Learning From Retail: The Consumer-Driven Future of Office Space With Joe Brady, Real Finds Podcast #42 Transcript
Joe Brady: Ribbon cutting is just the beginning, because whether office owners and operators, or even big corporate occupiers, realize it or not, employees are the new consumers. The office space being provided needs to be thought of as experiential, as hospitality, rather than the old cubicle farm.
Gordon Lamphere: Hi, I’m Gordon Lamphere, and welcome to the Real Finds Podcast, where we interview key entrepreneurs, activists, and researchers shaping the real estate industry and, as a result, our world. On today’s podcast, we chat with Joe Brady. Joe is a commercial real estate veteran with extensive experience in both office and retail, including serving as CEO of the Americas for The Instant Group and as head of real estate for Walgreens. We discuss the evolution of retail compared to office, steps to building healthy businesses and business communities, rethinking metrics for workplace performance, and, most importantly, the keys to building the workplace of the future around effective principles and behavioral economics. It’s well worth a listen. Joe, thanks for hopping on the podcast today.
Joe Brady: Gordon, great to be with you. Thanks.
Gordon Lamphere: For listeners who don’t know you, tell us a little about yourself.
Joe Brady: I’ve been in commercial real estate for thirty-five years. I grew up on the retail side and worked every chair at the table in development: advisor, developer, and in-house as head of real estate at Walgreens, so I’ve been part of some of the largest retail rollouts. In the last couple of years I’ve focused on office. I joined The Instant Group in December 2019 thinking the notion of flexibility was on trend. Little did I know that with the pandemic it would become truly on point. I worked through the pandemic on flexible office, and once the pandemic ended, it was clear to me that the office asset class was having a retail asset class moment. I felt like I’d seen this movie already. I was curious about the underlying elements, and that gave me the impetus to do a bunch of research and write a book.
Accelerating Technology and Changing Consumers
Gordon Lamphere: We’ll get back to the book, but what are those underlying elements?
Joe Brady: Two key elements: accelerating technology and changing consumer behavior. The iPhone was only released in 2007. Not that long ago, and yet think about the impact this little box has had on our lives. A lot of it good, a lot of it bad, with societal issues we could discuss. From a consumer behavior perspective, we saw the idea of a shop move from four walls, a physical place you went to spend money, to an active verb, a thing we did irrespective of place. We still went into Best Buy, but we used our phones, took pictures, checked prices, and had the liberty to buy anytime, anywhere, delivered home or to a store for pickup. This idea of omnichannel retail, or e-commerce, went from idea to reality to the point where, of over three trillion dollars in US retail sales, e-commerce is fifteen to seventeen percent, and it’s stayed there through the pandemic with no sign of retreating.
There was clickbait back in the day about the death of brick and mortar, that no one would ever go to a store again, that we’d all be like the characters in WALL-E, sitting in our recliners drinking Big Gulps while everything came to us. Part of the myth is that we’re tribal, social beings who want to interact. What’s interesting is that Gen Z is back in retail stores at a level similar to baby boomers. Consumer behavior change continues at pace. Retailers who acknowledged changing tastes have done quite well; those that haven’t have become irrelevant. Consumers vote with their wallets to determine which retailers are relevant, and we’ve seen a dustbin of bankrupt retailers that didn’t cut it. Technology has also changed our expectations. Apple is now one of the most successful brick-and-mortar retailers out there, so much so that when malls report sales per square foot, it’s with and without Apple, because Apple’s per-square-foot sales are so high. Apple created a place of gathering with purpose and meaning, multidimensional: you could go to learn, to get questions answered at the Genius Bar. People lined up for hours and camped overnight for a new iPhone or Apple Watch. It’s astounding what some retailers have done, because they understand that consumers today want purpose, meaning, and connection with a brand.
Better Business Districts, Not CBDs
Gordon Lamphere: I loved the chapter on Apple and how they designed things, and I want to come back to what we can learn from that as people in office or other employee-driven asset classes. But what ultimately inspired the book? A lot of writers are looking at the shift toward not necessarily a better office, but a different office.
