The Outpost Economy

When major corporations mandated large swaths of their workforce operate remotely, many employees relocated to areas more desirable to them. Perhaps closer to family, or lower rent, whatever the case may be the trend has drastically changed the commercial real estate outlook. In this episode, we talk about what we see changing and how we've adjusted our strategy in the asset class.

Transcript

 Ryan Swehla:
The last thing an employee would want to hear from his employer is, Hey, I don't need you to come to work. Why don't you move to Austin, Texas?

Speaker 2:
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Joe Muratore:
Welcome today. We're going to talk about what we see as the outpost economy. This is a hub and spoke trend that we're seeing with companies, especially as employees are leaving primary markets and going into secondary markets, and we're going to talk about what's prompting that. We're going to see it from the employee side, the employer side, and from the real estate side.

Ryan Swehla:
So what's interesting about this is I think we all have seen this, I don't want to say Exodus, but we have seen a movement out of primary markets. We like to call that the untethering. So all of a sudden these employees who before were told, come to work every day, report to the office. And so you could only live so far away. All of a sudden they said, no, work remotely.

Joe Muratore:
Yeah.

Ryan Swehla:
Disperse. And we've all seen this trend, but what does that mean? What does it mean for the future of work? What does it mean for the future of this work-life balance? I think with COVID, all of us have reflected a little more on what's important to us, what's meaningful.

Joe Muratore:
It's kind of like an American theme being in search of a better life or in search of a better opportunity. It turns out about 30 million Americans move every year, but this year it's different. Millions and millions of executives and senior level people have moved and that's very unusual.

Ryan Swehla:
And so what does that mean? Well, first of all, for the employee, all of a sudden your employer has said, instead of I need you at work every day. They said, oh no, no, no, no, don't come to work.

Joe Muratore:
Yeah.

Ryan Swehla:
And so some employees have taken this opportunity to say, okay, well maybe I don't want to live in this geography. Maybe cost of living is too much, maybe my commute time has worn on me, whatever the case may be. Now, I can go live at Lake Tahoe or I can live in Boise, Idaho, or I can live Salt Lake city, wherever I want to and still have an ability to work for the company, but it's not perfect. At the end of the day, employers still have to say, is this a good equation for me?

Joe Muratore:
Well, a lot of these people are millennials that maybe are from somewhere else and have come to large urban areas, but now are thinking of getting married or starting families or imagining a life like they grew up with that's less urban and that's drawing them to other locations and greater lifestyles.

Ryan Swehla:
So at some point employers start readjusting and that's really kind of what we're talking about is what is the new work dynamic look like right now that people have dispersed out or some number of people have dispersed out into these secondary markets.

Joe Muratore:
When this was happening pre COVID, there's all those stories about Amazon's HQ2 and Google has had this and Apple's had this and a bunch of companies who've had other locations, but now there's this pressure for companies to follow their workforce almost to create a menu for them, create remote work locations to work from home sometimes, to work at headquarters sometimes. And so the question for both employers and employees is how does this shake out? What's the shift? What's the mix a year from now, five years from now?

Ryan Swehla:
And I think you mentioned in a Wall Street Journal article, that the last thing an employee would want to hear from his employer is, hey, I don't need you to come to work, and why don't you move to Austin, Texas? But now all of a sudden employers are recognizing there's economic value in that equation.

Joe Muratore:
Yeah.

Ryan Swehla:
I can have an employee that lives in a lower cost of living. They have a better lifestyle than they did living in a more expensive area, and I also see a benefit because I'm working with a lower cost structure as well.

Joe Muratore:
I think employers have seen the upside on this, which is there's a strong ability to save money. This wasn't probably their idea. They've had to react to a large part of their workforce wanting to be in another location, but I think at some point they began to say, hmm, one of our largest costs is staff, is our team, is talent. Some of our largest costs are real estate. How can this work in a way that both works for us and works for them?

Joe Muratore:
In a place like Silicon Valley where talent commands very high wages, now employers have the option to say, well, some of our people are going to work from home. Our best talent, they might want to work from an island somewhere and that works fine for us. Other people, we might have a Nashville headquarters and we'll be able to draw from a talent pool there and we'll have a headquarters location. And so it'll be finding the right employees in the right spot so that their costs is a value relative to what they produce.

