Episode 4: Is now the time to buy? Real estate dynamics in 2022

Transcript: Season 3, Episode 4: Is now the time to buy? Real estate dynamics in 2022

Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.

Cassandra Spratt: So I've heard of the residential market, you can usually get two of any three things you want. Size, location, or price. I think that when we're talking about office in the commercial space, what you're going to be talking about is am I sticking to my budget, or am I sticking to my timeline, right? And those are the two things that we're really seeing a lot of trade offs on,

Dan O'Donnell: It's understandable to look at the current events taking place in the housing market and anticipate a crisis, right? I mean, we all have 2008 in our minds and remember what happened then. However, I think there's strong data indicators which really do not support a bubble bursting scenario.

Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Private Bank and GZERO Media. On this program, we examine global risks and opportunities from angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.

Where we live now and how we live has been upended in the last few years. In the US in particular, this has meant people moving, working from home, and buying property in a crushingly fast order. For years, low interest rates also helped encourage people to get mortgages and buy property.

Then in the spring of 2020, real estate came to a grinding halt as cities and households shut down at the start of the global pandemic. As cities and companies bounced back, the market then boomed to record highs. 2021 saw record low inventory of housing stock, with this year starting with just around a million homes for sale. In the U.S., October also showed record high year over year annual home price growth at 18%.

Inflation and interest rates are now rising, and some inventory seems to be opening up. So today, we wanted to take a look at where both residential and commercial real estate stand. Joining us are Dan O'Donnell, Global Head of Alternative Investments at Citi Global Wealth, and Cassandra Spratt, Chief Operating Officer at Eurasia Group. Hello, and welcome to you both!

Cassandra Spratt: Thanks so much for having us.

Dan O'Donnell: Thank you.

Shari Friedman: Dan, let's start with you and kind of get the lay of the land. Give us the broad strokes of where the real estate market has been in the last year. I mean, anecdotally, I think we've all heard stories - it's really hard to buy homes in some markets and people are buying houses sight unseen. What does this look like at the macro level? And are you still seeing bidding wars? Also where are the hottest markets right now?

Dan O'Donnell: Yeah. Shari, on the residential side, luxury sales have soared to record levels since the start of the pandemic. I mean, despite rising mortgage rates, which now sit at five and a quarter percent, we still anticipate pricing to hold due to the shortage of supply in the single-family home market. It's estimated that we are about 4 million homes short of demand from would be home buyers, and the pandemic-related supply chain issues have slowed new housing starts, which is not helpful to close in this gap.

To put this into context, this is the greatest level of under supply in over 50 years. The increased demand coupled with the shortage of supply has driven up pricing. And according to Zillow, for sale home prices rose almost 20% in 2021 and are expected to rise another 11% in 2022.

Some of the hottest markets in the post-pandemic environment can be found really in the Sun Belt region. With remote working as an option for many, young adults are gravitating to areas with good weather, low taxes, lower cost of living relative to Metro areas like San Francisco and New York.

We're also seeing demand for mixed use environments where young families can work, shop, and eat in a community environment. Some of these cities include Raleigh, Nashville, Phoenix, Tampa, Charlotte, Atlanta, Austin, Texas, and these are all areas that are really resonating with home buyers. To give you an idea of the difference in cost of living between a city like Phoenix and San Francisco, the median listing price in Phoenix is under $500,000. It's right around $475,000 as of April, versus $1.3 million in San Francisco.

Shari Friedman: I’d like to move over to Cassandra. So far we've been talking largely residential real estate, which is really only part of the picture. And a huge driver of the economy is of course commercial real estate. And so, let's start with office space, which I know you spend a lot of time thinking about. Where is the market now for commercial real estate – has it recovered?