Joe Brady: As we’ve discussed, I spent thirty years in Chicago. I love the city, I’ve been to every nook and cranny, I was head of real estate at Walgreens, and I’ve been involved in the civic fabric. It’s my adopted hometown. I’m also seeing tremendous struggles in parts of the city, including the Loop. This has been an exploration, and I didn’t have this thought when I wrote the book, but having written it and now speaking about it, it’s really about building healthy communities. Forever, CBDs were the vibrant, beating heart, led by work in office buildings, with retail and food and beverage there to support work. What we’re seeing now is that a monolithic view of just work, absent live, work, and play, is leading to disastrous results in Chicago, Philadelphia, Washington, DC, the San Francisco financial district, parts of New York, though New York is an outlier and extremely resilient, and in Seattle, downtown LA, Portland, and so forth. Central business districts reliant predominantly on work rather than a live-work-play ecosystem are suffering.
Then there are other cities. Detroit got down to rock bottom, where residential lots were valued higher as agriculture than as residential. Dan Gilbert of Rocket Mortgage came in with his development company, Bedrock. Not every city has an entrepreneur who can put five billion dollars to work, but he did for his hometown, and it’s been extraordinary. Another example: a healthy community emerged in what was downtown Tampa, which was an afterthought. Jeff Vinik, formerly of the Magellan Fund at Fidelity, came in with Cascade Investment, Bill Gates’s fund, and envisioned a whole new downtown Tampa, generally referred to as Water Street. What we’re seeing are better business districts, BBDs, not CBDs. They make sense because they have the live, work, play component, 24/7, 365. In Chicago, go a mile and a half west of the Loop and you’re in Fulton Market, a beautiful example of a better business district. Google is there. McDonald’s world headquarters. I put a Walgreens in the McDonald’s headquarters building. CVS went in. You’ve got grocers. You’ve always had the hip lofts and residential and great restaurants, and now amazing hotels: Nobu opened there, and the Hoxton is super cool. That’s a stark contrast between a live-work-play better business district and the monolithic Loop, where Google is now trying with the State of Illinois building. Crain’s this week ran an article that lit up every building in the Loop that’s in foreclosure or on a watch list. So the impetus is to say we have a slow-moving car crash coming in the office asset class. Fifty percent of existing office leases expire by the end of 2025, and there’s two trillion dollars of mortgage debt against that space. We haven’t seen the beginning of how bad the office market can get. I’m raising my hand to say this is one man’s observation and we should be thinking about what it means. The mayor of Chicago has a hiring freeze and is laying people off. Now more than ever, we need public-private partnerships to start shoring up our world-class cities.
What Office Can Learn From Retail
Gordon Lamphere: You talk about how retail survived what many thought was a fatal blow in the mid-2000s and early 2010s. What are the biggest similarities between office and retail?
Joe Brady: The notion of obsolescence. I don’t think it’s fair to say with a broad stroke that the office asset class is going to fail. The obsolete and irrelevant parts are likely to fail. Jeff Blau of Related Companies was just on CNBC saying Hudson Yards is a hundred percent leased. SL Green’s One Vanderbilt, next to Grand Central, is a hundred percent leased at $275 a square foot. There are amenities, and people want to be there. The problem, using New York as the example, is that seventy-five percent of the office stock was built before the IBM mainframe, 1964. These are sixty-year-old, functionally obsolete buildings with floor plates too big to convert to residential. You can open an urban brewery or a vertical farm, but you’re not converting them, and for the most part you’ll have to scrape and rebuild, which owners don’t want to hear. We already saw this in retail. In the last ten years, over a hundred million square feet of retail was taken out of supply. Whole malls demolished and replaced with hotels and mixed use. Old Sears and JCPenney boxes converted into multifamily, Life Time fitness locations, flexible office. That creative destruction has been going on in retail for over ten years and still hasn’t settled.
