Special Report: How City Office Centers, Written Off as Relics, Will Return, Post-Pandemic

The urban workspaces of the future are going to see more personalization, more automation, and more focus on health and wellness.


You have a couple options for your early morning commute. There’s the train or the company rideshare. But you have to drop your kids off at school, so you take the car. Once you’re in the city, you park in the firm’s smart garage, which directs you to an empty space. 

The air seems cleaner and healthier in the office. A quick glance at your phone tells you your desk assignment for the day, what section of the building you’ll be in, even the room temperature. The area is too cold so you turn the thermostat up. Another tap and you have a list of colleagues who are also scheduled to be in. It’s been weeks since you’ve seen some of them so you’re eager to catch up. 

At noontime, you consider going through your options on UberEats, but the company commissary is right downstairs. So you scroll absentmindedly from your desktop to see what it has. 

Welcome to the future of office work. In the social sense, the environment will resemble what workers left last March. But like many other aspects of life now, the pandemic has accelerated some trends that had already been in place: more personalization, more automation, and more focus on health and wellness.

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With vaccines rolling out, companies are hard at work figuring out when remote employees can come in again and what will happen when they do.

That means employers have to help build trust on the health aspects of public spaces. That said, they also have to compete with the comfort of home offices, since many workers no longer need to be onsite to accomplish their tasks. Real estate firm JLL says it’s been working with many of its Fortune 500 clients to ready their workplaces.  

“If you’re going to attract and retain the right kind of talent, you have to provide these capabilities and abilities to people so they can be effective,” said Sanjay Rishi, JLL Americas CEO for corporate solutions.

Excess Office Space

All of this will be a boon to our once-bustling city centers. While residential neighborhoods in urban centers have remained lively, commercial buildings in places like Times Square have stood empty and abandoned for the past year. 

Commercial real estate has suffered. Last year, the value of office real estate investment trusts (REITs) tumbled 18.4%, according to numbers from the National Association of Real Estate Investment Trusts (Nareit). Those numbers have since bounced back, up 1.35% for the calendar year, although they remain far from returning to pre-pandemic levels.

As for whether office buildings will ever make a full comeback, the jury’s still out. At this stage, however, there likely will be “a reduction in office demand moving forward,” said Peter Rogers, director of investments and head of real assets research, Americas, at Willis Towers Watson. 

For wary real estate investors, the consulting firm has been recommending other return-generating properties such as senior housing, medical offices, data centers, and, recently, life sciences facilities. Willis said it picked these properties because they are much less likely to be tied to tenants who can opt to work home. 

Other experts have been thinking similarly. PwC forecasts that the impact on office demand could be minimal, or as high as 10% to 15%, in the future. 

Still, there are some notable trends that mean good news for office real estate investors. Owing to social distancing, the shift to densify space has reversed, requiring “more space per square foot per employee than perhaps you had historically,” Willis’ Rogers said. That may offset lower demand for the asset class as a whole. 

Not to mention, plenty of workers want to return to the office, with JLL finding three in four workers hope to come back at least part time—either for collaborative work projects or to spend some time with their colleagues around the water cooler. 

“The purpose of the office is tilting much more toward collaboration, toward innovation, toward the sense of community, toward the sense of belonging,” JLL’s Rishi said. “Because talent is so portable.” 

The Rise of Healthy Buildings 

As for how analysts expect firms will use office space, they say the square footage will have more smart property technology, which has gotten cheaper. Offices will have purification systems pumping out filtered air—a health consideration that is likely now ingrained into commercial buildings. 

“We’ve seen the demand for healthy buildings grow steadily over the last decade as property owners have increasingly recognized the connection between the built environment and holistic health outcomes,” said Joanna Frank, president and chief executive officer at the Center for Active Design.

“The pandemic has been a catalyst for accelerating this demand as they seek to mitigate the spread of infectious disease within their buildings,” she added. 

This nonprofit is the sole licensed operator of Fitwel, the healthy building certification system that was originally created by two federal agencies, the US Centers for Disease Control and Prevention (CDC) and the General Services Administration. Last fall, Fitwel launched its Viral Response module, setting baseline requirements to reduce transmission of infectious diseases. Supporting the Fitwel effort are leading asset managers including Brookfield Properties, Hudson Pacific Properties, and Nuveen Real Estate. 

Fitwel and other certifications such as Well are showing that there is a connection between investors and the health and safety of the buildings in their portfolio, Frank said. 

Much has changed in our relationship with public spaces since the pandemic started one year ago. When the coronavirus calms down, there’s a strong case that office space, and city centers, will come back. The question is when. PwC estimates it will take about three to five years for large cities like New York, Los Angeles, and others to fully recover. 

To Meredith Jenkins, chief investment officer at Trinity Church Wall Street, it’s hard to recreate the same kind of infrastructure elsewhere. She says her portfolio, which is more than half made up of directly held NYC commercial real estate, has remained resilient. That’s partially because blue chip tenants like Hudson Square have thus far wanted to remain at their Manhattan perches, even as they have announced publicly that they will allow significantly more remote work.

