1 00:00:01,966 --> 00:00:05,266 JUDY WOODRUFF: There are fears that COVID-19 cases might spike again, and it's not clear 2 00:00:06,433 --> 00:00:08,866 how long many of us will be working from home. 3 00:00:08,866 --> 00:00:13,566 Paul Solman looks at the consequences for commercial real estate. It's a second of two 4 00:00:13,566 --> 00:00:16,066 reports for Making Sense. 5 00:00:16,066 --> 00:00:19,866 NICHOLAS BLOOM, Stanford University: I could easily see downtown skyscrapers in the center 6 00:00:19,866 --> 00:00:22,866 of big cities falling in value by 60, 70 percent. 7 00:00:22,866 --> 00:00:27,366 PAUL SOLMAN: Economist Nick Bloom says three factors are about to devastate the office 8 00:00:27,366 --> 00:00:32,033 skyscrapers of the world's mega-cities, one, of course, the COVID economy. 9 00:00:32,033 --> 00:00:36,466 NICHOLAS BLOOM: This is really looking like being, you know, a long and incredibly painful 10 00:00:36,466 --> 00:00:40,033 recession, the likes of which I don't think anyone alive currently has seen before. 11 00:00:40,033 --> 00:00:45,000 PAUL SOLMAN: Well, maybe, maybe not. But there's a second factor, says Bob Edelstein, who teaches 12 00:00:46,466 --> 00:00:48,666 real estate economics: a sharp shift to working from home. 13 00:00:48,666 --> 00:00:50,966 ROBERT EDELSTEIN, University of California, Berkeley: Just recently, we saw a Facebook 14 00:00:50,966 --> 00:00:55,933 saying they're going to have employees work remotely forever. Other companies are considering 15 00:00:56,500 --> 00:00:58,566 that. 16 00:00:58,566 --> 00:01:02,466 PAUL SOLMAN: Bad news for, among others, shared workspace giant WeWork. The largest private 17 00:01:04,400 --> 00:01:07,600 renter of New York office space was already hemorrhaging money before the pandemic. 18 00:01:07,600 --> 00:01:09,633 Now? 19 00:01:09,633 --> 00:01:12,233 ROBERT EDELSTEIN: Do you want to go into an office space where three people have used 20 00:01:12,233 --> 00:01:15,066 it this day and share some facilities? 21 00:01:15,066 --> 00:01:20,066 PAUL SOLMAN: Now, WeWork says they are stepping up sanitization, but there's still a third 22 00:01:21,466 --> 00:01:23,600 factor, anxiety about working at close quarters. 23 00:01:23,600 --> 00:01:27,133 ROBERT EDELSTEIN: You will see people worrying about social distance distancing within the 24 00:01:27,133 --> 00:01:31,233 office market, and, therefore, there's going to be more space per employee. 25 00:01:31,233 --> 00:01:36,233 PAUL SOLMAN: One glimpse of this future comes via a new video from office space services 26 00:01:37,100 --> 00:01:39,100 giant Cushman & Wakefield: 27 00:01:39,100 --> 00:01:42,866 NICHOLAS BLOOM: Imagine you now need twice as much space per person, probably three times 28 00:01:44,933 --> 00:01:47,166 as much space per person in a large skyscraper because they were packed in like sardines 29 00:01:47,166 --> 00:01:50,800 before. For the next three or four years, people are going to be really uncomfortable 30 00:01:50,800 --> 00:01:53,800 about being in close offices, tightly packed elevators. 31 00:01:53,800 --> 00:01:57,566 DAVID KENNY, CEO, The Nielsen Company: Anything that requires an elevator is going to be very 32 00:01:57,566 --> 00:01:59,600 hard. 33 00:01:59,600 --> 00:02:02,433 PAUL SOLMAN: Dave Kenny, CEO of the Nielsen Company, a global market research firm, has 34 00:02:02,433 --> 00:02:07,400 done the math on how long it would take his employees in Lower Manhattan to get to their 35 00:02:07,400 --> 00:02:12,400 desks under the new CDC office guidelines, one person at a time in any elevator less 36 00:02:13,600 --> 00:02:15,600 than six feet across. 