We’re now well into the development stage of the real estate cycle—even though commercial vacancy rates are higher than average in many markets this late in recovery. Construction activity is still only about half the last peak, a healthy sign of still somewhat restrained lending, but tenant demand remains lackluster. Office developers and their money partners probably properly calculate in many cases that their new technologically-advanced product can lure tenants out of last generation properties, creating value above project cost.  It’s the older buildings, losing tenants to the upstarts, which will likely suffer the consequences of demand anemia not the new projects. And the lower down buildings stand on the quality pyramid, the greater the risk of obsolescence fatigue setting in followed by value erosion.

So that leads to wondering about why some investment managers are paying record price-per-pound amounts in New York, Los Angeles and San Francisco for older product in fringe, but hopefully up-and-coming, downtown neighborhoods. And when I mention older product we’re talking 80- and 90-year-old buildings. Would not these investors be better off at this stage of the cycle developing new rather than making bets on restoring really old?

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