Cassandra Spratt: Yeah. Hearing what Dan’s sharing about the residential market, which I think all of us have seen, I don't think it's surprising that the commercial sector hasn't bounced back quite as quickly, right? I think the pandemic has really pushed people to just really prioritize where they're living, because they're spending a lot of time working now in those places as well. And so, the impact on the commercial sector is that you just don't have as many people going into the offices. And so, things are definitely starting to rebound in 2022, right? Vaccines are out. You definitely see a mix of policies coming out across different sectors in terms of return to office. You know, a lot of places are trying out the hybrid or partially remote policies. Some places have been back since May 2020, right, in terms of full time in the office.

I think we're seeing the big jump, right, in residential real estate in the Sun Belt, In the gateway cities, like typically hot markets, in particular in Eurasia Group, we're based in New York, we have an office in DC, small office in California. We just aren't seeing that return to office there. So those leasing markets continue to be pretty depressed, but I think there's a pretty strong correlation between occupancy rates.

JLL shared some figures with me. Austin, Houston, and Dallas are places where the re-entry rate, people actually being back to the office, is in the 50 to 60% range compared to pre-pandemic levels, where you've got New York, DC, San Francisco, and Silicon Valley under 40%. And that's growing pretty slowly.

When you look at the leasing numbers, right, like, where we are with companies basically signing new agreements for office space, it's the same thing, right? Miami and Nashville are actually over their pre-pandemic levels. So, we're seeing some increases there. Austin, Atlanta, Phoenix are hot on the trail in the high 90s in terms of those leasing numbers. And you really just continue to see a drag in New York and DC.

I think the thing that's really interesting from our perspective is that the market rents themselves don't seem to be going down even in the cities that continue to have the depressed occupancy levels. What we're seeing though is landlords are willing to offer more concessions, right? And having been on the side of a commercial real estate purchase somewhat recently, that's really to make sure that the lenders have that guarantee of the income stream. So, they're not really dropping the per square footage rents. We're seeing that hold pretty steady.

But something we're seeing in our negotiations is that where before, you maybe had a standard six to 12 month rent abatement that was being included, that's creeping up to 18 to 24 months with a lot of bells and whistles being thrown in for build out funds that landlords are being able to give to tenants.

So all of that to say that I think as tenants are trying to get back into the office and employers are trying to entice their workers back in, office space isn't going to go away, but we're going to start using it differently, and there's going to be more of these kind of customizations, right? I’m personally going to be fascinated to see what happens to the open floor plan. I think all of us have gotten really used to working on Zoom and a lot of video conferencing capabilities that it can be pretty hard to maintain that in the open floor plan office.

An alternative to this and something where I've seen it actually get pretty competitive coming back is the serviced office space. I don't have actual numbers on this, but anecdotally, we are not just in the US here in Eurasia Group. We have offices in the UK, we're in Tokyo, we're also in Brazil in a couple of areas. And because our footprint's a bit smaller there, we've you know leaned on the Regus office workspace and also Knotel in the UK.

And as a company that's growing pretty quickly or maybe uncertain what our footprint's going to look like in five to 10 years, which tends to be the standard timeline for a lot of commercial office space leases, we are able to sign leases for a year or three years. Definitely get a little bit of discounted pricing if you can commit longer, but those properties are flying off the shelf fairly quickly. And especially as people started getting back to office, we've had to move really quickly. I would say both in Tokyo and Sao Paulo, you know, we would find a space we really liked and begin negotiations with the building and needed to sign those agreements in a matter of weeks, if not days sometimes. And often, they would just get snapped up in an instant.

Shari Friedman: So that's really Cassandra, that you’re bringing in these parameters beyond just the bottom line dollar value, but also what the space looks like and how it functions. So Dan, I’m curious, what’s your take on what Cassandra has just shared?

Dan O'Donnell: I think the interesting dynamic here is tenants are a little uncertain about their needs right now, right? It's a balancing act of how do you manage a work from home environment? How do you manage that with an open floor environment? You have this confluence of forces that are sort of at odds, and I think really, tenants are trying to figure out how are they going to ultimately manage this. Just a couple anecdotes. There's a lot of movement over recent years to become much more efficient, you could use Citigroup as an example, whether it be open floor plans like Cassandra mentioned or just shared desk environment, but certainly trying to increase efficiency. And that lends itself really well to a partial work from home environment, whether that be 2, 3, 4 days a week, whatever it may be.