What relevant retailers did was listen to their consumers. Consumers tell us everything we want to hear; the question is whether we’re listening. The office asset class got fat, dumb, and happy. It said, ribbon cutting, our job’s done. I argue ribbon cutting is just the beginning, because employees are the new consumers, and the office needs to be thought of as experiential and hospitality rather than the cubicle farm where we showed up at our assigned station and, because a middle manager saw us sitting there, we were deemed productive, which was a tremendous fallacy. We’re in the new-collar economy, where technology has untethered us from the industrial-era construct of going to a factory nine to five, which is what the modern office turned into. We have to be more creative about how office space is used for the workplace where work gets done. Is it necessary to be in an office every day for eight or nine hours? For some jobs and professions, yes. For the vast majority of the knowledge economy engaged in the keyboard economy, they’re voting with their feet right now: Mondays and Fridays super low, Tuesday through Thursday peaking. So there has to be a mandate for leadership to orchestrate the purposeful presence of people coming into an office, as opposed to passive attendance.
In my previous role, we did research concluding that if you lived in Westchester County and commuted into Midtown Manhattan, on average you’d spend eight thousand dollars after tax on commuting and food, and more importantly, at least two hours a day, ten hours a week, that you could spend with your children, your partner, sleeping in, meditating, exercising. Since the pandemic eased, people are making that trade. If I’m going to get on a train into Midtown, or a Metra from the western suburbs of Chicago into the Loop, there’d better be a purpose. If I’m going in so someone can say, glad you’re in the office, while I’m on Zooms all day, that’s not smart. We have to get together for collaboration and culture, but I don’t think you need five days a week to maintain culture. A mandate to be in is a neon sign saying, we don’t trust you. You were hired as an adult, but I’m treating you like a child. Companies have to get away from the management aspect and take a leadership approach to why people should come together. We use the term “on-site is the new off-site,” which means your time is respected, there are curated events, and hopefully a social aspect where everyone comes together. Just as e-commerce settled at fifteen to eighteen percent, we’ll see hybrid work at about the same level, if not more. And we’re all the same humans: voting with our wallets in how we spend our money, and with our feet in how we make it.
Consumer Primacy, Nudges, and Choice Architecture
Gordon Lamphere: We’ve had psychologists on and folks who’ve touched on behavioral economics and the office as a service, which is very different from how investors I’ve worked with saw office, which was: you build it, someone occupies it, maybe you move a couple of walls. How would you characterize office today, from the perspective of consumer primacy, which is an important case study in your book?
Joe Brady: I spent time digging into behavioral economics, which sounds funny from a retail real estate guy with an electrical engineering degree. Like most people, I read and saw Moneyball. I love Michael Lewis. But what I found most interesting was his response to that movie, a book called The Undoing Project. Lewis tells the story of a review of Moneyball, which was about Billy Beane, the Oakland A’s, eliminating biases, and focusing on data. The review came from Richard Thaler, a Nobel laureate at the University of Chicago, and Cass Sunstein, a professor at Harvard Law School, and it said Lewis was clearly channeling the work of Danny Kahneman and Amos Tversky. Lewis had no idea who those guys were, and it led to his next book. It’s a beautiful book, and I highly recommend it. From there it started a journey: if we’re talking about consumer primacy, we have to think about behavioral science and its extension into behavioral economics.
A couple of things emerged. Traditional architecture in the United States is a fifty-billion-dollar-a-year industry. Yet if you ask anyone whether they know what choice architecture is, they’ll look at you sideways. Part and parcel of Thaler and Sunstein’s work is nudges. I’m holding up Nudge: The Final Edition. They cover the basics of behavioral economics, biases and heuristics, how the mind thinks. Kahneman wrote Thinking, Fast and Slow: if I ask what’s one plus three, your fast brain says four; if I ask what’s 2,422 divided by pi, your fast brain doesn’t process that. Choice architecture is the environment in which people make decisions, and nudges are any adaptation of choice architecture that alters decision making. Two important points: it doesn’t limit or restrict the individual, and it doesn’t change their economic incentive. The choice architect’s role is to create environments that are ultimately beneficial for the individual. The most obvious example is a 401(k). You show up at a Fortune 100 company, and to not participate, you have to opt out. You engage in a painless forced savings program, and your employer matches it. That’s choice architecture.
Workplace professionals need to think about what nudges to put in place. There’s a fintech payments company here in Jacksonville, Florida, and the head of real estate told me excitedly, I had eighty-five percent attendance today. I asked how, and he said, I gave away AirPods. One day doesn’t make a trend. I wrote a paper called “The Nudge Is Mightier Than the Mandate,” and the challenge for corporate occupiers and building owners is to think about nudges such that people want to show up with purposeful presence: an intramural league where young people socialize, guest speakers, any level of curation. If you subscribe to the construct that employees are the new consumers, you have to dig deeper into what environments you can create that are good for them and good for the company.
