During the last three decades of commercial real estate investing, KBS’ Co-founder, President and Chairman Charles “Chuck” J. Schreiber Jr. has steered the company successfully through a multitude of opportunities and challenges from the savings and loan crisis to COVID-19 and more. Chuck has a unique perspective on the industry that is honed by his outstanding business acumen and career-long accomplishments.
We sat down with him to tap into his deep understanding of the market, his take on its current challenges and what he sees over the horizon for commercial real estate investment.
Chuck, you founded KBS alongside Peter Bren and Don Koll in 1992 and served as its CEO for 23 years before taking on the role of president and chairman in 2022. What are some of the most notable commercial real estate changes you’ve witnessed over the last 30 years in this industry?
I’ve been part of the dynamic commercial real estate market through numerous cycles. One of the most prominent changes I’ve seen is the availability of widespread market analysis. For many years, all the market data came from a few large brokerage firms. Today, several sophisticated companies publish excellent, targeted market data that investors can use to make sound decisions. This has permanently altered the trajectory of the industry.
Today’s investors have visibility into net demand from tenants, trend overviews, case studies of competing properties, planned developments and more. At KBS, we take this information a step further by conducting our own market-level analyses in each area
where we invest.
We have boots on the ground with asset managers in each region who have firsthand experience and in- depth insight on these markets. Our commercial real estate portfolio, which is valued at close to $10 billion, consists of properties that are comparable to the assets we are considering, providing additional data for us to make effective investment decisions. This ties back to our core ethos, which is to serve investors first.
To do this, we maintain and track a list of at least 25 target markets where our team conducts thorough and continuous studies to understand each and every building we’re targeting. Rather than simply hearing that, for example, Charlotte, North Carolina, is a great market, we go into each target market, understand the tenants and familiarize ourselves with every detail about the area so we can deliver at the highest level for our investors.
Based on our approach, I’d suggest that we have better data than any entity that is not negotiating leases or dealing directly with tenants in the marketplace. We have a ground-level perspective on changes in the industry and a deep comprehension of market conditions that few other investment managers have.
So now that the entire market has better data and KBS has that boots-on-the-ground insight, as you look ahead to negotiate leases, what are some of the office amenities that are most beneficial to offer tenants?
Health and wellness are enormously important to tenants and investors today. We have understood this for a long time and have placed a strong focus on well- being at our properties.
I personally enjoy the gyms and fitness programs offered at our premier office assets around the country. That said, our commitment to tenants goes beyond these high-end amenities and services. KBS is also nationally recognized for the environmental and physical health of our buildings, with certifications such as LEED and Energy Star at many of our properties as well as UL Verified healthier indoor air and touchless systems in common areas.
We take our responsibility seriously in running our buildings so our tenants can be as successful as possible. Enhancing the health of our properties is a means to that end.
Moving back to data for a moment, how has technology affected commercial real estate over the last five to 10 years?
Technology has allowed our analysts and asset managers to run scenarios and financial models quickly and thoroughly, giving us both a bird’s-eye and a granular view of our portfolio.
For example, no single tenant occupies more than 10% or 15% of rentable square footage at most of our properties, which reduces downside risk if a tenant should leave. We are also careful to ensure our tenant mix is diverse among industries, so each property remains stable against industry-specific downturns.
This is important based on the complexity of activity across our assets. At any time, one or more assets will have dozens of dynamic scenarios regarding how tenants will lease space and how local market fundamentals will shift. Our high-level use of technology enables us to understand these shifts and make smarter investment decisions to manage risks accurately.
Because we work proactively to minimize risk, we’re one of the few commercial real estate investment managers that actively sells buildings whenever we determine the risk of holding is too high. In those cases, our strategy is to sell properties and return those proceeds to our investors or reinvest in assets that demonstrate lower risk and higher value. Our investors are always top of mind in every decision we make.
When you speak about KBS being one of the few managers who is actively selling buildings and really assessing risks, how does this forward-thinking approach affect your investors?
Our investment thesis and process enable us to position our assets to provide the best possible returns for our investors on a building-by-building basis.