37 00:02:15,600 --> 00:02:18,333 DAVID KENNY: I calculated to, to refill our, you know, floors in New York, people would 38 00:02:18,333 --> 00:02:22,233 be in line for over four hours to use the elevator up and use the elevator down. 39 00:02:22,233 --> 00:02:24,800 PAUL SOLMAN: Bottom line, then, predicts Nick Boom succinctly: 40 00:02:24,800 --> 00:02:26,933 NICHOLAS BLOOM: Catastrophic drops in value. 41 00:02:26,933 --> 00:02:29,833 DOUGLAS DURST, Chairman, The Durst Organization: Obviously, as an owner of commercial office 42 00:02:29,833 --> 00:02:31,800 space, I think he's wrong. 43 00:02:31,800 --> 00:02:36,733 PAUL SOLMAN: Douglas Durst's family business owns or manages 8.5 million square feet of 44 00:02:38,666 --> 00:02:41,866 New York office space, including One World Trade Center and the former Conde Nast building 45 00:02:43,766 --> 00:02:47,666 in Times Square, where TikTok, the wildly popular Chinese-owned video sharing app, just 46 00:02:49,033 --> 00:02:51,133 leased seven floors. 47 00:02:51,133 --> 00:02:55,066 DOUGLAS DURST: We are actively leasing space even now. The demand is not going away, so 48 00:02:56,566 --> 00:02:58,666 we don't think there'll be any need to reduce rents. 49 00:02:58,666 --> 00:03:01,466 MARY ANN TIGHE, CEO, CBRE New York Tri-State Region: I'm not declaring the death knell 50 00:03:01,466 --> 00:03:03,500 of offices. 51 00:03:03,500 --> 00:03:06,466 PAUL SOLMAN: Superbroker Mary Ann Tighe is New York CEO of the world's largest real estate 52 00:03:06,466 --> 00:03:08,566 services firm. 53 00:03:08,566 --> 00:03:11,566 MARY ANN TIGHE: Yay, we can all get each other on the screen. But it doesn't tell 54 00:03:11,566 --> 00:03:15,833 us a darn thing about real-life work from home. 55 00:03:15,833 --> 00:03:20,833 PAUL SOLMAN: Have there been no fire sales of office buildings from landlords who need 56 00:03:23,200 --> 00:03:25,233 the cash? 57 00:03:25,233 --> 00:03:29,200 MARY ANN TIGHE: There have been no fire sales to date. This is not a moment where you want 58 00:03:31,233 --> 00:03:34,366 to place a valuation on an asset, simply because you may get an answer you're not going to 59 00:03:36,600 --> 00:03:41,100 like. And the answer may be different a month from now or six months from now. 60 00:03:41,100 --> 00:03:46,100 PAUL SOLMAN: Take BlackRock, CBS' iconic Manhattan headquarters, which Tighe's firm had been 61 00:03:48,100 --> 00:03:51,066 preparing to sell for over a billion dollars. It's now off the market. Why? 62 00:03:51,066 --> 00:03:56,066 MARY ANN TIGHE: I think people are on pause waiting to see what the market reveals. 63 00:03:58,433 --> 00:04:02,100 PAUL SOLMAN: Bob Edelstein, however, has evidence that uncertainty is actually killing real 64 00:04:02,966 --> 00:04:05,366 estate deals at the moment. 65 00:04:05,366 --> 00:04:08,566 ROBERT EDELSTEIN: I'm privy to 10 recent potential transactions. Six have stopped negotiating. 66 00:04:10,600 --> 00:04:15,100 I don't know if they will ever negotiate again. Three of them were negotiated and had gone 67 00:04:17,100 --> 00:04:21,200 hard, which means the deposit was accepted and would not be returnable if the deal was 68 00:04:21,800 --> 00:04:23,800 not consummated. 69 00:04:23,800 --> 00:04:27,333 PAUL SOLMAN: So they put down millions of dollars as a deposit and then just walked 70 00:04:27,333 --> 00:04:29,433 away? 71 00:04:29,433 --> 00:04:33,333 ROBERT EDELSTEIN: Yes, because they would have required many more millions to consummate 72 00:04:35,833 --> 00:04:38,500 the transaction. And they felt, as most people do, uncertain about the future, and they weren't 73 00:04:40,733 --> 00:04:42,766 willing to risk these extra dollars. 74 00:04:42,766 --> 00:04:46,933 PAUL SOLMAN: For dramatic evidence of price drops, though, look at the stocks of companies 75 00:04:46,933 --> 00:04:51,933 that invest solely in office buildings, down six times more than the S&P 500 this year. 76 00:04:53,833 --> 00:04:58,366 But current rents have been unaffected, Doug Durst insists, for at least one very good 77 00:04:58,366 --> 00:05:00,466 reason. 