Office is dead – change my mind

Written by Tyler Kastelberg

April 24, 2022

Happy Sunday!

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 …

  1. Office investing is capital intensive (lots of TI and capex …)
  2. Dynamics with markets can shift against you systematically (example, COVID)
  3. It’s a commodity, sort of. Yes, you can differentiate your building with a pretty lobby, but your options are limited.
  4. 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.”
  5. 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.
  6. 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.
  7. 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. 

Before you go! 🎉 … if someone forwarded this to you and you liked it, subscribe here. You can also use that link to view our archive.

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