Unveiling The Bottom Line Impact of Integrity

Introduction

Everyone has one of those friends with whom you never seem to be able to have a serious conversation. That’s been my 60-plus-year relationship with my buddy Joe Sciolla, the managing principal of Cresa, a national real estate firm.

A Harvard graduate, Joe has long been on the cutting edge of his industry. And he joined me to talk about what we can expect next in the world of corporate real estate. What will office footprints look like in a post-COVID world? What does an industry vet think about remote vs. in-person work? How will A.I. play a role in real estate moving forward?

We discussed all that and more. I hope you’ll enjoy reading our conversation.

Making Waves is a series of conversations between New Ocean Health Solutions CEO Hal Rosenbluth and a variety of executives from a wide range of industries and areas of expertise. The below article has been edited for length and clarity from the podcast version of Hal’s interview with Joe, linked here.

Interview

Hal: So, you’ve been in in real estate. You were a managing director of Cushman Wakefield. And then Cresa, where you’re the managing principal, and that’s a national real estate firm.

I wanted to talk about real estate with what’s going on now. I mean, are there going to be buildings that are like dinosaurs? Are people going to go back to work? What do you think is going to happen? You’re in corporate real estate.

Joe:  Well, when COVID hit and there was a rash, everything froze because nobody could go to the office. A lot of it was regulated by states that wouldn’t allow people back in the office. Immediately when people were working from home, it started a national experiment on virtually the same day. So the amount of data that we’ve been able to get back as a result of corporate America all starting to experiment at the exact same time has been phenomenal.

And what we have seen—and what I predicted would happen—is the corporate footprint across the U.S., primarily for office space, is going to shrink by at least 20 to 25%.

And we’ve seen Facebook, Google and Amazon, large tech companies shrinking as a result of people working from home. But the buildings that are going to take a real hit are going to be the, what I call the Class B buildings, Class C buildings. So when you have this shrinkage of demand, that means there’s less need for inventory and people working from home is going to be more prevalent.

And I’ll just give you an example. You have a company in San Francisco, New York, Boston, for instance, they’re paying $80 a square foot for office space. Well now all of a sudden, 30% or 40% of the population’s working from home. Well, the first thing that the CFO says is, “Oh, maybe we don’t need as much real estate.”

They’ve got to figure out how they’re going to house people in 35% less space. Because the CFOs now are under pressure to drive expenses down. Well, when that happens, that demand shrinks across Chicago, L.A., Dallas, Boston, New York. So that whole corporate footprint now gets smaller as a result of hybrid. Now, are we going to continue to see that happen?

I believe so. Do I see the demand maybe go up above 50% occupancy over time? Yeah, maybe it gets to 60. But even pre-COVID, we were probably 80, 85%. As you know, not everybody comes in every day. Your salespeople are on the road, people are sick, maternity leave, vacations. So, you likely never had 100% occupancy. But that’s a big spread between being at 60% three days a week, compared to 85% five days a week.

So from the standpoint of real estate, what’s going to happen is there’s pressure being put on the landlords, because there’s less occupancy and they’re taking less space. So the dynamic now has swung back to the tenants. They have the leverage as opposed to the landlord. And what they want today is flexibility. They don’t want to be locking in for ten or 15 years like they did in the old days.

You know, we’re going to be here forever. They don’t know what’s going to happen. When’s the next Black Swan event? When’s the next pandemic coming? There’s a lot of lessons that have been learned, a lot of data has been gathered.

Hal: I think the office is a gathering place for ideas and discussions. People on Zoom, you know, you can hide behind that. You can even, you know, mute yourself. You can turn off this or that. You don’t get that interaction. You don’t get to look in somebody’s eyes and say, yeah, this person is jiving with me.

I think it’s critically important that not only the CFO be involved, but human resources, I think, needs to be tied at the hip with the CEO because what you just mentioned about the mentoring and the tutoring and learning, the CEO can see all that. Not that the CFO can’t.

But human resources, they get that information that’s part of their role. So going forward, strategically it’s critically important that a human resources executive plays a big role because you’re talking about the psychology, the sociology and the business of people who are now free agents.