Productivity Versus Effectiveness
Gordon Lamphere: One of the biggest challenges you discuss is measuring goals. I have a client who surveyed employees on whether they felt more productive, ninety-five percent said yes, and then billable hours were down. There are examples the other way too, where managers feel people aren’t productive but results are better at home. You mention productivity and effectiveness a lot. Can you speak to gauging results?
Joe Brady: Microsoft did widely distributed research on twenty thousand employees about the productivity paradox. Eighty to eighty-five percent of employees said they were redlining, working harder than ever, and eighty-five percent of managers didn’t trust hybrid and didn’t think people were working that hard. We’ve got a problem. It goes hand in glove with leadership versus management and effectiveness versus productivity. Managers drive productivity. In manufacturing, if you’re building cars, you want to be as productive as you can. But we have these conversations in a reductive, silver-bullet way, as if there has to be one answer. There could be groups within a company that can be untethered, hybrid, or remote and come together periodically. Ultimately, are you delivering results to the bottom line and the objectives of the company? A leader’s job is to lay out strategy, hire the right people, and get obstacles out of the way so they can be effective. If productivity means I sent a hundred emails today, and Gordon, my boss, asks whether any were effective, compare that to someone who sent five, four of which created a positive result. We have to look at metrics differently. Productivity is an industrial-era construct, and so much of the office and work right now is anachronistic. We worked in the fields, then the factory, then the office building emerged, and as technology continues on Moore’s Law’s near-exponential curve, it’s rattling our old ways of work. We’re flying the plane while reading the manual, which isn’t always safe.
There’s a high degree of confusion in corporates about who’s in charge. HR, IT, and corporate real estate all point at each other: aren’t you supposed to be running this workplace thing? There’s an emerging school of thought that the workplace experience executive belongs at the chief level, because HR was responsible for the company’s biggest cost, people; the real estate guy is probably the second biggest; and IT has a big budget too. In a hybrid world, people and places come together at random times. How do you build a healthy ecosystem of places for your most costly and valuable element, your people, to be as effective as they need to be? That’s questions around hub and spoke, and using flexible office space to give employees options to test working in a northern or western suburb. If you follow their behavior and measure where they go and how often, you get insight into where satellite offices could be. Again, ribbon cutting is just the beginning. There has to be ongoing monitoring and leadership.
Loss Aversion and the Fear of Change
Gordon Lamphere: The hardest thing is the leap of faith employers have to take. As someone who consults people on their future, loss aversion and risk aversion are such important parts of the human psyche. How has that played out in office and retail, with so many decision makers paralyzed by fear of making a mistake?
Joe Brady: It goes to the failure culture, or lack thereof. We don’t generally get rewarded for trying something and failing unless we work for a really special company. Loss aversion is powerful. If we had a hundred dollars and a chance to win fifty or lose a hundred, we’re not taking that bet. The pain of losing is twice the gain of winning. A couple of things are happening. Employees are engaged in loss aversion: they went from pre-pandemic work-life balance to an inversion, life-work balance, and now you’re telling them they’ll lose that? It’s even more pronounced because it’s about their families and lifestyles. And there’s a seeming loss of power from the manager’s perspective. I call them Dilbert managers in the book: where’s my red stapler? There’s a lot more work leaders need to do to make sure sub-leaders, not managers, are guiding their teams. People don’t work for a paycheck; they work for a purpose. They want to be associated with a company that means something, and if it’s just a paycheck, there are plenty of other places to go. Unemployment is low, and if you have a set of skills you can carry elsewhere, you likely will.
