have stayed liquid.

They’re not as efficient as what they were. Quotes have a much broader range, but they’ve stayed liquid. If you’re looking at some of those sectors that still see good demand, we don’t see a step back. If you’re looking at sectors that you know are going to pause. Well, we’ve seen the pause, but we haven’t seen a drop.

Okay. Now my disclaimer. I hope for a well educated approach to it, but the future is very difficult to completely put your arms around in the commercial real estate sector.

Brian Anderson: (30:16) A lot of the points and a lot of problems in ‘08 and I know you came from banking, so you’re fully aware of this. A lot of problems in a way were related to equity and liquidity issues on landlords and owners.

Right now, we just don’t see that problem. We don’t see people who are upside down. We see deals getting done on the landlord side at 60% loan to value where their debt coverage is almost two. So they get an actual problem. They’d have to have nearly 50% occupancy issues. So we’re not expecting to see the end of the world like we did last time. 

Ben Hart: (30:51) It is fascinating. I think the two points you had both made, which is comparing this to our last major economic downturn. It just feels much much different than it did in 2006, 2007, 2008. It was almost like a lot of the fear, we knew the residential mortgage market issues. We knew a lot of the toxic assets were out there, and there was almost an expectation of market failure. People were just waiting for it. I almost wonder if in a lot of ways that contributed to it, but it feels different now. It feels like this market really wants to survive. It feels like this market is still alive and operating in spite of the pandemic as best it can.

Lloyd and Brian, you both are at the forefront of this. Thank you for everything you’re doing to help keep our economy thriving here in the state of Utah. If people do want to get in touch with you, learn more about CBRE here locally in Utah, is there a place they can go online and find you.

Lloyd Allen: (31:50) Our website is cbre.com. I would welcome any direct calls. A direct line is (801) 869-8044. We welcome the chance to talk, not just about our brokerage, a bit about CBRE, valuation business and property management business. Our project management business has been fun to watch some of our project managers out at the airport, which comes online in 10 days. Happy to talk about all of our real estate services. Welcome the chance to assist in any way we can.

Ben Hart: (32:27) Thank you, Brian and Lloyd, we’ve got no one better in this state to address these important topics. Thanks to both of you, we appreciate you spending time with us this morning, giving us incredible insights into the commercial real estate market. Best of luck, gentlemen, moving forward. We hope that our economy is able to survive this pandemic and our best days are ahead of us, which I’m sure they are. So thank you both again for being with us.

Lloyd Allen: (32:51) Ben. Thank you.


Thanks for listening to the Business Elevated podcast, a production of the Utah Governor’s Office of Economic Development. Listen to other episodes where you get your podcasts or at business.utah.gov.