For example, at one of our large Northern California properties, a tenant occupied 25% of the building and wanted to expand by another 30%. Upon completion of that transaction, they would have occupied 55% of the building and extended their lease. That tenant also had the ability to develop and occupy their own building down the road, which, in addition to increasing vacancy at our property, could substantially put a damper on its value. The risk of that scenario becoming reality was great enough to prompt our decision to sell the asset while its valuation was still strong.
This move protected our investors’ capital and appreciation in the value of the asset.
We believe this strategy helps KBS preserve and grow our investors’ capital for the long term. We understand that in many cases, the funds placed in our care comprise retirement savings that will give people financial freedom throughout their lives. KBS is vigilant over these investments. Our first responsibility is to our investors, and we always try to put their needs first.
You’ve been extremely successful in your career. Looking back, who have your mentors been, and how have they helped shape these strong opinions for you?
The three mentors who stand out for me are Ray Wirta, former president of Koll Companies and the Irvine Company, Donald Bren, chairman and owner of Irvine Company and Peter Bren, previous partner and past chairman of KBS. Peter passed away in 2019.
Ray was one of the smartest gentlemen I’ve ever known. I was fortunate to work with him for a number of years. He was simply unmatched in his management talent, business acumen, methodology and accountability.
Donald’s wisdom, tenacity and passion distinguish him as a true mentor and model. Instead of focusing on his new worth, he has always cared about the community at large.
This principle — attention to others — is what truly matters. It’s a remarkable trait in a businessman and one I have always admired, respected and strive to maintain in my own life.
Peter was a great thinker and understood all aspects of real estate investing. I was blessed to have him as a partner for close to 30 years.
Throughout your career and certainly since the inception of KBS, there have been several defining moments. Some of the top challenges that come to mind include the savings and loan crisis, the dotcom bubble, September 11th, the Great Recession and COVID-19. Many of these stand out in investors’ minds as well. As you look at those challenges, what do you take away from them and how have they shaped your own leadership?
These pivotal events have taught us that the commercial real estate industry is always changing. We cannot control this change, and in many cases, we were not able to anticipate it, but we can be prepared for it. Equally, these disruptors have taught us that while trends will vary among markets and some markets will recover differently than others, nearly all markets will eventually recover.
At KBS, we believe that well-located, high-quality office properties are positioned to fare well, especially when paired with a disciplined investment strategy like ours.
We know recovery will look different in each market across the country.
Current post-COVID-19 office occupancy by employees is being reported at approximately 60% on average, yet it’s as high as 90% in some markets. It’s important to also consider how these numbers compare to actual leasing activity. Companies with hybrid and/or remote policies still need space to accommodate all team members when they come to the office — activity that is poised to further boost occupancy averages.
Beyond the data, the reality has set in, and most CEOs now realize that while remote work has value for some workers in certain job functions, there is tremendous value in having teams together in the office.
In-office schedules help companies maintain a supportive and cohesive culture and a level of training that is just not possible in a remote environment. The ability for senior talent to teach and mentor younger team members face to face is invaluable.
KBS is helping tenants find solutions to these issues while also committing capital to freshen up lobbies, outdoor space, parking and common areas — all part of our dedication to support a healthy lifestyle for our tenants.
Let’s dive a little deeper into what you see ahead in the office sector. As people are coming back and reconnecting with the office, what changes do you expect to see in that space?
There is renewed energy in the office sector because companies and owners are investing capital to bring these spaces to life in a new way.
In addition to KBS’ commitment to continually improve our buildings, we are seeing tenants commit substantial capital to improve their own spaces. Investments are being made in tenant lounge/ reception areas, coffee bars, restrooms, etc.
These tenants know that as people come back, they will notice the improvement and feel more comfortable and more accommodated than ever before. It is important that employees are proud of their office environment.
In addition, as interest rates rise, we expect to see continued demand for multifamily properties near premier office properties. Many people who can’t afford to buy a home because the cost of debt has risen so much will be looking for high-quality multifamily properties close to where they work. The call for apartment homes across the board is growing louder, and where there is high demand for Class A apartment homes, Class B assets can be redeveloped or refurbished to provide great places to live.
We also anticipate increased demand for office properties in business centers with well-run public transportations systems that make commuting easy and convenient for building occupants. This trend will have the potential to positively impact property performance.
