MetLife has been investing in office buildings in the U.S. for nearly a century—it participated in the financing of the Rockefeller Center and the Empire State Building—and has been involved in developing significant office buildings in most cities around the country.
CIO: Working from home has worked for a lot of people during the COVID-19 pandemic, and some large employers plan to continue the practice permanently, potentially reducing their real estate needs. Do you see this working long term?
William Pattison: Over the last decade a number of companies have shown it can work for a short period of time—maybe one to two years. But as coworkers become strangers to each other, company culture degrades and departmental silos grow. So we’ve seen most of those companies bring their workers back, and we think that’s probably the best roadmap for what we’re going to see now. While office demand will almost certainly get worse in the near-term, we believe it will probably get better in 2022 or 2023.
CIO: What about companies that bring employees back to the office? Will they have to make changes?
Mark Wilsmann: In the short run, yes. We’re working with tenants in a number of our buildings that have been gradually reopening, and they’re all looking at redesigns that involve social distancing. Depending on the flexibility of their existing space, they may not be able to accommodate more than 50% or 60% of their people coming back. They’re also exploring issues around traffic flow, how people are allowed to use the common areas, and how touchless technology could make people safer when using elevators, doors and bathrooms.
CIO: What do all these developments tell us about office space demand?
Pattison: We believe the one development that could significantly move the needle would be new standards for worker spacing. If we now need 300 square feet per person instead of 200, that could create a lot more demand for office space. Our view is that this will likely happen on the margins, but that the majority of companies will not increase their square footage per employee.
CIO: How do you see all this impacting office building valuations?
Wilsmann: Uncertainty around demand and the willingness of tenants to do long-term leases, along with the possibility that landlords will have to spend more to make their buildings viable, could make investing in office space riskier today than it was before COVID-19. Being in a recession wouldn’t help. Overall, we expect valuations for office buildings will decline over the next 12 months or so.
CIO: How is that impacting your investment strategy?
Pattison: If we see a significant price correction, we think it could be an investment opportunity. What’s significant? This could all change tomorrow based on the changing relative value of other investments, but right now we wouldn’t get excited about generic multi-tenant office buildings trading at a 5% discount to where they were at the start of the year, and we would underweight the sector at those levels. We think discounts in the 10% to 15% range represent fair value, and we’d keep a normal weighting. But if the discount exceeds 15%, we’ll probably want to start overweighting the office sector. Of course, you also have to overlay that with considerations about which regions and types of buildings will be most desirable.
CIO: Which sectors look most attractive?
Wilsmann: The COVID-19 situation has accelerated some things that were already going on, like the movement out of high-cost, high-tax states into those that have lower costs and still offer a high quality of living. We also anticipate a growing demand for more open, flexible, creative office space that can be configured to the tenant’s needs. Another big trend, we think, will be around health and wellness in office buildings—everything from air quality to amenities that support health and well-being, such as fitness centers and outdoor spaces. We think office buildings in growing cities that have some of those features are going to be the most likely winners—as will buildings that have the flexibility to alter their layout.
CIO: So investors need to be selective?
Pattison: Our sense is that real estate investors historically have not been as proactive as they should be when thinking about which markets are likely to underperform or outperform during a downturn. This is a good time to bear down a little harder when analyzing potential investments .
This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors.
This document has been prepared by MetLife Investment Management (“MIM”)solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong.
This document contains links to third-party websites not owned or operated by MIM or any of its affiliates. This content is being provided solely for informational purposes. MIM is not responsible for the content of third-party websites linked to or referenced in this document. MIM does not endorse the information, content, presentation, or accuracy of these third-party websites, nor does it make any warranty (express or implied) in relation to them.
In the U.S. this document is communicated by MetLife Investment Management, LLC (MIM, LLC), a U.S. Securities Exchange Commission-registered investment adviser. MIM, LLC is a subsidiary of MetLife, Inc. and part of MetLife Investment Management. Registration with the SEC does not imply a certain level of skill or that the SEC has endorsed the investment advisor.
For investors in the EEA – This document is being distributed by MetLife Investment Management Limited (“MIML”), authorised and regulated by the UK Financial Conduct Authority (FCA reference number 623761), registered address Level 34 1 Canada Square London E14 5AA United Kingdom.
For investors in Japan – This document is being distributed by MetLife Asset Management Corp. (Japan) (“MAM”), a registered Financial Instruments Business Operator (“FIBO”).
For Investors in Hong Kong – This document is being issued by MetLife Investments Asia Limited (“MIAL”), a part of MIM, and it has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”).
 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC.