The Swig Company LLC, a privately-owned real estate investment firm with a significant presence in several major U.S. cities, has been through many market cycles since its founding in 1936. Its roughly 9-million-sq.-ft. portfolio, largely made up of office buildings, includes the Grace Building in New York City, Penn Station in Newark, N.J., The Mills Building and The Russ Building in San Francisco and 444 Castro St. in Mountain View, Calif., among other assets.
With its portfolio concentration in major urban markets, The Swig Company had a front-row view to the disruption caused by the pandemic over the past 17 months, as well as tenants’ start-and-stop efforts to come back to the office. To get a better sense of how owners of urban office buildings are dealing with the unpredictable nature of this market cycle, WMRE recently spoke with Connor Kidd, executive vice president with The Swig Company. In the following Q&A, Kidd talks about the impact of COVID-19 on Swig’s portfolio performance, how the company is preparing its properties for tenants’ returns and Swig’s current investment strategy.
This Q&A has been edited for length, style and clarity.
WMRE: How has the pandemic affected your company’s office portfolio?
Connor Kidd: Leasing of new space abruptly stopped in March of 2020. In 2021, leasing activity has started to resume. We were fortunate to have a well-leased portfolio. Tenants with lease expirations between March 2020 and now have largely done short-term renewals to see what the future of their operations will be. A small number of tenants have given up their space.
WMRE: How were overall occupancy levels impacted?
Connor Kidd: With some tenants not renewing and minimal new leasing activity, vacancy has increased a little, but only by 3 to 4 percent, and rent collections have been pretty steady throughout the pandemic.
WMRE: How is the portfolio performing at this point in the cycle when it comes to those fundamentals?
Connor Kidd: Our portfolio was well-leased, with over five-year, weighted-average lease term, so we were in a fortunate position.
WMRE: Are your tenants coming back to the office if they went remote last year?
Connor Kidd: The vast majority of tenants are scheduled to return to the office between July 2021 and September 2021. However, with the rise in the Delta variant, we are seeing some tenants push those dates out. A return to the office has been faster in New York, followed by Los Angeles. San Francisco has been slower to return to the office.
WMRE: What strategies is your company using to convince tenants to return the office or sign new leases?
Connor Kidd: During the pandemic we achieved the WELL Health and Safety rating for our buildings to demonstrate that we take the health and well-being of our tenants very seriously. We also require all our staff and vendors to be vaccinated. We have an app call h3e that enables us to communicate directly with the occupants of our building and provide them with the latest health and safety resources.
WMRE: How is the WELL certification impacting tenants’ return to the office and lease renewals or is it too early to tell?
Connor Kidd: Tenants were just starting to come back to the office in a meaningful way and then the Delta variant caused a spike in COVID cases in July. Since that time, many employers are pausing their return plans to see how the Delta variant spreads.
WMRE: The Swig Company also has a flexible office division. Are you seeing a difference in demand for regular office space vs. flexible options?
Connor Kidd: Before the pandemic, tenants wanted flexible space to be part of their leasing strategy. The flexible leasing strategy will continue to be part of tenant plans for space, but it’s still unclear if the pandemic will be a catalyst for increasing the allocation to flexible office options.
WMRE: From an investment strategy standpoint, how did Swig deal with the disruption brought on by the pandemic?
Connor Kidd: We had an increased focus on the health and well-being of our employees and occupants of our buildings, but it did not change our overall strategy.
WMRE: Your company sold 300 Lakeside, an office and retail complex on Lake Merritt in downtown Oakland to TMG Partners last fall. How was the capital from the asset’s sale used or will be used?
Connor Kidd: That transaction started before the pandemic and was not related to the pandemic. We partially reinvested in the Lakeside project with the new owner. We expect to reinvest in new opportunities as they present themselves.
WMRE: What is Swig’s portfolio strategy at this point? Are you planning to dispose of assets, acquire new ones, or focus on improvements to the existing portfolio?
Connor Kidd: We are looking to grow our portfolio—acquire assets—and will continue to improve our existing portfolio.
WMRE: Can you talk about Swig’s equity-raising strategy? Are you actively looking for new equity investors or more focused on your existing capital partners?
Connor Kidd: Swig is fortunate to be a well-capitalized company and plans to invest its own capital, but we look to bring in partners for opportunities that are suited to like-minded investors through institutional partnerships or joint ventures on individual assets. We are always interested in expanding our network of like-minded, institutional investors. For example, Brookfield is our institutional partner on The Grace Building in New York, and Rockpoint was our institutional partner on 300 Lakeside in Oakland, which we sold but retained a small ownership interest in.
WMRE: What is Swig’s equity structure? Who are your investors?
Connor Kidd: We are privately-owned, and we invest primarily from the company balance sheet. The Swig family members are our primary investors and shareholders, but we have worked with institutional and family office investors [largely on individual deals].
WMRE: What is Swig’s debt strategy?
Connor Kidd: Our investments involve moderate leverage, generally not over 50 percent.
WMRE: How do you communicate with the company investors? What sort of reporting do you provide? Has the pandemic changed how your communicate with them?
Connor Kidd: We provide standard reporting to the shareholders, but since they are family members, I can’t divulge the details out of respect for their privacy. For institutional partners on individual assets that Swig manages, we provide monthly reporting on the asset, as per standard industry practice.
WMRE: Is there anything you’d like to add about your outlook for the office sector?
Connor Kidd: There were a number of trends pre-pandemic—tenants were getting less dense and increasingly incorporating flexibility as a portion of their leasing strategy. I think those trends will continue. The new trend will be an increased number of employees working remotely part of the time. I see companies having the remote time for employees to accomplish focused tasks and then come together in the office for collaborative, team-building and cultural activities.
