December 7, 2021

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Will “The New Normal” Still Need Commercial Real Estate?

With the corporate world proving that it can effectively work from home, what is the outlook for the commercial real estate space? The corporate business world may not need to throw away $100s of thousands, if not millions, on a premium downtown high-rise.

An anonymous source at Cushman & Wakefield (CWK) said in an interview that the slowdown in leasing is only as temporary as the economic conditions. The source also said that they expect the commercial real estate space to resume normal activity once the global economy is fully functioning again. Cushman & Wakefield is a quickly expanding commercial real estate firm with an international footprint that continues to advance with its aggressive inorganic growth (acquisition oriented) strategy.

Commercial real estate stocks have gotten demolished since this pandemic began. CWK shares are down almost 50% for the year, and competitors JLL (JLL) & CBRE (CBRE) are experiencing similar pain.

Long commutes and business travel are being replaced by video calls as the global stay-at-home order persists. Technology has allowed us to conduct a face-to-face business meeting without leaving our homes. Society is being conditioned to be comfortable with operating business in this manner.

In a CNBC interview, Goldman Sachs (GS) CEO David Solomon said 98% of his 35K staff are working remotely, and the company remained fully functional. Goldman Sachs leases some of the most expensive downtown real estate in cities around the world. If the business can function just as well from outside the office, what is stopping them from cutting back on its premium office space?

Commercial Real Estate Is Not Obsolete 

Having downtown office space is still going to necessary in the post-pandemic world for a number of reasons. Being able to communicate in person with cohorts to collaborate, learn, network, and even make friends, are things that only a physical office can achieve.

Many people actually prefer working from the office to get away from whatever distractions they left at home, more effectively interact & manage teams, and engage in social interactions that they may otherwise not have. Attractive downtown office space can also allure quality candidates and increase business morale.

The Evolution of Office Space

As offices open up, we are going to start seeing employees go in shifts, splitting the company into groups that work remotely some days and from the office others to decrease capacity and control a potential outbreak.

I suspect that this will be the ‘new normal’ for jobs that enable employees to be fully functional from home. Many offices had already been implementing these types of policies prior to COVID-19, where employees would reserve a desk in advance when they wanted to work from the office.

Social distancing practices will be required until a treatment or vaccine is universally available (likely more than a year out), which means that companies will need to space out their employees. This will require many businesses to maintain their office size but reduce capacity, which is good news for commercial real estate firms.

Are Commercial Real Estate Stocks Attractive?

This pandemic has had a sizable impact on this sector’s short-term financials, with defaults surging and commercial deal-making temporarily paused. Still, as a long-term investor, I see value in some of these heavily discounted commercial real estate stocks.

Retail is the only commercial real estate segment that may not recover from the pandemic. The retail apocalypse has been underway for years with the ease & convenience of e-commerce, making archaic brick-and-mortar retailers seemingly obsolete. This is a trend that commercial real estate and its investors had already taken into account. COVID-19 only sped up retail’s predicted demise.

Cushman & Wakefield

I like Cushman & Wakefield’s market positioning, despite toeing the line of profitability, the company is more hedged against the broader economic downturn than its cohorts because of its focus on property & facility management (PMFM). This focus gives the firm a more reliable topline in these times of uncertainty.

The business is more leveraged than its competitors because of its aggressive acquisition-centric growth strategy. Still, management is confident that its cash-flows will remain sufficient to satisfy obligations and even allow the company to be opportunistic. CWK has already completed 4 PMFM acquisitions in 2020 thus far. I have confidence in the firm’s management and see its current valuation as attractive for a long-term buy if you can stomach short-term volatility.  

CWK is a Zacks Rank #4 (Sell) because of analysts’ recent downward revisions on EPS estimates. I believe that these revisions are priced in for the most part. You may want to wait until the stock is upgraded to  a 3 or higher before purchasing.


CBRE is a safer play than CWK because of its market leadership and robust capitalization. The firm is operating at a healthy net debt-to-EBITDA of 0.6x and liquidity of $3.4 million. CBRE is also focused on growing its property management division, which is categorized as Global Workplace Solutions (GWS).

CBRE is only 10% exposed to retail, with 50% of its business coming from office space, followed by multifamily at 21% and industrial at 19%.

CBRE is 113 years old and has lived through many market downturns. The management team is already strategizing on how they will take advantage of these adverse market conditions and stay ahead of fundamental changes in the space.

CBRE shares are down 36% for the year, which presents an opportunity to buy this commercial real estate giant at a discount. Most analysts are giving these shares a price target north of $50 per share, which would represent a sizable upside.

CBRE is a Zacks Rank #4 (Sell) for the same reasons as CWK, and again I think a lot of this downside is already priced in, but the risk is still unquestionably there. You may want to wait until CBRE is upgraded by Zacks before putting a position on.

Key Takeaway

The global pandemic is changing the commercial real estate space and its future remains highly uncertain. Still, there is upside potential in some of these heavily discounted stocks that have maintained an optimistic future.

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