May 11, 2020 - From the May, 2020 issue

Kilroy Realty's Sara Neff: How Might Office Buildings Change Post-Pandemic?

With ‘nonessential’ businesses in California shuttered for two months on May 19, commercial building owners and operators are sifting through the operational and economic impacts of shelter-in-place restrictions on their tenants and businesses. TPR, looking to share experienced thought leadership and operational expertise, reached out to Kilroy Realty’s Senior Vice President on Sustainability, Sara Neff, for insight into the challenges, solutions, technologies, and trends emerging in commercial office spaces to accommodate public health requirements and restore trust in shared workspace as governments begin to ease social distancing orders. Neff also offers her personal advice for emerging real estate, planning, and design professionals nervous for their prospects ahead; she reminds readers there will always be winners and to use the time and technological resources during the downturn to brush up on the fundamentals and network.


"Any building that helps to reduce disease transmission is a more resilient and healthy building, and more likely to weather shocks and stressors like this one."—Sara Neff

Sara, as the SVP of sustainability at Kilroy Realty, which owns and operates commercial properties up and down the West Coast, share how COVID-19 has impacted your projects under construction as well as those that Kilroy manages.

Sara Neff: We're very lucky that the vast majority of our development pipeline was already leased. We’re moving forward with the turnover of some of those projects that were already completed, and those will be on time. We're not seeing giant impacts.

We're trying to be cautious and making sure that we're being smart about it; but overall, we're feeling pretty confident about our balance sheet. We're prepared to weather the storm.

That's been the general feeling with development. We know that individual tenants are going to want individual responses to COVID,  so we are in the process of having those conversations right now.

Are there any preliminary readings on what additional health security your tenants want that’s different from what their leases provide?

It's important to remember the priorities in terms of what the CDC recommends. What you're supposed to be trying to reduce is person-to-person transmission of the virus, then surface transmission, and then down to mechanical and ventilation. That's the CDC’s order of operations in terms of how to best mitigate.

Nobody knows what's really happening yet, but there will be more shift work with people staggered throughout the day to have fewer people in a building at once. Some tenants want more ventilation, so we're figuring out how to provide that in a way that isn't going to be a major energy concern. In general, the stickiest issues that I see market-wide—not just at Kilroy—are multi-tenant commercial buildings.

A single tenant has a good amount of control over who comes in and out, and how healthy they are. But in a multi-tenant building, the tenant looks to the landlord to provide protection. The feeling is always uncertain whether every tenant followed procedures. Those are the properties where we are really having to step up as landlords and provide extra health security. 

Will the pre-pandemic office market trend favoring shared office and common space likely change with growing concerns about public health and cleanliness? Or, is it unaffected by the pandemic?

I think the theme is going to be flexibility. Can we make it so that our spaces allow for people to be six feet or more apart in meetings and then put back together when people are able to be closer? We think that the office space is a place for collaboration, and we don't see that going away—but when you're designing, are you allowing people to adapt for what they need? For an outside area, is the furniture fixed or can you move it around?

And the same goes with open offices. We're going to see a request for flexibilities. Some people are going to want to be more isolated or to be able to work on their own, but nobody wants to work in prison cells. People, at some point, are going to want to be able to collaborate again and the name of the game is going to be flexibility as we figure out what this world looks like.

I was on a webinar with somebody from Shanghai, and in some ways, they're a couple months into the future on this. In their own anecdotal experiences, that behavior pretty quickly goes back to what it was before: people don't wear masks in an office, and it's hard for them to stay six feet apart from colleagues. The suggestions they get from other entities to walk only counterclockwise around an office to not accidentally breathe on each other doesn't seem to be followed by the people who have gone back in other countries. I can only use that as a guidepost that we can expect to change over the long term.

It's about both responding to the pandemic preparedness, and then communicating that you're responding. A tenant can’t tell if you’ve changed your filtration or added UV lights in a supply shaft, so you also have to be doing a good job communicating what it is you’ve done.

In TPR’s April interview with JLL’s Carl Muhlstein, he seemed to indicate that there might be a trend away from shared space back towards single-occupancy offices.  Is he onto something there, or is it just a preliminary reaction to COVID?

I think that is going to be a desire for some. It's going to be about providing that to employees who need it to stay comfortable and for others to still have the shared space. I also think we're going to see a lot more folks telecommuting than we used to. This situation is great for some people who find that working from home is better for them. I’m not one of those people, but some find they're more productive, commuting less, and less stressed.

