You may have noticed that, paraphrasing Mark Twain's famous quote, it does now seem like that the death of office has been greatly exaggerated. Indeed, it is just starting to seem like there is going to be an office shortage coming up. Note the recent article in The Real Deal: Conversion surge turns office supply negative for the first time in 25 years.
I did stick my neck out several times over the past couple of years predicting exactly this in various articles. I admit my timing was off, but it is looking like I am going to be proved correct in the end. My latest article, just a few months ago, again suggested an office shortage would be in the offing. The same thing happened a few years ago when there was what was then called the "Retail Pocolypse." An article in the news said (shrieking in its headline) that 50,000 retail stores were predicted to close the next year. I remember writing at the time that the predicted numbers were irrelevant unless one also predicted how many stores would open during that time period.
Of course, the Retail Pocolypse turned into a buying opportunity since it turned out not to be a Pocolypse after all. I recall the WeWork frenzy when it was valued at $49B. I wondered at the time, and wrote an article, why every landlord wouldn’t have a co-working analog in their building. Sure enough, competition ended up knocking WeWork down, and co-working is now a viable asset class in and of itself. I recall way back when Brexit – do you remember that word? – was going to destroy London, and I predicted that London would be just fine. It was one of my first articles.
A few years ago, an asset class I had never heard of called "Life Sciences" was hyped up the moon, but then quickly became overdone and now is in the doldrums. I didn’t write about this, but I did muse about it at the time.
And don’t forget that the world was ending with COVID when the economy took a deep dive. I am proud to say I was the first one to create the phrase "Big V Recovery," and I (gulped hard) when I stuck my neck out to predict the Big V Recovery. I admit I did breathe a sigh of relief when I was right.
Okay, this sounds like I am bragging about my predictive ability in real estate, and maybe I am doing that. Forgive me – or don’t forgive me – but I was wondering myself, why am I right so often, as I wasn’t sure myself? Then it hit me. The reason is that I instinctively use the media as a barometer for my predictions. Breaking it down...and starting with the obvious stuff before showing how you can use it to your advantage...
The media is not evil or good. It just is. It is comprised of organizations and persons who vie for your attention. If they cannot get your attention, then they go out of business or get fired. And the way they get your attention is what is generally known as clickbait. It is something that draws your eyeball to at least look at what they are saying, and hopefully read the article.
An article that says that retail is challenged, which is to be expected during COVID since, after all, the stores are closed, is not really that exciting. But one that says, "Retail Stores Experience Largest Drop in Past 100 years!!!!" Well, that will grab your attention, won’t it?
Or, that "Office is a Four-Letter Word."
Boring news, even if accurate, just doesn’t sell newspapers. Yes, everyone knows this, but before you roll your eyeballs how obvious my article is, consider how you can use this to your advantage in what I advocate should be your quest to be Overpaid for Risk.
It is pretty easy to do. Just look for media hype and consider if this is leading to an imbalance between what is actually happening – or likely to happen – to a real estate asset class, and then go the opposite way seeking bargains.
Another way to say this is that the media can be a friend to the real estate investor based on the way it over-amplifies the perception of highs and lows.
To be clear here, I don’t advocate mindless contrarian investing. I advocate careful underwriting, but sourcing transactions and investments where the media is hyping up negativity. And of course, being trepidatious (a word I made up, by the way), investing, or even selling off assets, where things are being over-hyped over-positively.
Building on the foregoing, fear turns to greed in a market, and greed turns to fear, sometimes in an instant, based on media hype. In this vein, consider how the media keeps beating the drum of negativity on an asset class with phrases like, “Record Drop – No End in Sight” – etc. And then the writers of articles realize that readers are getting bored with that. No one is reading the articles anymore. Perhaps an article that says "Bottom Reached" might be just the thing. Then, almost immediately, things move the other way, just like the Big V Recovery did.
Today, consider the following thoughts about being Overpaid for Risk or the converse:
For office, my guess is that it is (almost) too late. I would still be looking here as there are likely distressed opportunities still available, but if so, they won’t last long, and the chances for major bargains have probably evaporated by now.
For data centers, my instinct is that since the media is hyping this up like crazy, I would be trepidatious here. Isn’t it a great word?
For plain old development investing, I admit the media hasn’t really been talking about it that much, but as someone who spends a great deal of time seeking funds for my clients, I see probably 90% of the investor world shunning development. This implies that the returns in the offering are higher than they should be.
For cities like San Francisco and Los Angeles, we in New York have heard a drumbeat of awful real estate news for quite some time. I wonder if those are places an investor should poke around now.
I am not sure it is a media hyped frenzy yet, but the push to invest in Sunbelt states – and avoid the other locations – is making me wonder if that might be just the way to be Underpaid for Risk.
Since this article is already too long, I will end it now by saying that instead of eye rolling and thinking negative thoughts about the media, it can become an investor’s and sponsor’s guidepost in being Overpaid for Risk if used correctly.
Bruce Stachenfeld aka The Real Estate Philosopher™