Besides, like many others, she is waiting to return to the vibrancy of large metropolises, as they continue to enchant new and old inhabitants. 

Said Jenkins: “I am quite positive that all of that will return.” 

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Special Report: Why Mortgage-Backed Securities Will Shrug Off Higher Rates

These bonds, undergirded by pools of home loans, benefit from the zest to nest, federal support, and other forces.

Mortgage rates are edging higher as economic growth quickens. So what does that mean for mortgage-backed securities (MBS), which have been a solid investment amid Federal Reserve buying and mounting home loan issuance?

Answer: They’ll be fine, market experts say, because MBS have daunting advantages that few other fixed income vehicles can boast. Namely, backing from Washington—the vast majority of these bonds are issued by government-affiliated agencies such as Fannie Mae. What’s more, the Fed is continuing its purchase program and the home buying boom shows little sign of slowing down.

“The fundamentals look good,” said Jose Pluto, head of mortgage credit research at Aegon Asset Management. “Mortgage issuance and home buying are still strong.” That’s even though loan rates have risen amid reflation, aka an expanding economy powered by government stimulus.

About those rates: Since mid-February, the rate on a standard 30-year mortgage has climbed 0.96 percentage point to 3.48%, from 2.52%, according to Bankrate data. But 12 months ago, right before the pandemic hit, the rate was even higher than now, 3.9%. And that did nothing to thwart MBS or their underlying mortgages.

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Some expect that mortgage refinancings, which deplete the pools of loans in MBS, will shrink. Yet there’s also a compelling argument that the higher rates aren’t enough to make a big difference. “Refi will be off,” predicted Andy Szabo, senior managing director, securitized products, at Newfleet Asset Management, “just a little.”

At an average yield of 1.85%, agency MBS pay a little better than the 10-year Treasury, at 1.68%, with which they often are compared. The spreads between them have tightened of late, as the benchmark Treasury note and other long-term bonds that it influences (that most notably would be MBS) head north.

Sure, you can earn fatter yields with, say, junk bonds. The ICE BofA High Yield Index average is 4.67%. But, ummmm, agency MBS are rated AAA for a reason: Uncle Sam won’t let them default. The same can’t be said for junk.

Nonetheless, compared with other government-supported fixed-income yields around the world, American MBS have princely payouts. Many foreign issues are saddled with negative rates.

“Reflation would support US MBS, which is an asset earning a rare positive yield in global bond markets where trillions of dollars of assets are offering a negative return,” wrote John Carey, head of structured securities for BNP Paribas Asset Management. A 10-year German bund, for instance, yields negative 0.31%.

The enormous advantage of the Fed purchasing $40 billion worth of agency MBS per month, something it shows no indication of curtailing anytime soon, bolsters their prices. Plus, the central bank has no intention of selling its MBS holdings, mirroring its policy toward the $80 billion in Treasury bonds it buys each month. “Reduced supply” of MBS in the public market, said Matt Lloyd, chief investment strategist at Advisors Asset Management, “means less volatile prices.”

Meantime, the housing market, which of course drives MBS, is still doing well. Investors have a lot of cash available to keep driving the housing boom, noted Shankar Ramakrishnan, senior bonds editor at Informa Global Markets. Add to that Washington’s edict that agency-issued mortgages can’t be foreclosed on, a practice known as forbearance.

In the recently passed government relief package, another year was added to the foreclosure ban—which had the effect of keeping such loans in the MBS pools, where a number of them stand to catch up with payments thanks to the expanding economy. That brings an added boon: It keeps excess housing supply, from foreclosures, off the market, aiding home prices overall.

Helping struggling homeowners is the fresh aid doled out from the $1.9 trillion relief bill. At some point, forbearance won’t be renewed, Ramakrishnan said. Nor will more manna from the government.  Then, he wondered, “what will happen?” Such a reckoning, though, is a ways off.

Last year, a record-breaking $4.3 trillion in mortgages were originated, with $2.8 trillion of them via refinancing, also an all-time high, along with $1.5 trillion in purchase loans, the largest annual volume since 2005. And in January, the national mortgage delinquency rate fell to 5.9%, the first time it slipped below 6% since last March.

Aside from all the cash sloshing around in the economy, another powerful factor propels the housing industry: a relatively small inventory of homes, the upshot of the 2008 crisis. After that unpleasantness, the homebuilding industry retrenched, and today is struggling to catch up to surging demand.

Building permits last month were down 10% from January, the US Census Bureau reported. That could be related to the escalating mortgage rates, But as Richard Moody, chief economist at Regions Financial, wrote in a commentary, a permit slump is unlikely going forward. For one thing, the February 2021 permits were still 17% above the pre-pandemic number in February 2020.

Also, the virus has seemingly altered the population’s psychology. So those who can afford to are buying homes, or moving to new ones, seeking comforting shelter from a harsh world. And this development, the thinking goes, will be a boost for MBS.

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