Before you send me an angry reply, I don’t actually believe office real estate is dead. With a 1-year-old at home, I very much cherish my time at the local WeWork, and I don’t anticipate that will change anytime soon.
However, I recently had a conversation with a freelancer at Bullpen who gave me a juicy diatribe against office investing in Chicago and Houston. The bullet points from our conversation are too good not to share, so I’ve dedicated this week’s newsletter to them.
BUT … I’m not irrational and know there are two sides to every story. Do you like investing in office real estate? 🏢 Reply to this note with your counterarguments, and I’ll share them next week.
Unfiltered with one of our freelancers … problems with office real estate in Chicago and Houston …
- Office investing is capital intensive (lots of TI and capex …)
- Dynamics with markets can shift against you systematically (example, COVID)
- It’s a commodity, sort of. Yes, you can differentiate your building with a pretty lobby, but your options are limited.
- Leasing decisions are emotional … if the CEO of your prospective tenant comes into the city a certain way, they may have zero interest in your property despite it being in the “right part of town.”
- New, “sexy” office inventory leads to “sweetheart” deals for fortunate 500 companies and a rush of “hip” companies moving to the new property. However, this creates a massive shadow inventory.
- In Chicago (and maybe other markets?), leasing commissions are paid by the square foot. Thus, the incentive for brokers is to get you a BIG deal instead of a GOOD deal.
- Unless you have a lot of new entrants in the market, leasing is very difficult.
That’s all for this week. As I wrote above, send me your counterarguments. I’d love to hear from someone who runs an office investment firm in Chicago and/or Houston.
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