Though the headlines remain mostly negative as the pandemic lingers and the election approaches, we remain optimistic that brighter days are ahead.
Office buildings are starting to fill back up albeit slowly. Rent collections remain strong and tenant defaults are limited. More of our tenants are starting to share their office reopening plans, a deliberate process but further evidence that the demise of a physical work environment has been exaggerated. We are experiencing increased leasing activity as new tenants are actively touring the market and existing tenants are re-engaging in lease extension discussions. By way of example, we recently signed a 7-year lease renewal for over 20,000 SF with a national law firm. They will retain their existing office footprint. Similarly, after a mostly quiet Q2 and Q3 we are re-engaging with a Fortune 50 financial services firm on a 10-year extension of their nearly 20,000 SF lease. The largest technology and life science companies in the world continue to hire new employees and lease new space, although at a slower pace as compared to pre-COVID. Amazon, by way of example, announced plans, in the height of the pandemic, to add 25,000 jobs within the Seattle suburb of Bellevue in the next several years. Other global companies such as Google, Apple, Facebook and Netflix have also expressed a long-term commitment to physical office space. We believe that the technology and life science sectors will continue to drive demand, benefiting core tech and life science clusters throughout the country including Seattle, the San Francisco Bay Area, West Los Angeles and San Diego. The major West Coast markets, while bruised in the short term, continue to have strong long-term prospects.
We believe that the trends of an ever-denser office environment experienced over the past decade will reverse in part as “distancing” becomes a more important social norm. Moreover, we, along with many companies, recognize the lost opportunity of spontaneous collaboration available in a traditional office setting. But some form of remote work is here to stay. Ultimately, we anticipate the desire for in-person teamwork coupled with the real benefits of a hybrid work experience will result in a net neutral impact to square footage for higher quality office. Differentiated office, more thoughtfully designed for the new normal, will become more important. Commodity office will continue to suffer. Office space will and has evolved and part of our personal adaptation will include more outdoor workspaces, floor plans that recognize the benefit of private and public spaces and further enhancements to building systems that provide for a healthier office environment. Many of our recently developed office experiences at Lakeshore, Mosaic and Ocean Ridge lean into this new reality.
A continuing trend is the rapid rise in demand for industrial space driven in large part by e-commerce and the continued dominance of Amazon in the marketplace. We have formally committed to a stand-alone industrial vertical as a complement to our existing investment program. This new investment vehicle will programmatically pursue core to value-add industrial properties of $10-100M in the highest quality markets in the Western United States. Similar to our commitment to building our residential vertical over the past decade, we see an opportunity to do the same with industrial as we build off the experience gained through previous entrepreneurial pursuits with partners in Mexico which has grown to a 30M SF core industrial portfolio. We are currently evaluating several interesting opportunities including an off market, 10-year sale leaseback investment in Los Angeles County with a value-add return profile (i.e., ~15% IRR / 2.00x equity multiple over 5-year hold). We’re also analyzing a variety of core investment opportunities with long term leases to investment grade tenant credit as an alternative to today’s lower yielding fixed income options.
Retail remains under siege but can’t be painted with a broad brush. Anchored retail with open and essential businesses (e.g., grocery and drug stores) have performed far better than most headlines would suggest. By way of example, rental collections for our “anchored” portfolio averaged almost 98% since the start of the pandemic. And leasing has picked up for a few tenant categories with fast casual restaurant activity especially strong for drive thru availabilities. We see a tremendous amount of value to be created within shopping centers via pad repositions. Retail is not dead but will continue to evolve. We will continue to search with a very selective eye toward stressed and mispriced (but not fundamentally flawed) retail opportunities where we believe our experience and hands on management and leasing provides an advantage in an increasingly dislocated marketplace.
Multi-family has held strong in most markets with our portfolio averaging 98% collections since April. Urban properties have been the most impacted as an elongated shutdown has made smaller units less desirable and, in some markets, the visibility of civil unrest, closed urban amenities such as restaurants, etc. has discouraged rental activity. We are also keeping a close eye on legislative trends as politics are playing an increasingly important role in our ability to collect rents, enforce evictions, etc. All told, we believe that multi-family will continue to be among the most resilient real estate asset classes, and we plan to be a long-term investor in the space. Despite the current disruption, our experience suggests that residential tends to bounce back the fastest.
Lastly, we are proactively engaged in tapping into historically low interest rates, actively refinancing almost a quarter of our portfolio with long term, trusted bank and lending partners. At a high level, we will fix interest rates at or near 3.00% for an average period of 7 years with moderate leverage. The debt markets continue to reward high quality product and portfolios and we will continue to explore options to place accretive and reasonable leverage to enhance cash flow while protecting against the downside of interest rate and maturity risk.
Though the impact to real estate associated with the pandemic, civil unrest, unemployment, and a contentious political environment is real, we remain optimistic that this too shall pass, and opportunities will emerge. The tougher times never last and we see real opportunity on the horizon as we close out 2020 and look forward to a more constructive 2021.
Partnership is never more important than in a challenging environment. We appreciate the faith you’ve placed in our team and look forward to the opportunities that change will bring.
Your partner,
