Howard Hughes CEO Paul Layne on why suburban real estate will thrive in a post-COVID world

July 19, 2020, 1:00 PM UTC

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When it comes to forecasting trends in one’s business, The Howard Hughes Corporation is practicing what it preaches.

Last year, the publicly-traded real estate development firm announced that it would move its headquarters from Dallas to The Woodlands, Texas—the master-planned community of more than 100,000 residents, located in the suburbs of Houston, which Howard Hughes itself owns and operates. 

While the company holds a diverse portfolio of residential and commercial real estate in both urban and suburban areas across the U.S., it is sprawling master-planned communities like The Woodlands that have fared the best during the ongoing coronavirus pandemic. Bridgeland, Texas—another of Howard Hughes’ communities, also located on the outskirts of Houston—set an all-time monthly sales record in May with 111 new home sales, according to the company. 

When Elon Musk floated moving Tesla’s headquarters from Silicon Valley to Texas or Nevada earlier this year, none other than Bill Ackman—the high-profile hedge funder who serves as chairman of the Howard Hughes board—publicly pitched Musk on the company’s “master planned cities” as a potential option.

These days, there are question marks over the future of living and working in high-density urban areas, and signs that a gradually aging millennial population is setting its sights on a more suburban lifestyle. And while Howard Hughes does own prime commercial real estate in urban cores—such as the Seaport District in Lower Manhattan, and the under-construction Bank of America Tower in Chicago’s Loop—CEO Paul Layne believes his company is primed to capitalize on these emerging trends.

“After America has been quarantined and sheltered in place for three or four months, people are starting to realize that they want to have a bigger house, or a house with a backyard,” Layne told Fortune. “They see the parks, the lakes, the amenities, the fantastic school districts, and 3% interest rates [on mortgages], and they realize they can have that quality.”

Speaking from his home in the Houston area earlier this month, Layne discussed the appeal of master-planned communities in the time of COVID-19, whether he’s nervous about developing a downtown Chicago office tower in the middle of a pandemic, and why he’s optimistic about the future of retail.

After years in which the prevailing trend saw young professionals flocking to live and work in urban areas, what do you think is driving some to migrate to a less dense, more suburban lifestyle? How much of that shift has been driven by COVID-19, and how much is a more natural demographic evolution?

There has been a shift. I think that as millennials age, get married, and have children, they start thinking about schools, open spaces, parks, amenities—and master-planned communities are suited to all of that.

I think that shift absolutely was already happening. But then you have a three-to-four month quarantine period in which people are cramped in their homes, and maybe they see the blemishes in their home or apartment. And they realize that with low interest rates, if they’re secure in their jobs, perhaps they can do better.

I heard a story recently about a couple living in a high-density urban center in the northeastern U.S. that decided they did not want to take public transportation anymore and wanted a change in lifestyle. So they Googled the best communities with open spaces in which to live, and they picked The Woodlands—28% of our 28,000 acres is open [green] spaces. They ended up renting one of our apartments, and are now looking for a home to buy. 

I think the pandemic has given people that push to make a change and think differently about how they’re living, and go to quality.

How has COVID-19 changed the way you’re approaching the development of certain projects, or how you’re operating certain properties?

First and foremost, the safety and security of our tenants, residents, customers, employees, and vendors is the most important thing. We’ve set up a “Welcome Back Task Force,” to welcome back our office and retail tenants and make sure that when they do choose to come back, that we’re going to do it in the safest way possible.

There are questions about what development will look like in a post-COVID world. Can it be frictionless? How will air filtration systems work? This applies for multifamily [residences], suburban offices, condos in Hawaii, retail. It applies to the 55-story Bank of America Tower that we’re opening in Chicago, which is now 80% leased during the pandemic. Things could shift and change from an architectural and technology standpoint.

We’re being patient, but we are positioning ourselves for the future also. We’re finishing, over the next three-to-four months, architectural drawings for three different new multifamily projects in three different master-planned communities, and we’re also working actively on the design and architecture for Victoria Place, our next high-rise condo in Hawaii. We are not starting any new projects yet, and I don’t know that we will start any this year; we take a very long-term view. But we will evaluate every possible best practice post-COVID.

You’re developing a massive new office tower in the heart of Chicago’s central business district. Are you concerned about the future of such properties, given our new work-from-home paradigm and the flight away from an urban lifestyle that you’ve described?

That site [110 North Wacker Drive, also known as the Bank of America Tower] was accepted as the best office site in Chicago when we started the project. The leasing velocity has been amazing; to open it 80% leased, if we do no other leasing between now and [its expected opening date in] October, would be phenomenal.

You’re correct that it is a very vertical project. I think companies will take steps to socially distance their employees inside their spaces. The office density you’ve seen in some urban markets with the most expensive office space—the benching, with long narrow tables where you’re elbow-to-elbow with colleagues—I believe companies will be shifting away from that, at least until there’s a [COVID-19] vaccine.

But I do think that lower-density suburban offices will also be popular for some companies. In December, we did the largest transaction in the history of our company, buying The Woodlands Towers from Occidental Petroleum [for $565 million] and moving our headquarters there. As part of that transaction, we also bought Occidental’s West Houston office campus: 63 acres of low-density office space, interwoven with lakes, green space, and amenities. We’ve put that campus up for sale, but for the right company looking for a lower-density campus, I think it would be a phenomenal solution. 

What’s your outlook for the retail sector moving forward? Large swaths of the retail market had been struggling for years even before the pandemic, and things appear to have only gotten worse.

We have more than 700 retailers throughout our portfolio, from Hawaii to Manhattan, and at one point almost all of them were shut down. We worked with each of our retail tenants individually through this; we want to come out of this with great relationships with our tenants. Many of them were able to take advantage of the government’s Paycheck Protection Program, but it’s been challenging. 

Being that most of our retail is typically inside of master-planned communities where people live, those people want retail to be part of a walkable experience—someplace where they can get out and gather as a community. Will retail change? Yes, and we’re engaged with our leasing teams around the country to understand what retailers are thinking and how they’re changing.

A lot of our retail is what we call “service retail,” servicing the everyday needs of the tenants that live in our communities. And that I don’t see being affected as much: grocery stores, hair salons, nail salons, dentists, doctors, exercise studios, restaurants. If you’re going to buy a pair of running shoes, most people I know want to try them on first. We try to find out what people want, and fill those needs—the services that attract and retain homebuyers, the people that rent our apartments and stay in our hotels.

While some segments of your business have done well, like many companies, Howard Hughes’ overall revenues and earnings took a hit in the first quarter as the U.S. economy felt the impact of the pandemic. How would you evaluate the company’s performance during this difficult time, and what’s your outlook for the future?

I’ve been CEO for about eight months now, and we had our best-ever quarter in the history of our company in the fourth quarter of 2019. And January, February, and the first week or two of March were on pace to beat that—and then the rug was pulled out from under us, and I had to make a lot of tough decisions quickly.

We shut down three hotels, we shut down the Seaport [in Manhattan], we went through dramatic temporary layoffs of our employees. We’re hoping that the business will progress and we’ll be able to get them back to work. A lot of decisions were tough to make and we made them, because we wanted to make the best decisions possible for our shareholders.

We’re excited about what’s happening. What we’re seeing is what America wants: the flight to quality in our master-planned communities. Coming out of quarantine, it’s very exciting. We will be positioned for growth when the time is right. We’ll be prudent and thoughtful about kicking off our next several projects, but we will be ready.

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