78 00:05:00,466 --> 00:05:04,133 DOUGLAS DURST: In the large office buildings, the tenants have signed long-term leases at 79 00:05:04,133 --> 00:05:05,333 least 10 years or longer. 80 00:05:05,333 --> 00:05:07,433 PAUL SOLMAN: Yes, agrees Bob Edelstein. 81 00:05:07,433 --> 00:05:11,000 ROBERT EDELSTEIN: It's better to have 10-year leases, but they may not be as good as the 82 00:05:11,000 --> 00:05:13,033 paper they're written on. 83 00:05:13,033 --> 00:05:15,900 PAUL SOLMAN: In fact, some office tenants have already tried to renege, says Mary Ann 84 00:05:15,900 --> 00:05:17,900 Tighe. 85 00:05:17,900 --> 00:05:21,166 MARY ANN TIGHE: Discussion number one was, I'm not using my space. Why am I paying rent? 86 00:05:21,166 --> 00:05:23,266 PAUL SOLMAN: The response? 87 00:05:23,266 --> 00:05:27,166 MARY ANN TIGHE: Show us your 2019 financials and your 2020 budget. Show us where you are 88 00:05:29,233 --> 00:05:32,200 in terms of revenue. Show us that you don't have business interruption insurance, and 89 00:05:33,833 --> 00:05:37,100 show us that you have applied for every kind of government help. 90 00:05:37,100 --> 00:05:42,100 Once we get all that information, we're happy to sit with you. We're not -- happy is an 91 00:05:43,533 --> 00:05:45,966 overstatement. We will sit with you and review the situation. 92 00:05:45,966 --> 00:05:50,966 DOUGLAS DURST: Any tenant who has difficulty, we are talking with and trying to make sure 93 00:05:52,100 --> 00:05:54,133 that they're able to get through this period. 94 00:05:54,133 --> 00:05:56,933 MATTHEW JACOBS, BLDG Partners LLC: If the return to normal is measured in years, and 95 00:05:56,933 --> 00:05:59,533 not months, there may be an opportunity in all of this. 96 00:05:59,533 --> 00:06:04,533 PAUL SOLMAN: Los Angeles developer Matt Jacobs' latest project, lofts to live and work in, 97 00:06:06,400 --> 00:06:09,133 favored by artists types, selling just fine, despite the pandemic. 98 00:06:09,133 --> 00:06:14,133 MATTHEW JACOBS: We have visual artists. We have people editing television programs. We 99 00:06:14,866 --> 00:06:16,933 have YouTube stars. 100 00:06:16,933 --> 00:06:21,133 We have had one broker ask for a coronavirus discount, but we have sold a number of live-work 101 00:06:21,133 --> 00:06:26,133 lofts over the past month at original market prices, no discounts. 102 00:06:27,666 --> 00:06:30,166 PAUL SOLMAN: So Jacobs has reframed the office space crisis. 103 00:06:30,166 --> 00:06:32,666 MATTHEW JACOBS: I'm in California, where we have a tremendous and sustained housing crisis. 104 00:06:32,666 --> 00:06:35,200 And housing is expensive and it's scarce. 105 00:06:35,200 --> 00:06:38,400 A lot of those office buildings that we considered class A buildings are not going to have tremendous 106 00:06:38,400 --> 00:06:43,166 utility right now, but they have perfect opportunity to be converted to housing. A well-built steel 107 00:06:43,166 --> 00:06:46,233 or concrete building is a perfect environment for housing. 108 00:06:46,233 --> 00:06:48,733 PAUL SOLMAN: Including in cities like New York, says Mary Ann Tighe. 109 00:06:48,733 --> 00:06:53,733 MARY ANN TIGHE: The downtown Manhattan market before 9/11 had 15,000 residents. Today, it's 110 00:06:57,800 --> 00:07:01,166 approaching 70,000 residents. 111 00:07:01,166 --> 00:07:06,166 Many of those residents are residing in office buildings that have been converted to residential 112 00:07:08,100 --> 00:07:11,033 rentals. So, I do envision that older stock will go in that direction. 113 00:07:11,033 --> 00:07:15,700 PAUL SOLMAN: What price that older stock will fetch any time soon, however, is enough to 114 00:07:15,700 --> 00:07:19,300 worry anyone who owns commercial office space. 115 00:07:19,300 --> 00:07:20,100 This is Paul Solman.