“If you need marketing advice, and you are in a co-working space, there is a good chance someone there has that expertise. Providing vendors with networking advice adds a whole other level of value to particularly smaller tenants. It also gives landlords incubator space to grow tenants.”
Insightive.tv: What are the key national and international market forces that are affecting your portfolio?
Michael: Across both the US and Europe, I think that job growth and market certainly have had an impact in terms of occupancy and letting. The United States have been relatively robust. I think France has picked up in the occupier market. In Great Britain, following Brexit, there has been more concern. But this hasn’t really shown up in terms of letting, and we have seen occupancy remain stable or increase — not just in our properties, but other properties as well. However, we will have to see how things play out.
Interest rates and currency are the other things that are affecting all investors. Questions about how real estate competes in comparison with bond yields, and whether or not the large variations between currencies, and the strengthening of the dollar, are going to affect our real estate decisions.
In the US, the interest rates are going up, but if you look at interest rates in Europe, many are heading down. Even though previous interest rates were at record lows, there is renewed incentive to refinance. We are continuing to look at the leverage on the investments.
If you look at the investment market, and the ability to borrow at such low interest rates, you have to continue to be diligent. This is a unique situation in terms of borrowing. We have never really been here before. So we try and remain disciplined in terms of borrowing and leverage, but also look at this as an opportunity.
Insightive.tv: What measures have you put in place to deal with some of these issues?
Michael: In Europe, because of currencies and because of the low interest rates, we have been more judicious in terms of how we use our capital — whether repatriating it or paying down debt.
In the US, we have the opposite — we have tended to see rising interest rates. So we look at the refinancing risk. Where appropriate we have taken the early view and said — we should refinance and go longer term today in order to lock in longer term debt that we think would be attractive in the future, both to our investors or potential purchasers of portfolio property.
Insightive.tv: How do you see yields over the next four years comparing to the recent past?
Michael: I think we will see stable or increasing market rents throughout Europe. In the US, we are seeing rising yields. Rents in the US, in most markets, have continued to go up. I think that will moderate. But from a commercial, office, and industrial perspective we have seen strong growth in where rents were from three or four years ago.
The last several years have been more turbulent in terms of US markets. I think job creation momentum will continue — increasing occupier demand. But I think there is definitely a bias towards quality. If you own quality, or developed or redeveloped into class A or class A- quality space, you can command better rents. .
Insightive.tv: Do you deliver services within your buildings and do you see this changing in the future?
Michael: I think there is a bias towards adding more services for tenants — bike rooms, small fitness centres. It is more common in Europe than the US, but we have started adding small cafes to our building. We have also begun adding a lot of outdoor areas where we can.
These developments are definitely a priority for us, especially now that business hours have increased. The headline unemployment numbers have continued to go down in both the US and Europe. But for the most highly productive workers, they still have a choice of what companies they go work for. Corporate owned facilities often take these kinds of services seriously. We not only have to compete with other buildings, but the likes of corporate owned campuses like Google and Microsoft because our tenants have to compete with them for employees.
Insightive.tv: What are your thoughts on the growing popularity of “space as a service” — co-work spaces?
Michael: I think it is interesting. In the US, this has been dominated historically by one group — Regus. WeWork has come in and made a very large entrance. The biggest shift is that large corporations are now contracting with the likes of WeWork and Regus. Tech firms particularly are renting desks, rather than opening an office, when temporarily locating in a city for a particular contract.
However, I don’t see this as direct competition to us because I think the co-work market has done more to bring people out of their homes and older small serviced offices than alter the habits of traditional renters. But this is an exciting development in its own right. It is allowing people to legitimise their businesses, so to speak, in terms of technology and locational presence — allowing them to have a meeting in an office, rather than a coffee shop. I actually think it is bigger competition for Starbucks than for what we do.
I do think these services help jobs. I think that is very positive for business and gives them confidence and services that they would otherwise not have. It also eases collaboration between businesses. If you need marketing advice, and you are in a co-working space, there is a good chance someone there has that expertise. Providing vendors with networking advice adds a whole other level of value to particularly smaller tenants. It also gives landlords incubator space to grow tenants.
Insightive.tv: Have you considered operating your own co-working areas?
Michael: In the US, we have not. We have several Regus leases in our portfolio. In Europe, we have an investment in Pure Offices. But this model is a little bit different in that we own most of the facilities.
It is an interesting investment for us because we do see the migration of tenants from smaller offices to larger and larger suites as they grow their business. But our goal with these clients is to move them to longer term leases, hopefully within our portfolio.
Our occupancy in our portfolio has been relatively high, based on improvements we have done. Taking out commercial developments and redevelopments, we are over 90% in the US and in Europe. Many of our offices in the US are 100% leased. So we really haven’t had the need or desire to do revenue sharing type agreements. But I know that they are becoming much more popular.
As a Managing Director, Michael O’Shaughnessy is responsible for the asset management of all Northwood investments. This includes working closely with the asset management of subsidiaries. Having previously worked as an Executive Director at UBS — overseeing almost $6 billion in direct property funds — Michael has more than a decade’s experience in the upper echelons of the market. We spoke with Michael to gain insight into his understanding of the future of real estate, and how Northwood Investors is poised to capitalise on market developments.
Northwood Investors is a privately-held real estate investor with investments in debt, equity and securities investments. Engaging in development and redevelopment projects, multi-property acquisitions and joint ventures, Northwood holds hotels, offices, retail, residential and industrial properties. Since its foundation in 2006, the firm has grown to possess over $6 billion in assets.
Part of THE FUTURE OF COMMERCIAL PROPERTY series
Trends, Challenges, and Opportunities An Inside View