Further, we expect office users’ need for flexibility in space usage to be a growing trend. In today’s business climate, flexibility is essential for office users, which is why KBS has created a successful spec suite program designed to provide turnkey space for smaller companies that are interested in growing. We also offer co-working space in some of our properties that can accommodate tenants with changing space needs. Since most office tenants will want to expand their staff within their suite by 10 to 15% upon move-in, it’s important for our tenants to know what flexibility exists within their lease terms as well as what space is available within the building that might meet their future requirements.
As both KBS and your tenants are committing capital to spruce up office spaces, how are you seeing ESG initiatives evolve? How important are they to you, and where is this headed?
ESG initiatives are a major focus for us at KBS and a growing movement in the office sector. The companies that own, operate and occupy commercial real estate have an opportunity to effect true positive change in the environmental, social and governance realms with these initiatives.
Our company recently established a dedicated Green Team and appointed a new ESG manager, Apaulo Malloy, to direct our ESG efforts as a proactive strategy to drive us toward a sustainable future.
I believe the business community needs more education, research and sophistication regarding ESG. We need better data to help us reduce petroleum products, establish alternative energy and achieve net zero carbon emissions by the established deadlines. I have faith that we will reach these goals if we harness our creativity and innovation to develop new solutions. As we approach this challenge, KBS will be looking to raise our game in the ESG scope as well.
Speaking of new solutions, many of them may be coming in from the next generation of leaders. As the commercial real estate industry faces our current challenges and opportunities, what is your advice for this next generation of leadership?
I encourage young people entering the commercial real estate industry to consider diversity in their career. Pursuing work that teaches them about a variety of areas in our industry, including construction, property management, leasing, finance and engineering, is key.
All the sectors of our business contribute to overall investor returns. It’s important to fully understand the challenges to all these sectors. For example, what’s happening in the financial market today is impacting the banks and life companies, which need to continue as active lenders. Nurturing relationships with those businesses will make young people more well rounded and serve them well in their careers.
A good example of this would be someone who begins their career in construction and engineering. There are so many aspects to developing a building. They will understand the simple importance of the entire development timeline. The developer in the current market must decide whether to postpone construction and modify the bank loan that is ready to fund immediately or take another course of action.
A young leader who has lived through these challenges will better understand how to create meaningful and workable solutions for our industry.
Having career diversity versus doing just one thing at a company can open doors for young people as they grow in this field. Comprehending how all these separate parts work together cohesively makes commercial real estate professionals more valuable and can ultimately drive a long and successful career in this industry.
From the lens of someone who has been in the industry for as long as you have, what do you believe distinguishes KBS from other commercial real estate investment managers?
From a strategy perspective, KBS takes a unique approach to acquisitions that allows us to identify and add to our portfolio properties across the country that are best positioned for strong returns — sometimes even before they go on the sale block.
Within the markets we track, we focus on roughly five to seven primary target markets. Our pool of market- specific asset managers located around the country identify buildings they want to buy in those markets — even buildings against which they’re currently competing. We have approached those property owners and informed them that we are interested in buying their building, and we may acquire a few assets per year successfully with that strategy.
Of course, we are nimble enough to change our strategy as needed. Among the 18 buildings across the country that we’ve targeted to buy, we may not attempt to purchase any of them for three or four years — or we may be considering an entirely different set of assets by then. Because we’ve been in this industry for three decades, we understand how markets can change.
Ultimately, though, I believe what sets us apart from other investment managers is our unwavering concentration on what’s best for the investor. While we’re in this industry for the long term and are not in the business of quick turnarounds, we are also willing to make changes to our portfolio and our strategy as necessary if it will benefit our investors. This philosophy has carried KBS through three decades of success, and it will continue to drive our company moving forward.
You’re a leader who runs a large, highly sophisticated and successful company. What is your personal advice for finding fulfillment in work? And as people are coming back to the office, what do you see personally that’s going to make work and humanity work together again?
First and foremost, since we are working for our investors, our goal is to be able to provide returns to our investors that exceed their expectations. To deliver a report that shows them what we have accomplished for them is incredibly fulfilling. And we are able to do it because of our extraordinarily talented, creative and tenured team, some of whom have been with KBS for 20 years. Our team is dedicated, passionate, enthusiastic and operates at the highest level of integrity. Their passion for the investor is quite remarkable. They are the reason why what we do at KBS is so rewarding for me and has been for the last 30 years.