Are you paying rent for someone else’s investment mistake?

The Wall Street Journal posted an article today entitled Ambitious Targets.  This article is more of a brief, discussing the latest trend in office building investments.  After Blackstone Group bought Equity Office Properties and flipped most of its buildings – many of which are now on the market again following the Blackstone sale – the industry coined the term the “EOP Effect”, in which rental rates are raised to justify exorbitant purchase prices.  Is this something to fear or just regular market correction? The full article can be viewed by WSJ subscribers here – Ambitious Targets.

As a real estate advisor, I’m worried about this trend.  We’re seeing owners of flipped buildings raising rents significantly more than the market averages, likely much more than the market can support.  The biggest question I have is “who will be the victim?”  Will it be investors who let their greed and poor forecasting models drive them to a Windorphin rush as they irrationally outbid their competitors?  Will it be the tenants, who may find themselves forced to move out of their existing spaces upon lease expiration/renewal because they can no longer afford the extreme price increases, unjustified in markets that have a glut of suitable space to which they can move?  Or will it be the residents of these fair cities, as the rush to increase rents pushes businesses out of the central business district and possibly to suburbs or smaller peripheral cities, drawing jobs and economic stability with them?

Perhaps this is just a small phase and the media is blowing everything way out of proportion.  Maybe the landlords will see the errors of their ways and bring their asking rents back into alignment with the broad market.  Could it be that this spaces were simply below-market?  After doing a bit more digging, I found a July 2007 article from WSJ’s Real Estate Journal site – A Dearth of Space Stokes Red-Hot Office Market.  In this article, Jennifer Forsyth writes that a public company like Equity Office Properties Trust was sensitive to reporting building vacancy in its quarterly and annual reports, whereas private firms like Blackstone care more about the almighty dollar and can afford to sit on vacant space until the right tenant comes along.  Maybe, just maybe, this Chicken Little scenario that some brokers are crowing about is really just a fairy tale.


One Response

  1. Wow…Excellent post! Thanks For Doing this research for us…

    Real Estate Investor in South Florida

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