At the same time, you have a need for employees. They're really demanding a little bit more space just given the backdrop of COVID, right? Shared desks, it becomes a topic of conversation. How much space you have relative to your neighbor. All of these are dialogues that we probably weren't having a couple years ago, but certainly are coming up with the employee base.

Shari Friedman: So, companies are often locked into commercial deals on a much longer timeframe than residential. What impact does that have on their ability to react to how quickly or slowly things change in the overall market?

Dan O'Donnell: Look, I think we'll see the biggest impact is in the office center. Due the pandemic, we saw a lot of tenants taking a pause on signing new long-term leases. Many firms took a wait and see approach. There's still not much clarity on how the pandemic will transform the day-to-day, as I sort of mentioned previously. However, it is clear that there's going to be remote work in some capacity, it's here to stay, and we know that companies are going to need to tailor their needs for office space accordingly. And I think office lends itself well to rent escalations, et cetera.

So I think you're going to see continued demand is what we expect. We expect to see rents increase longer term. In fact, if you just look at the activity, US office leasing was up, I think, about five and a half percent in Q1, which is the fifth consecutive quarter of improved tenant demand. So again, I think we're seeing trends head in the right direction. And I think that's an area that we're just going to continue to see demand progress, as companies and the employees come together to figure out what the needs are.

Shari Friedman: it seems like a lot of uncertainty right now, but you're seeing some trends.. And I'd like to go back over into residential for a moment and something that you had mentioned early on, which is that the housing stock is very low right now. So how low really is it, wbat if anything is being done to remedy that?

Dan O'Donnell: Yeah, housing stock remains an all-time low. I mean, to put this into context, active listing stood at a little over 400,000 homes as of the end of April 2022. On average, from 2017 to the end of 2019, there were typically about 1.2 million active listings at any point in time, and this is according to Realtor.com. So, home builders just simply can't keep up with the demand. I think Cassandra or you mentioned this earlier in the call that there's about 1 million net new constructions per year, versus about 2 million new household formations. So, this deficit is growing and not shrinking. And while household formations may cool off a little bit as interest rates rise, the average rate of home completion would have to triple to close the gap over the next five or six years. I mean, that's how tremendous the gap is right now, and so we have a long way to go.

Single family home builders are ramping up I think the most in the south and west. If you look at sort of the numbers, almost 60% of all single family home permits in 2021 were in the south with approximately 23% in the west. I mean, that speaks volumes about where development is happening. And there's some obvious reasons for that. Land availability, but also it ties back to my comments around demand. And these trends from 2021 appear to be continuing as cities such as Austin, Nashville, Raleigh, some of the ones I mentioned before, Jacksonville, are really seeing an outside proportion of housing permits.

Shari Friedman: So Cassandra, how has the fact that people are now working at home affected where builders are building?

Cassandra Spratt: So I think everything I have to share here is going to be pretty anecdotal, but here in DC, I haven't seen construction slow down at all. When I get up and visit our New York headquarters, there's also scaffolding still all over the city between Penn Station and the Flatiron district. So I think we're seeing a lot of home renovations, right? People have been wanting to improve their ability to kind of work at home and just investing there, but also potentially exploring buying a home somewhere that's not in the area that they have traditionally lived, right? So we see some of the folks leaving, say, the New York, DC areas, some of those gateway cities where it's pretty expensive to own and renovate your real estate, and move into some of those Sun Belt or markets where before they weren't able to live, because they needed to be right near the office.

We're seeing a lot of luxury, multi-use go in, I think, right? So, condo buildings kind of going up all around the cities. And then, you're seeing a lot of construction in terms of office retrofits, right? I don't have numbers around what the investment in, say, office construction looks like. I think we're going to see a pretty big dip there. But just given the shortage of inventory around housing, I know single family homes are almost impossible to come by even still in the gateway cities, right? Even with all of this flight into these tertiary markets, where maybe we weren't seen as much growth before because of the business either willingness to let people work remotely or actually relocating their headquarters to places like Nashville or Dallas, Houston, et cetera.