But then again, in the office space, we're going to see more people wanting more space between them, so it's really hard to gauge if people will need more space or less space. Staying open and staying in communication with tenants is the way to go, but we won’t really know until people start going back to the office and seeing what works for them. 

Kilroy has done an excellent job in its office buildings in enticing and providing for ground-floor retail. Address what you believe the short term and post-pandemic world issues and prospects are for ground-floor retail.

Only a small percentage of our portfolios are retail, but I think it's two things. One, how do we keep the retail in business during this time—how do we make it easy for people to do takeout from a restaurant, sell gift cards, or buy things online. All of a sudden, we're doing a lot more delivery. It’s about figuring out those logistics to try to tide people over until we can all go back.

We assume this is going to be staggered or that some percentage of people are going to be able to come back and enter a restaurant at maybe 25 or 50 percent. How do we make restaurants flexible to be able to do that, so that they're ready to go and still be in business when people can go back to full capacity?

Sara, knowing that the margins for restaurants are quite thin, and cutting capacity by 50 percent to provide for social distancing is like the death sentence for most restaurants, how, as a landlord, do you try to keep your tenant restaurants in business?

It's not easy, and I'm not sure anybody's figured it out right now. We hope what's happening is that restaurants, as small businesses, are getting federal loans to be able to keep their staff. Way fewer people are on-site to meet the reduced demand, and because they've been able to retain their staff, they'll be able to ramp back up. We're hoping that the protections put in place federally are enough to keep people afloat during this, hopefully, not too much longer rough time.

As landlords, we want our tenants to stay, and we also very much believe in the importance of ground-level retail for activating the ground plane, making an area more pedestrian friendly, and providing a space for more interactions. We don't want to lose our retail, and we're working closely with those tenants to try to be helpful. For example, changing around the parking garage to make pick-ups and deliveries easier is one of the ways that landlords can be helping right now.

You’ve been champion of redefining ‘resiliency’ in real estate development: from design, the materials chosen, to construction processes, and to operation. Is COVID-19 necessitating another iteration of the meaning of ‘resiliency’?

I hope one of the lessons that we learned from this is the connection between buildings and health, and buildings and the environment. Resiliency, at least in California, has been very much wildfire and earthquakes only. Now, I hope that we're really able to broaden that definition of resiliency to include health. Conversations and panels on resiliency are either about floods, wildfires, or hurricanes. I think we're also going to see resiliency in terms of flexibility and in terms of health.

The thing about a lot of the recommendations that landlords are putting in right now is that a lot of them are just good ideas. It's obviously not as devastating as COVID, but it's not like there isn't a cold and flu season every year. The more we can keep people healthy in our buildings, the more productive and happier our tenants will be.

Any building that helps to reduce disease transmission is a more resilient and healthy building, and more likely to weather shocks and stressors like this one. We're going to see an expanded definition of resiliency, and I hope it helps us think more holistically about what resiliency measures look like.

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Share some of the innovations and advanced technologies that, as a result of the pandemic, are likely to be accelerated in their deployment?

There’s a broad variety, but they come into two main flavors: Technologies that can give you more data about your buildings and technologies that actually make your buildings more disease resistant.

In the first category, air sensors have improved a lot over the last two to four years from where we were. You're not going to get an air sensor that can detect a COVID particle wandering about, but there are proxy metrics for air sensors that can show you how much ventilation you have and, in general, how good a general janitorial program is. The air sensor market has improved significantly, but I think we're going to see a lot more as people are going to want more precision and to not have to calibrate all the time.

We're seeing a lot of UV products out there that can zap particulates and other germs. And, I know absolutely nothing about personal thermal scanning, but I know that is what some buildings are using in China, and we’re certainly having those discussions.

The other thing is around elevator technology—and doorways in general—to make them more touch-free. Whether they’re voice-activated, Bluetooth activated, or keycard activated, there are a lot of competing products in the market, and none seem to have won out.

There's also some technology that's pretty low tech. I know of another real estate company that's giving out little brass fobs people can use that to punch elevator buttons, so they don't have to touch it with their fingers or bash it with their elbow. Brass is naturally antimicrobial, so we're seeing a whole lot out there.

Something major thing that I would like to see accelerated is automated valet and automated vehicles, in general. It's going to be a challenge for landlords to have a valet person—who’s been in many cars—getting into everyone’s car to park it. Obviously, there will be PPE, but how much? This going to be, if nothing else, a major source of waste stream. As you know, automated valet is still on track to go to the Wilshire Grand this year, and maybe this is a catalyst for parking technology so that we're not allowing potential vectors—into a person’s car, which is such a personal space.