Ryan Swehla:
And this is the outpost economy. This is this idea that instead of one campus, the Apple campus, for instance. Instead of one campus, all of a sudden employers are recognizing that I can have a small campus here. I can have a small campus here. And again, this is not a new trend, but what has happened is as employees have dispersed out, it made it all the more compelling to have those small campuses and other locations and disperse the headquarters.

Joe Muratore:
So I think this is a win for all parties. This is sort of a both and thing. At the moment, we're seeing disruption. Primary markets have significantly increased sublease space. There's increased vacancy, but I don't think it's permanent. I think that companies develop outpost opportunities, but they're growing. Companies are innovating and growing and I suspect that their headquarters will continue to grow as well. I know those buildings will be occupied two, three, five years from now. The interesting part is seeing what happens between now and then, but I think ultimately the buildings are full and outpost buildings are full. In the outpost location, that probably means development. And in the primary market locations, that probably means a 10, 12% reduction in rental rates. But there's an equilibrium there that's being found. Not yet, but it's starting.

Ryan Swehla:
Absolutely. So one of the other ideas is this idea of hyper-local and hyper global and the outpost economy accomplishes that because on the one hand, it's hyper global because we are now connected in a deeper way than we were before. We've all become more accustomed to zoom meetings, to other ways of interacting besides in-person. But then it's also hyper-local in the sense that instead of just these primary markets being the place of choice for people to go to, all of a sudden this untethering opens up Tucson, Arizona, and Twin Falls, Idaho, and all these smaller markets that otherwise would not have been attractants to people who are highly professional or highly skilled because the skill set wasn't available there and now they can.

Joe Muratore:
So you layer on the slide that we showed earlier today, which is that highly efficient, high culture, high innovation companies, their workforces want to be in the office and the employers want to have them in the office because that's where culture, innovation and efficiency thrive. Dogs aren't barking. Tasks aren't need to be done. There's not outside influence. You are in the zone of accomplishing value add at that company. But companies that have poor corporate cultures, lower efficiency, lower innovation, their employees tend to want to work from home. So I think that's part of what we're going to see play out here that's layered on top of that.

Ryan Swehla:
In these markets that are recipients of these transplants, corporations are going to be looking at how do we set up our satellite office there? How do we create that office environment that is effective and productive now that there's, I guess, a critical mass of employees in that area to be able to do that?

Joe Muratore:
But it gives them more parts. It's almost like a Lego set. You need to find exactly that right chemistry for a headquarters, outposts, work from homes, globals, salespeople out and about. There's an exact right mix for that and that hasn't been fully discovered yet. That's being reinvented as we speak.

Ryan Swehla:
Yeah. And I think maybe a last side note is this is truly centered around cities that offer quality of life. So the biggest beneficiaries of this outpost economy, where there's a critical mass of people that have transplanted there are going to be cities that offer high quality of life. That's because this trend that we're seeing is a trend of employees opting for a new location, not employers and employers responding to that. So I think an opportunity for cities is also to ask yourself, what are we doing to create a quality of life that isn't attracted to these employees?

Joe Muratore:
Yeah. Really, this is a discussion of network or networking, and that cities are largely cities because they're a giant network of talent pounded people in the same spot with amenities and efficiencies and resources and the ability to collaborate. And that traditionally has been what makes cities grow and prosper and why people come to cities. With this dispersion, the network has been scrambled a little bit. There's pieces of the network that are now in different spots, and some of those are going to grow and thrive and some of those are going to be challenged and not make it, but it'll be a little bit different than it is.

Joe Muratore:
I think overall, this bodes well for the world and for the American economy and that it gives more people more opportunity to participate in primary market activities. And overall, I think that will make America more productive and successful.

Ryan Swehla:
It's the new American frontier, the outpost economy.

Speaker 2:
Thank you for listening to Durable Value, an investor's podcast, where we demystify commercial real estate with safe, sound, investment strategies to help you balance your portfolio. If you enjoyed this podcast, be sure to rate it on iTunes or wherever you get your podcasts. To learn more, visit crucetapartners.com, where you'll find more information, investor's tools, case studies and more. This podcast is hosted by Joe Muratore and Ryan Swehla. It's produced, edited and mixed by Melodic with intro music by Ian Post. Thanks again for listening and we'll see you next time.