So yeah, just really not seeing it slow down. And in fact, looking at these numbers from JLL, construction is almost at 99% of those pre-pandemic values again. And it's anticipated that we're going to see something like, I don't know, $5 trillion of growth in four major markets, including the US, China, and India over the next 10 years or so. So, I don't see that slowing down. I think the biggest impacts around construction and new building is definitely supply chain issues, right? So I've heard of the residential market, you can usually get two of any three things you want. Size, location, or price. I think that when we're talking about office in the commercial space, what you're going to be talking about is am I sticking to my budget, or am I sticking to my timeline, right? And those are the two things that we're really seeing a lot of trade offs on, either because you can't get the materials you want or you can't get them in the timeframe that you want to get them. So a lot of those kind of delays, and just the supply chain stuff hitting, with just everything getting back to pre-pandemic levels, it's pretty big.

Shari Friedman: Great. And Dan, a lot of the housing market has also been helped by historically low interest rates, which are now starting to go up. Will the rising interest rates cool the markets at all? And I'm also curious whether the supply chain issues that Cassandra was noting have cooled or likely to cool the market down?

Dan O'Donnell: Sure. And I think the interest rate question is something that is on most people's mind right now. Look, we're starting to see a slow down demand. And I think that at the margins, that can be attributed to the recent sharp increase in rates. As I mentioned, if you look at the Mortgage Bankers Association index that tracks the volume of loan applications for home buying, that was down about 6% during the first week in April from a year earlier. And again, I think some of that has to do with the rise in interest rates that we talked about earlier. And a couple other anecdotes or a couple other data points. Wells Fargo, which issues more mortgages than any other US bank, in 2021 said that April mortgage originations had fallen about 27% from the year prior. And JP Morgan, which is another big home lender, also reported that its mortgage originations had dropped about 37%.

So, certainly meaningful year over year drops. Refinancing have also slowed as higher rates reduced the share of homeowners who can save money with a fresh mortgage. The MBA's index for refinancing volume is down a little over 60% from a year ago. And as I mentioned, the current average 30-year fixed mortgage rates, it's at about five and a quarter percent per Freddie Mac. And that's up from about 3.55% in February of this year, and up about 250 basis points versus the pandemic low, which was around 2.65%. The last time the average 30-year fixed rate mortgage exceeded 5%, we have to go back to 2011. And that's in stark contrast to just 15 months ago when mortgage rates were at an all-time low, which as you mentioned, did fuel record demand in the housing market.

So in terms of the broader fed policy, I think the recent market action does not seem to worry Chairman Powell, but Powell noted that the Fed might continue to push rates beyond neutral, imagining sort of a soft-ish landing for the economy. And I think with limited new inflation data in the near term, it appears likely that they're going to keep proceeding with interest rate increases, probably another 50 basis points in June.

So, I think we're going to see interest rates continue to eke up. We're going to continue to see that start to impact new mortgage demand as well as refinancing demand. But I go back to my comment around supply demand imbalance. I think that supply demand imbalance of a million new developments versus 2 million new household formations, the continued demand that we're seeing for secondary and tertiary markets, I think that's going to supersede the lag that may occur or the degradation that may occur relative to interest rate rises.

When you have this type of imbalance between demand and supply, new household formations, when you have that sort of underpinning demand, I think that's going to just continue to provide stability, despite some of the increases in interest rates or sheer increase in value of homes.

Shari Friedman: So there's an impact, but there's still a really big demand. So Cassandra, what's the long-term outlook for commercial real estate as they try to plan around higher interest rates in the coming years?

Cassandra Spratt: Yeah. So honestly, I think interest rates are just one factor. I mean, I know we've been looking at historically low ones that make it a very attractive time to invest, but I don't think that people are going to stop getting into the commercial real estate game just because those start to go up again. What it means though is that the cost of financing is going to become a little bit more expensive. So, people are going to kind of have to get creative maybe about how they're funding that. And you know I think there's a difference too between a company who's looking to invest in a couple of properties that they intend to be tenant occupied, whether that's for their industrial facilities or manufacturing or whatever it might be. Eurasia Group for instance, um we actually invested in a New York property that we purchased last year and plan to make that our headquartered space. We actually looked into the SBA loans, right?

