Why I'm Investing in Office Buildings

To pick an investment everyone hates, you must look at office buildings. So, in keeping with the great investor Charlie Munger, here is why an investment in this real estate class won’t work.

1. More people are working from home. Downtown offices are empty or, at best, 50% occupied a few days a week.

2. Most office REITs have debt that will double their interest costs when refinanced in the next few years.

3. Many offices are not new, so the cost to get them to a standard acceptable to today’s workers surpasses any possible rent increases.

4. Many investors have considered converting offices to residential units, but it usually doesn’t work. 

5. When evaluating the buildings, there is no value given to the structure, only to the land.

6. Because of the surplus of space in the market, tenants are demanding that rents be decreased when it comes time to renew.

Here are the facts of what is happening now that seem to counter the six reasons not to invest in offices.

While more people work from home, most jobs require time in the office. Suburban offices are booming with increased term renewals at higher prices. Downtown big city offices that are aging are in trouble, however. People don’t want to be driving for 2 hours in a city to get to work. In many cases, however, the land is worth much more than the actual building ever was.

Converting an office building to residential requires a different skill set than running an office portfolio. Intelligent companies are selling buildings with no office or commercial future, not turning them into apartments.

While interest rates have increased, the best-of-the-office REITs have managed their debt so that the increases when mortgages are renewed are not company-ending. Tenants in suburban offices are accepting increased rents due to the desirability of the locations being acceptable to workers.

Office REITs have been beaten down as never before. Many are selling for less than 20 cents on the dollar. I discuss the two I’m buying in my next podcast.

Of the many lessons taught to us by Charlie Munger, the reverse engineering strategy is the most powerful. When deciding, document everything that could go wrong and challenge yourself to calculate the risk correctly. The bees have taught us that they seem to live in a world of calculating the probability that an action will lead to success or failure. We are best served to do the same before acting.

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