They Lied to You About the Office Market

Moshe Popack (0:00)

How many times have you heard this? Office is dead. Dead. Not struggling, not changing, dead. Recent data shows South Florida has some of the lowest office vacancy rates among the largest markets in the country. So what happened? Did everybody suddenly decide to go back to the office?

No. The headline was too broad. Office wasn't dead. Certain office was in trouble. There's a huge difference. And one of the biggest lessons I've learned is that you cannot invest based on a headline. You have to invest building by building, block by block, market by market, because the numbers don't care about the narrative.

For the last five or six years, how many times have you heard this? Office is dead. Dead. Not struggling, not changing, dead. People are working from home. Companies are downsizing. Nobody wants office space anymore.

Banks don't want to lend on it. Investors don't own it. And listen, I understand where that came from. The pandemic fundamentally changed how people work. There were absolutely office buildings that got crushed. There were owners who bought buildings at the wrong price, with the wrong debt, based on assumptions that didn't hold up. But here's the problem I have with statements like office is dead.

Real estate is almost never that simple. And South Florida is giving us a really interesting case study right now. Recent data shows South Florida has some of the lowest office vacancy rates among the largest markets in the country. Rents in parts of Fort Lauderdale and Palm Beach are up significantly. In Brickell and West Palm Beach, the best buildings are commanding incredible rents. So what happened? Did everybody suddenly decide to go back to the office?

No.

What happened is something I've seen over and over again in real estate. The headline was too broad. Office wasn't dead. Certain office was in trouble. There's a huge difference. I've been doing this for a long time.

At YMP, we've invested in multifamily, office, assisted living, different markets, different cycles. And one of the biggest lessons I've learned is that you cannot invest based on a headline. You have to invest building by building, block by block, market by market. Because two office buildings can be three miles apart and have completely different economics. One could be 95% occupied with tenants fighting for space. Another can be sitting half empty. Same city, same asset class, completely different investment. That's why whenever somebody tells me Moshe, this asset class is dead, my first question is, which asset? Where is it? Who's occupying it? What's the basis? What's the debt? What's the rent? What are the operating expenses?

What's happening in that neighborhood? Because the numbers don't care about the narrative, and that's something my grandfather taught me a long time ago. The numbers don't lie. Now, does that mean I'm bullish on every office building in South Florida? Absolutely not. In fact, I think that would be just as foolish as saying all offices dead. What we're seeing is a flight to quality. Companies may need less space than they did 10 years ago, but the space they do want, they want it to be good. They want amenities. They want great location. They want restaurants nearby.

They want somewhere their employees actually want to come to.

And that creates winners and losers. To me, that's where things get interesting. Because when everybody wants the same beautiful trophy building, pricing gets aggressive. But what happens to the building down the street? What happens to property that's structurally good in a strong location but needs capital?

Maybe the lobbyist is tired. Maybe management hasn't been great. Maybe occupancy is 70% instead of 95%.

Maybe the previous owner didn't have the capital or the patience to reposition it. That's when operator starts asking questions.

Can I buy it at the right basis? Can I improve it? Can I create a better experience for tenants? Can I increase occupancy? Can I make the economics work without assuming everything goes perfectly? That last question is important. I don't like deals where everything has to go perfectly. Because in real estate, something will go wrong. Insurance goes up, taxes go up, your renovation costs more than you thought. Tenant leaves, interest rates move. There's always something. So when we underwrite, I want room for things not to be perfect. That's investing. And this whole office conversation reminds me of something broader. Some of the best opportunities happen when perception and reality become disconnected. When everyone loves something, be careful. When everyone hates something, get curious. Notice I didn't say buy it. I said get curious. There's a big difference. Contrary investing doesn't mean automatically doing the opposite of everybody else.

Sometimes, everybody else is right. It means being willing to do the work yourself. That's what I think South Florida office demonstrates beautifully right now. The market isn't saying office is back everywhere. It's saying good real estate still matters, location matters, basis matters, operations matter, capital structure matters, and quality matters. The only thing we have to remember is that South Florida itself has changed. Businesses moved here. People moved here. Capital moved here. Miami today isn't the Miami of 15 or 20 years ago.