So I think you'll look to some of the smaller businesses, may try to take more advantage of those small business programs, and able to get a better interest rate. Shari, you will love this, but the SBA... I think for purchases of commercial space, tend to - there's certainly a dollar cap on that and how much they'll do towards a building purchase. The really interesting piece is that if you're doing any renovations and want to use SBA funding for that, they actually have a number of things, criteria, you have to meet in order to qualify for a small business loan to do a renovation project. And one of those things is actually committing to have some sustainability improvements to whatever property you're purchasing.

So we actually did an audit on the existing building we were buying, the current space where Eurasia Group is operating in New York, and basically had our architects kind of work up a plan where what are all the places that we can do energy saving initiatives, right? So everything from putting LED lights in to getting a very efficient HVAC system in place, and then conducting essentially a sustainability audit that said, "Hey, we're going to manage to save 15 to 20% in our energy usage when we move into this property after it's been rehabbed."

So, I think you're going to see a little bit of that. I wouldn't though underestimate the ESG and green financing push and impact. I think thus far, you still see it mostly being driven by city requirements, right? It's a balancing act in terms of you want to be attracting businesses to continue operating and running and having their offices in your metropolitan area, but also, asking them to kind of live up to some of these new sustainability standards that we're seeing. And all of that, in a lot of ways it can save you money in the long run, but it certainly can exacerbate the pricing and budgeting issues that go into kind of building up those construction plans from the get go.

Shari Friedman: And Dan, kgoing back to you, I know that real estate investing is not just about buying an individual home, but that many investors have money in their portfolios going toward real estate. Any risks or benefits to flag there?

Dan O'Donnell: Yeah. Shari, before I hit that directly, I want to take us back just for a second to the commercial real estate sector more broadly, because I think we'd be remiss if we didn't just talk about industrial for a minute, because that is away from office really one of the topic de jours. I mean, when you think about the pandemic, without a doubt, it's shifted customer preference to online shopping, right? This e-commerce secular trend is something that we've identified years ago, but it really was exacerbated or accelerated by COVID. And as you think about that and you think about what Amazon has done, right? Consumers now expect real time or next day delivery, but the shipping and the warehousing associated with that, it's necessitating larger, more sophisticated, and centrally located distribution facilities. And this is not a phenomenon that's just in the US. I mean, I've been all around the world. Whether you're in Asia, whether you're in South America, the US or Europe, this is a global phenomenon.

You look at e-commerce sales. They were about $870 billion in the US last year. That was an increase about 14% over 2020. But that was a 50% increase over 2019. So, you could see how quickly this is accelerating. And even after the pandemic, we expect eCommerce sales really continue to grow at double digit levels, somewhere in that, call it, 12 to 15% range annually, as the eCommerce really gains market share relative to brick and mortar retail. So again, this is a trend that was there before. We've seen it for years. But it's starting to accelerate, and it's certainly something that I think COVID has changed or accelerated buyer behavior. And I don't see that ever going back.

Another sort of interesting data point is really when you look at e-commerce sales and you think about demand for industrial real estate, so just getting into sort of the real estate aspect of this, eCommerce transactions require about three times as much space, right? So you need three times the warehouse space as a traditional brick and mortar retail, because just the nature of the storage, that space is less expensive to construct per square foot. But if you sort of dive into that, it means that 1% increase in e-commerce sales as a percent of the overall retail sales, it's really going to result in about 65 million square foot of demand for industrial space.

