Cluck, cluck, cluck!
I’m guessing that you read the famous story Chicken Little when you were a kid, or perhaps you are reading it to your kids or grandkids right now. For those who haven’t had the pleasure, the concept is as follows:
An acorn falls on Chicken Little’s head, which leads Chicken Little to conclude that the sky is falling and she must tell the king immediately. Since life is too short, I am using the AI summary for the following paragraph:
“While running to tell the king, Chicken Little repeatedly shouts, "The sky is falling! The sky is falling!"
Along the way, she recruits Henny Penny, Ducky Lucky, Goosey Loosey, and Turkey Lurkey.
There is a grim ending where the fox tricks the birds, saying he knows a shortcut to the king, and lures them into his den, where he eats them.
And there is a child-friendly version, where the characters reach the king, who explains it was just an acorn, allowing them to return home safely.
The tale serves as a warning against spreading gossip, hysteria, and irrational fear without investigating the facts.”
So I read this article this morning in Bisnow:
AI Scare Trade Wipes Out Billions From Commercial Real Estate Stocks, Spreads to Office REITs
The phase AI Disintermediation was used, and there are a whole bunch of references to articles about jobs being lost. When I read the article, it sounded to me a lot like déjà vu all over again.
What I mean by that is that only a few years ago there was a big article about how many retail stores would close during or because of COVID, but there was no mention of how many retail stores were likely to open. The Real Estate Philosopher – ahem – made this exact point at the time, and it turned out in the end that more retail stores opened than closed. That meant that the media hype was actually creating an opportunity in retail.
Now we hear a constant drumbeat of information about AI wiping out jobs, but not that much drumming about how many jobs it will create.
Dare I say….Cluck, Cluck, Cluck.
So I’m taking the liberty of revising the foregoing headline as follows:
Media Freakout Over AI and Office Leads Savvy Investors to Scour the Market for Office Deals
Before concluding, I will do you a favor and skip my personal analysis as to what AI will or will not do to demand for office space – I mean how on Earth would I know? My guess is that it will shrink some demand and grow other demand. It will also likely hit some markets badly and help some markets a lot. I’m sure I don’t know and equally sure no one else does either. It is a mystery. However, I don’t think emulating Chicken Little makes much sense.
To be super clear about what I am saying here:
I am not recommending office because of the media hype. AI is going to change the landscape of most and maybe all industries to different degrees. The only sureness here is that we cannot predict what is going to happen.
However, I am saying that the media hype is going to over-scare away a lot of buyers, developers, lenders and other players. That means that those seeking capital will likely have to pay more for it. And also those creating office will have less competition from others. All of this will result in investors, lenders, sponsors and other parties’ odds of outperformance being higher in this sector.
As I have said a bunch of times before, the name of the game is to be Overpaid For Risk.
The AI scare in the office sector is giving you the chance to do exactly that.
Bruce Stachenfeld aka The Real Estate Philosopher™