Real estate: COVID ‘accelerated’ demographic shifts into suburbs, realtor explains

Workspace Property Trust Co-Founder, Chairman, and CEO Thomas Rizk joins Yahoo Finance Live to explain why his real estate firm is bullish on suburban office properties as a result of COVID and the overall state of the housing market.

Video transcript

DAVE BRIGGS: One real estate firm is betting big on the return to office. Workspace Property Trust has acquired a majority stake in 53 suburban office buildings. And that's the key. The $1.1 billion transaction beefs up a portfolio that now includes properties in 14 of the top 20 US metropolitan areas. Workspace Property Trust co-founder, chairman, and CEO Tom Rizk joining us now. Tom, good to see you. Courage, they say, is running into a burning building when others are running out. Why is this a good time to invest in office space?

TOM RIZK: Well, you have to distinguish between suburban office space and CBD, or downtown office space. We believe that the demographic shift is really moving to the suburbs. And the pandemic just accelerated that. We're seeing that in our numbers. We're seeing increased leasing velocity this quarter. We have the largest pipeline of leasing activity in the suburbs than we've had in a few years. We feel that at the end of the day, the suburbs are the big winner coming out of the pandemic. And so you will see us continue to invest aggressively in the suburbs for those headline reasons.

SEANA SMITH: Well, Tom, not all suburbs, obviously, are equal. Those high growth markets, what are they? How are you defining those areas?

TOM RIZK: Well, I guess, high growth markets tend to be reflective of things like tax structure, lower tax states, demographics, increase in population. You see that in several different markets across the country. And in those cases, you've got-- I guess, a decade ago, you saw millennials driving the market to the cities. People said millennials will live, work, and play in the city. The suburbs will suffer.

Now the opposite's happening. The millennials are having children. They're moving to the suburbs. And now they don't want to get on a subway. They don't want to get on an elevator with 25 stories. They prefer to be close to home. It is a good sort of medium solution or moderate solution to I don't want to work at home, but I want to be in the city. And so we're seeing population growth, taxes being sort of two of the high profile factors in growth markets.

SEANA SMITH: Well, Tom, I'm curious to get your thoughts in-- because in the second quarter, we saw Denver, Charlotte, Washington, DC, Seattle, among those downtown submarkets that recorded the biggest increases in vacancy during Q2. But taking a look at some of those other cities, obviously, Austin, Fort Lauderdale, Las Vegas, Miami, Atlanta were on the opposite side of the spectrum. But taking a look at the cities, I guess, that see the highest vacancy in downtown, are those areas that are seeing the most demand for the suburban offices? Does that make sense?

TOM RIZK: Well, maybe. They're not necessarily related. They can be related. So if you look at the vacancy rates in general, this is the first time in over a decade that the vacancy rate in the suburbs is lower than in the cities. OK, they're not necessarily related. I still think we're talking about those markets in general, what are the demographics going there, what state are they in, what's the tax structure, what's the cost of living.

But you are seeing some of that. You're seeing even in the what I call growth markets-- you mentioned Austin-- you'll see some decrease in occupancy in the downtowns and some corresponding increase in the suburbs. And to take it a step further, there's going to be some permanent shift of occupancy from the cities to the suburbs, we think as a result of the pandemic. And so you're going to see even better numbers.

RACHELLE AKUFFO: So, Tom, how permanent do you think that shift is going to be? And how much will be left? Obviously, as a lot of people return back to the office, a lot more companies asking people to come back, and once that sort of commute kicks in and people are like, maybe I should be back in the city, are you concerned at all that sort of after the pandemic sort of normalizes, that people might want to actually be in some of these downtown offices?

TOM RIZK: Well, we don't-- we think-- first of all, we do think the downtown office space is going to rebound. OK, I want to make sure we say that. But having said that, we think the shift to the suburbs of some occupancy will be permanent. People are making-- we think people for the first time, in a long time, are really focusing on their quality of life. We like to focus on live, work, and balanced.

And we think that that's really going to drive the day. We don't think they're going to go back. We think there'll be some permanent decisions made. We think there's a demand for more space because they don't want to have people as crowded in the office space. It used to be six bodies per 1,000. It's going to go back to 3 and 1/2 bodies per 1,000, which is where we were 20 years ago. So we think the shift is permanent.

DAVE BRIGGS: Tom, how important are amenities when it comes to these new suburban buildings? And a really quick one, if I told you I had a sweet deal on a New York office building, the number one market in the country, you tell me what?

TOM RIZK: We are not investors in the cities. We think there's going to be some continued turbulence in the occupancy rates, and we would not be an investor there. You mentioned, what about amenities? Amenities are extremely important in the suburbs. You have to be-- even more than that, the entire environment. It has to be a live, work, play environment.

It has to have a lot of retail opportunities. It has to have everything you can think of from workouts locations. They want-- the folks want everything. And if you have a lower quality building where you just don't have the amenities, those buildings are going to suffer, whether or not they're in the suburbs.

SEANA SMITH: Tom Rizk, great to have you here on Yahoo Finance. Thanks so much for taking the time. We hope to have you back again soon.