The other thing that we're seeing is that as retailers are looking to combat supply chain disruption, they're looking to do more onshoring, right? They're trying to store more inventory on shore to be able to combat prolonged delivery times. Prologis actually estimates that a 5% increase in inventories for US retailers would result in an incremental need of five to over 600 million square feet of industrial space. So when you think about the two factors, more onshoring which may be a temporary phenomenon but certainly something that's probably here for the next couple years, and then you think about just the more permanent shift from bricks and mortar to e-commerce, both of those trends are really lending themselves well to the need for more industrial warehouse development in the coming years.

The other thing I'll hit quickly is multifamily because again, this is another topic that is always on our investors' and our clients' minds. But I think the development of Class A multifamily assets is also going to continue to boom, especially in the Sun Belt markets that we've been talking about. The apartment sector is the largest and most liquid portion of the US commercial real estate investment market, and multi-families saw really the biggest increase investor interest last year, accounting for almost half of all US commercial real estate transactions. Now that we're about a quarter into 2022, we've already seen historically unprecedented demand around occupancy, and rents for multifamily continue to increase. I mean, net demand for market rate apartments totaled over 700,000 units nationally over really the trailing 12 months.

That's really 8% more than the previous high that was set in late last year, and I think it's something like 76% higher than what we had seen pre-COVID area. So really the numbers are frankly staggering, and I think this is in part to really young adults who are benefiting from a strong labor market, unprecedented wage growth, and they're really flooding the apartment market.

So, investing in real estate. So, one of the risks that we're paying close attention to is really related to the development incursion real estate more broadly and it's the rising construction cost. The rising construction costs are substantial. As we think about the onset of COVID and the high demand and limited supply that I've talked about several times, coupled with inflation, it's really led to dramatic increases in labor prices, steel prices, lumber prices. I mean, it is phenomenal the increases that we've seen. And it's important for investors in our mind to focus on developments in areas where that can be passed through in the form of rent, right? You need to make sure that as you're looking at this from an investment perspective, the rental growth that you can achieve, that you project you can achieve, will be beyond really the increases that you're dealing with, as it relates to construction costs driven by supply demand and materials increases.

The other thing that we also keep an eye on is really around guaranteed maximum price contracts. And again, this is not a panacea, it's not a solution to all things. But as we think about deals that we're looking at, investments that we're looking at, there are a number where we're able to come in at land bases that we believe are attractive or things that prices had been set from a year or so ago, where the project is at a stage such that the GMP, the guaranteed maximum price contract has been finalized and in many cases has been largely or fully bid out. And all of those in combination can provide protective measures for investors.

Shari Friedman: So it sounds like it's still a really hot market. And are we at risk of a bubble bursting and entering into another housing crisis? Particularly with rising interest rates, and the demand is going up for variable interest rate mortgages, which can be a slippery slope. What are your thoughts on this?

Dan O'Donnell: Yeah. Look, it's understandable to look at the current events taking place in the housing market and anticipate a crisis, right? I mean, we all have 2008 in our minds and remember what happened then. But look, rates have soared from their lows during the pandemic and demand for a variable rate mortgage is certainly gaining, which could be a slippery slope, like you said. However, I think there's strong data indicators which really do not support a bubble bursting scenario and rather support more of a soft landing. I think some of these I've hit on already, but these indicators really include sort of new family formation from millennials and gen Z, which is starting to ramp up. Strength in lending standards that did not exist prior to 2008, I think that's really important. If you think about the bubble of 2008, a lot of that was predicated off of weak lending standards, and I think that's something that we don't have today. We have much higher quality lending standards.

And then, I go back to the overall demand versus supply. So while there has been a record surge in prices and demand certainly was fueled by low interest rates during the pandemic, and that certainly could lead to some concern around a property bubble, I think the foundation for the housing market looks much more stable than it did back when we saw the collapse in 2008. I think this time around, the rise in housing prices has more to do with the lack of inventory and demand versus relaxed lending practices, which is really what has got into trouble before. So look, it's certainly possible that we'll see a pullback in the near term as interest rates rise, but I don't anticipate a collapse and I certainly think the fundamentals underpinning real estate are pretty sound. And so I think even if we do see a bit of a contraction, it'll be a very soft landing just because of the fundamentals.

