Is commercial real estate still a good investment?

With the shift to working from home during the pandemic, many industry observers have forecast the end of office space demand. Larry Antonatos isn’t one of them.

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“Successful companies value the power of in-person collaboration in shaping a dynamic corporate culture, and their employees do, too,” said Antonatos, managing director and portfolio manager for Brookfield Asset Management’s Public Securities Group in Chicago, in a recent interview.

Other periods of upheaval for commercial real estate didn’t keep workers from the office.

For example, before the dot-com bubble burst, “technological advances such as telecommuting were expected to render physical offices obsolete,” said Antonatos, who manages the Renaissance Real Assets Private Pool.

Fear in the wake of 9/11 didn’t render high-rises in dense urban areas obsolete, nor did office space vanish after the financial crisis of 2008–2009.

“Office buildings endured these and other shocks, and we expect this resilience to continue through and after the Covid-19 pandemic,” Antonatos said.

A caveat is that his firm focuses on “top-quality,” or Class A, office buildings in major gateway markets. “We expect these assets will fare much better than lower-quality office properties in less desirable locations,” Antonatos said.

Over the longer term, he expects three trends will emerge to support that market.

First, working from home will supplement — not supplant — working in an office.

“While remote work can be effective in the short and even medium term, it cannot replace human interaction forever,” Antonatos said.

“Office work allows for collaboration, connection and culture — essential ingredients for enterprise growth, risk management and control, and employee development.”

Second, Antonatos forecasted that the virus will reverse the office densification trend of the last few decades, resulting in greater demand.

“With certain social-distancing norms and health and safety protocols likely to endure, office square footage per employee will need to increase,” he said.

That measure was 425 square feet in 1990, and 150 square feet today, Antonatos said.

A third ongoing trend is that major cities will continue to serve as magnets for talent.

The death knell was wrongly sounded for many cities many times, Antonatos said.

For example, New York City’s future was questioned during the fiscal crisis of the 1970s, the crime waves of the 1980s and 1990s, the aftermath of 9/11 and the global financial crisis.

“New York City not only weathered these storms but emerged stronger for one simple reason: people young and old want to enjoy the vibrancy of a great city,” he said.

Antonatos acknowledged that his optimistic view on Class A office space was contrarian, but such a view can drive excess returns.

“Public real estate companies with outstanding office portfolios in major global cities are trading at significant discounts to real estate asset value,” Antonatos said.

Still, investing in those portfolios isn’t risk-free, considering that renewed lockdowns could occur if infections spike or workers’ return to the office is slow.

“But in the long run,” Antonatos said, “we believe office space is essential to business and will be resilient.”

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