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There's no silver bullet for fixing commercial real estate's woes: Expert

As the American workforce continues to trickle back into the office, property managers and landlords are struggling with keeping tenants happy. The pandemic opened workers' eyes to the options of remote work, which comes with the comforts of home. Chase Garabarino, HqO CEO, joins Yahoo Finance to discuss how workers, property managers, and businesses are feeling about their current office arrangements and how property owners will have to transform their space to keep their tenants happy in this new age.

Garabarino reflects on what he has heard from his clients: "A number of our landlords are saying that when they're going to negotiate with their lenders, they won't re-negotiate beyond one year. The big thing if I'm a lender that I want to know is, are the people in the building actually happy? The demand side of the equation has significantly more leverage than they did before. You used to have to have an office because it was the cost of doing business, thats no longer the case."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JOSH LIPTON: So Chase, you have some unique insight that into property managers, landlords. I'm just interested what they're telling you right now. How is business for them?

CHASE GARABARINO: Yeah. And look, I think you've probably talked about this a little bit. I've seen it on Yahoo Finance, which really, you know, it's a tale of two cities, pun intended, with regards to commercial real estate. You know, you're seeing the flight to quality in the office sector. And the question around workspace in particular is not whether people necessarily want to work in person. I think they're just tired of working in product that's not particularly good.

So when you have a global event like the pandemic that no one really could have predicted or prepared for, everyone goes home. And they personalize their workspace to them. So the consumer expectations in terms of, you know, if I'm going to spend half an hour or an hour, however long your commute is, in terms of the environment that I'm going back to, they're just significantly higher.

So I think there's a lot of work to be done in terms of the current stock of product meeting the new consumer expectations. But if you meet those expectations, you know, we're seeing, particularly in New York, where you all sit, significantly higher rental rates. People value really good space. So we certainly have to work our way through the rate cycle.

It's going to be painful in terms of just how quickly the cost of capital has gone up on all these folks who have adjustable rates. But I think that's why where we sit, it's so much more important. A number of our landlords are saying when they're going to negotiate with their lenders, they won't renegotiate beyond one year. And the big thing, if I'm a lender, that I want to know is, are the people at the building actually happy? The demand side of the equation has significantly more leverage than they did before. You used to have to have an office because it was the cost of doing business. And that's no longer the case.

So I think it's going to be painful in the short term. But it's going to make commercial real estate significantly more customer-oriented, which I think will be a win for everyone.

JULIE HYMAN: Chase, what is the biggest factor in whether or not the tenant is happy at this point?

CHASE GARABARINO: Yeah, I think, you know, the part of the problem is that a lot of folks are looking for a silver bullet, right? And I think the problem that commercial real estate has to grapple with that almost every other industry has tackled-- right before this, I was watching the Taylor Swift segment that you all had on. If you remember what music went through, we used to have this kind of analog distribution method, where you would buy bundles of music, i.e. an album, and then distribution was tightly controlled. And the record labels kind of owned the supply.

And then the internet came along and consumers had all sorts of choice and freedom. And the music industry had to take a hit, and then ultimately they got into streaming, and they've started to become much more granular around individual preferences.

And commercial real estate is going through the exact same thing. We all have different requirements for what we need out of a physical space. And they need to be much more data-driven in terms of the types of amenities and things that are needed. You can no longer just look at the building across the street and say, great, it worked for them, we're going to copy it. The people that work at the companies in your building probably have different requirements than just being able to carbon copy every property.

So there is no kind of one amenity that's a silver bullet. It's significantly becoming about data-driven insights around the consumer as the customer.