You work wherever you want. I mean, look, you moved out here to Linton, North Dakota, from Boston. It doesn’t matter nearly as much where you are anymore. So this this distance needs a new definition. I don’t know what that definition is, but it’s not measured in miles.

Joe: It’s a great point. And as there’s a hybrid decision, there has to be thought leadership around how we keep people connected. You can have the hybrid. In my opinion, it’s up to the CEO and the C-suite to say, “Okay, once every three months, once a quarter, we’re going to have a company meeting or team meetings that are required.”

“You get your ass on a plane, you fly from Indiana and you’ll meet us in in Las Vegas for whatever it may be.” That is another component that needs to be woven into this, because it’s not going to go away. And I think to your point, Hal, as quick as the pandemic came in, as quick as they said, “Stay home, everybody stay home,” well, we all got comfortable. Like you said, we’re on Zoom. You know, you’re not there entirely. Half the time, you get your pajamas on and you got a dress shirt on, so you’re only half there.

So the fact of the matter is, we got to come up with a way to maintain this connectivity where leadership is able to physically see you. Unless you’re bringing your teams together like that, you’re not just losing productivity in what you’re actually delivering to your customer, but you’re going to lose the capital productivity, like you said, of thoughts, ideas.

Hal: I couldn’t agree more. I mean, there’s also situations, let’s say you’re in a conference room and in an individual is kind of either out of line or they’re getting into an argument with another colleague. After that, you can take that person aside and say, “Look, I get your point. I see what you’re trying to say. I also understand where the other individual was coming from.”

“So let’s try and work this thing out.”

But anyways, Joe, your industry is changing rapidly. Do you see any conflicts emerging at all?

Joe: Well, when I started Cresa, in 1995, we started on the basis of, unfortunately, the way corporate America worked and the way our real estate brokerage industry worked back then was brokers represented both landlords and tenants. And there’s a real conflict in that. I use the analogy of, would you have a lawyer represent a plaintiff and a defendant in the same trial?

It’s impossible, right? So why in our industry, which has grown up from the 1700s, do you have a broker representing both the landlord and tenant in the same transaction? I mean, that’s a conflict of interests. So we started in ‘95 and said, “You know what, we’re going to start a platform across the partners that’s just going to represent corporate tenants.”

We saw a real void, a real need in the real estate industry to fill that, to be on the tenant’s side, to advocate for what’s good for them.

The biggest issue I see in leadership today is lack of integrity. Just do the right thing. And accept that sometimes that means it might cost you money.

Hal: That’s what I like about farming. You can’t fake it. You can’t say my corn is knee high by the 4th of July, and then come the 4^th, it’s browned out. And individuals, we all know who’s telling us the truth and who’s not. Integrity comes from honesty, right? And I think human beings are built with this inherent ability to know who’s telling the truth.

So Joe, for a 25 year old who’s considering getting into real estate. Any thoughts for them? Any suggestions?

Joe: Boy, it’s going to be a much more challenging career now with modern technology, number one. And I don’t know where that’s going to go. I believe artificial intelligence will replace the real estate broker to some degree.

But the number one thing to me for kids coming out of school is, they got to be prepared to accept working their ass off and the trajectory by which in the real estate business, you get rich.

You get rich in real estate, but you get rich very, very slowly over a long period of time. And I see a lot of these young 25-year-olds who get hired at Wall Street. They’re making a couple hundred grand a year, but they’re working 80 hours a week.

They get frustrated and they want to go faster. Well, they’re making this run, and that’s just not the way it works in in the corporate real estate industry. You’ve got to build and have patience in doing it.

But to me, the number one value you have to express is honesty and integrity, because in our industry, people are relying on your advice. They relied on your advice at Rosenbluth International. How should we do this, Joe? How much space should I take? Who should I put in that space?

Should I go to Dallas? Should we have an office in Chicago? Those younger people, it takes a long time. I say to them when they start, it’s going to be five years before you know what you’re doing. It’s going to be seven years before you have a business. And it’s ten years before you have a business that you could actually take a shingle anywhere and hang it up.

Hal: This has been not only a pleasure, it’s always a pleasure. We’ve never had an argument in 64 years. I hope it’s been instructive and insightful for our viewers and readers. Thanks Joe.

Joe: Thanks Hal.