While Kilroy has invested in much of West Coast, your development firm has made a sizable investment in Hollywood’s office market, in part because Los Angeles’ public transportation system is beginning to fully serve both Hollywood and the region. Is the current dramatic drop in public transport ridership, in great part out of health concerns, likely to affect going forward a B market like Hollywood in a way Kilroy hadn't anticipated? 

One of our concerns is that the very transit-served buildings are the ones that are going to need more sanitizing stations for people as they come into the building. It's a different experience to arrive in a personal vehicle as opposed to public transit that puts people potentially within a radius of dozens and dozens of people. You're going to want to make sure that those people have an opportunity to sanitize, wash hands before they come in, and have walk-off mats to try to reduce particulates that could be contaminated coming into the building. I think those are the buildings that are most sensitive, and so they certainly have heightened concern about them.

In Los Angeles, we are very excited about transit, but we know that people have other options. Lots more people are biking these days. Shared services are going to come back if people don't feel comfortable taking public transit, even though we know that Metro is working really hard to make sure that they are reducing transmission on the Metro system. People are also trying to make alternative arrangements right now—like putting in more EV charging—especially in Hollywood to try to accommodate people who might be driving.

With the pandemic now impacting just-in-time supply chains, is Kilroy concerned, as well, with regard to its developments and supply chain issues?

We had been thinking about the supply chain issues more in terms of embodied carbon of our supply chain in our development projects. We had just started the work of really understanding where the carbon is embedded in our building material at the end of 2019. Looking at what concrete [we’re using] and what steel glazing means, and any other items that indicate where the carbon is to try to source lower-carbon materials was the most engagement we've done down supply chain The other thing is working on site testing in an unoccupied building to see how effective your construction practices were in keeping the building non-contaminated. That's something else I think a lot of landlords are exploring as well.

Now, in a COVID world, there’s definitely a lot more engagement with our contractors, and their subcontractors, about what procedures are in place; how people are keeping safe; and what PPE is on site.

In every economic crisis—as was the case in 2008—there are investors who are stressed, and there also are buyers of stressed economic opportunities. Who might be the office market, real estate winners in the midst of this crisis?

I know this is going to sound surprising, but I feel like in many crises there's a flight to quality. I'm hearing a lot more noise from the impact investing side. Those folks seem to be quite active, and I believe that they're going to be able to get assets, make an impact investment, and get outsized returns as a result in this kind of market. I think impact investors—with where they are raising funds—are ready to buy buildings. Those who had made those moves beforehand are well positioned right now.

Obviously, there are sectors of real estate that are more and less impacted by this. It's hard on retail, but we have life science tenants that are considered essential who’ve never left. Folks who hold assets like that are the ones who are going to see the least disruption to their businesses.

Lastly Sara, what sage advice could you offer the students from schools of planning, engineering, and design in the class of 2020, who had anticipated six months ago that they'd be coming into a booming economy but instead now encounter a cratering economy?

I'm a really good person to ask because I cleverly managed to graduate in, not one, but two financial crises. I graduated from Stanford in 2002, during the dot-com crash, and from business school in 2010, when we were just coming out of the mortgage crisis. Obviously, broadening your search is very good, and getting any experience in real estate is important.

I think a lot of people—especially who do what I do—want to rush out and do impact right now, but unless you understand real estate fundamentals, you're not going to get there. If you happen to have extra time, this is the time to learn the fundamentals of whatever business it is. If you are going into real estate, now's the time to do some online coursework on what a cap rate is and how it works, or what a capital stack is and what it means, because too many people are going into this industry not knowing.

It’s the same thing with impact. If it isn't your world, but you are getting into development, now is the time to learn, understand, and network. The thing that helped me through both of my crises was having a strong network. People are very active in social media; now's the time to follow the people on LinkedIn and Twitter that you find interesting and engage them in conversation.

There's also a whole lot of online learning that's happening right now. You and I were very lucky that VerdeXchange had its conference before this all happened, but there's a whole lot of conferences that are going online. The important thing is not to just be a passive recipient of knowledge. That's helpful, but the key is figuring out how to use these to network. If there was an interesting speaker, reach out to them, see if they might have some time to talk to you.

Understand the fundamentals and building your network are definitely the two things that I would be doing, but also looking to see who the winners are and being strategic. There are winners here who can't seem to hire fast enough. It's not a great time to go into retail sustainability, but it's a great time for healthcare, so going towards where the growth markets are.

 

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© 2020 The Planning Report | David Abel, Publisher, ABL, Inc.