Shari Friedman: We're going to have to wrap up. I'd like to get some final thoughts from both of you. And Cassandra, starting with you, are there any trends that you're seeing in real estate that the average listener should be looking out for and perhaps we haven't touched upon here?

Cassandra Spratt: Yeah. I mean, I really think ultimately, especially looking at the commercial office space, just keep an eye on those return to office policies, right? I think we can see the impacts of those. The financial sector, particularly financial institutions in New York, have been pushing pretty hard for a full-time return. You can see those numbers have dropped significantly in San Francisco and the Silicon Valley, and their numbers are around 30% reentry down there. So I think a lot of that's going to drive where we actually see the office rebound coming in, right? I was on a COO forum call at the beginning of the year when DC and New York were kind of just coming off of dropping their mask mandates and we were rolling out some hybrid and 50% return to work options, and imagine my surprise to hear from my colleagues who are based in the Sun Belt states talking about being back to the office five days a week in May 2020, right? So I think we see why those markets are rebounding so quickly, especially in the commercial space.

I think the biggest thing that we're really going to see is that companies are not going to stop getting office space. I think the stuff that's really going to suffer is those kind of subpar classes, maybe stuff that hasn't been updated in a while, older buildings that haven't been retrofitted. And as Dan mentioned, that's getting very expensive to do with construction now. So, I think the luxury and Class A stuff just continue to do really well. It's going to keep driving those lease amounts up. What I think we're going to see drop is kind of the price per square foot, right? So as companies are expanding, I don't think we're going to see the increase on a per person square footage go up at the same rate that it would have in the past.

Seeing a lot of sort of options for who gets a full-time desk to themselves kind of depends on how often you're going into the office. And then, what's the ratio of kind of headcount to desk for a hotel desking situation, right? And Shari, as you and I have talked about, that's definitely got some positive impacts for sustainability, right? When we start having these requirements, which I'm seeing more and more of, from our clients these days to talk about our sustainability practices, kind of our office space and how we're utilizing it and how many people we have in here, there's a little bit of a benefit to having kind of more people able to utilize the space. I think we're just going to see them coming into the office less often. I think we're coming back, but it's going to be slow, and I don't think that we've seen the end of the pandemic's impact on the sector.

Shari Friedman: So Dan, your final thoughts on just sort of looking forward where the real estate is now and where is it going this year. What advice would you give to those trying to invest?

Dan O'Donnell: Yeah. And I'll just maybe bring the conversation upper level, but what I would say is that I think investors need to understand the impact of COVID, and not the short-term impact, but the long-term. So when you think about 2022, I think it's ramping up to be a good year for investors, but it's those that really understand that the trends that are being accelerated or areas that are being impacted negatively by COVID. Volatility, which is really what we've seen over the last 12, 24 months, typically presents a lot of opportunities. It sometimes presents the best opportunities for investors that are so well-prepared.

Dan O'Donnell: Conversely, it can also disadvantage investors who react negatively, don't anticipate, and are less familiar or ill equipped to deal with sort of the fundamentals of the real estate space. But I think these challenges overall, look, they always create winners and losers. That's what volatility does. But I think if you're paying attention to the trends, to long-term fundamentals, right? Look at the data, look at where you're seeing the real demand, where you can see rents increases, whether that be by geography, sector, property type, whatever it may be. I think investors that are really looking at the fundamentals, they should be well-positioned to persevere in the coming years.

Shari Friedman: Thank you so much. That's Dan O'Donnell, Global Head of Alternative Investments at Citi Global Wealth, and Cassandra Spratt, Chief Operating Officer at Eurasia Group. Thanks for being here.

Dan O'Donnell: Thank you.

Cassandra Spratt: Thanks for having us.

Shari Friedman: And that's it for this episode of Living Beyond Borders. Stay tuned for upcoming episodes. This season, we'll also be looking at the US-China relationship, global supply chains, and cybercrime. For more information, head to https://www.gzeromedia.com/living-beyond-borders-p..., or subscribe wherever you get your podcasts. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group. Thanks for listening.