Change management, as you know from your consulting practice, is one of the hardest things. JPMorgan has call centers all over the world, including a two-million-square-foot call center in the Phoenix market. No one thought those people could work from home, and yet for about two years they did. The residential internet held up, there were no security violations or hacks, people were happy and more productive. That made JPMorgan say, maybe we don’t need two million square feet; maybe a million, maybe half. Unless and until there’s a shock to the system that forces people to pivot, the inertia is powerful. Between office and retail, that’s seven trillion dollars of inertia. But we saw a tectonic shift in the pandemic, and companies will have to keep grappling with how to change. Today is the slowest day of change for the rest of our lives. McKinsey says that by 2030, we’ll have at least five thousand quantum computers active, and a company called Atom Computing is on the verge of a thousand-qubit quantum computer, a billion times more powerful than a classical computer. If we think NVIDIA is frothy, wait until quantum happens in five years. If you and I started a company and leased office space, we’d probably sign a ten-year lease, and halfway through, the whole world changes again. That’s why building agility and resiliency into these asset classes is vital.
The Final Four
Gordon Lamphere: Let’s get into our Final Four. First: where do you see real estate going over the next ten years, with Moore’s Law driving change at an increasingly rapid rate?
Joe Brady: I’ll go back to the economic philosopher Schumpeter and creative destruction. We’ll continue to see space that becomes functionally and technically obsolete get scraped and rebuilt. Hudson Yards is only halfway built. There will be more One Vanderbilts. Blackstone put almost a billion dollars into Willis Tower, the former Sears Tower. The winners will be in healthy ecosystems, the better business districts with live, work, play. The monocultures of just work, the anachronistic CBDs, are going to feel an awful lot of pain before they rebound.
Gordon Lamphere: About a quarter of our listeners are brokers and real estate professionals under thirty. When you were starting out, what one minute of advice would you have given yourself?
Joe Brady: Be more brave and reach out to more people. At this point in my career, I speak a lot, go to student groups, and I’m on the board at the University of Florida’s real estate program, and I’m amazed at how many people don’t take the opportunity to come up and talk to an old silverback about the industry. The ones who do, and who are prepared, stand out mightily, like receiving a handwritten thank-you note. And a pro tip for young colleagues: even if you’re only supposed to be in the office three days a week, show up five, because in real estate, stuff always happens on a Friday afternoon. Being there to catch it gives you a competitive edge. But the first thing is to have more courage and gumption to meet people, ask as many questions as possible, and learn as much as you can.
Gordon Lamphere: We’ll link your book below, and we highly recommend it. Besides your book, what should someone interested in real estate, office, or the future of work pick up?
Joe Brady: There’s a biography of Trammell Crow, Trammell Crow, Master Builder, that I love and have gone back to several times. It’s easy to look at a visionary developer a couple of decades in and say he made it look easy. This book talks about the slings and arrows of how difficult the business can be. I find it helpful for myself and for young people to understand that this is hard, you’re going to have bad days, you need to be resilient, and you can only control what’s controllable, and an awful lot is uncontrollable. There are a lot of life lessons in it. I always say there are ten thousand reasons something can’t happen; I just want the five reasons it can. Optimism can take you pretty far.
Gordon Lamphere: We’re a very optimistic podcast. The whole philosophy behind the Real Finds Podcast is that the men and women in the arena know the best connections. Who should be the next guest?
Joe Brady: I’d recommend Walter Wahlfeldt, Wally Wahlfeldt, from JLL. He’s Chicago based at JLL headquarters, leads the retail practice, has seen dramatic change in the industry over the last ten years, and is one of the leading voices in and around retail.
Gordon Lamphere: We might even get him in the podcast studio as a Chicago-based individual. One final question: what’s the best way for somebody to reach you or learn more about your book?
Joe Brady: I have a webpage at joebrady.ai, and my email is [email protected]. The book, Work/Shop, is available on Amazon in hardcover, softcover, and Kindle. I haven’t done the audio version yet, but I may. Stop by the website for articles I’ve written and presentations. I just got back from Latin America, speaking on this subject at WORKTECH in Santiago and Lima, and we’ll have excerpts there as well.
Gordon Lamphere: Joe, it’s a great read, and thank you very much for hopping on the podcast today.
Joe Brady: Gordon, thank you.
Gordon Lamphere: Thanks again to Joe for coming on the podcast. If you enjoyed the podcast, please give us a like, a share, and especially a review. Reviews truly matter and help us continue to get quality guests. You can find us on YouTube, Apple Podcasts, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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