When I went to my old banker Glenn in the 1990s with one of my early mobile home park deals he admonished me "why don't you invest in things more respectable like office buildings?" To Glenn, mobile home parks were junky and not on the level of office buildings, which he admired. That was 30 years ago. Mobile home parks have steadily risen in value over that time while office buildings have plummeted. Check these current office building sales out:
"Williams paid only $147.5 million for 470 Park Avenue South, an historic, 300,000 square-foot property that takes up the entire west blockfront between East 31st and 32nd streets. The sellers were Steven J. Pozycki's SJP Properties and PGIM Real Estate, a Prudential Financial affiliate — which bought it for $245 million in 2018. Eastdil Secured's Gary Phillips and Will Silverman advised the sellers. However, the low purchase price paid by Williams doesn't necessarily reflect the recent market phenomenon of bargain-basement deals as notoriously epitomized in the $8.5 million sale of 135 W. 50th St., which previously fetched $332 million".
So how can it be that a $332 million office building in Manhattan would one day be worth $8.5 million while an average 100 space mobile home park in Denver can eclipse that amount today? Where did Glenn go wrong? The answer is simple.
The danger of changing tastes and technology
Let's be honest: nobody likes going to the office. They never did. But that's what society demanded in the 1990s and Glenn just figured we were all stuck with that lifestyle in perpetuity. He never predicted that the barriers would come down and going to the office would become optional. And certainly, nobody ever saw the internet coming back in the 1990s. But the combination of those two factors spelled the end of demand for office properties. However, Glenn should have appreciated the fact that office space really was at risk in some ways (the desirability of locations changes over time, Class A buildings become Class B over time, etc.) while housing has no such alternatives. While mobile home parks are a basic human need that hold the #1 position of affordability, office buildings always were really just a luxury that had threats to its very existence even back when it was considered a safe investment.
Pretty things often don't make as much money as uglier things
One of Glenn's big mistakes was to have this mindset that valuable things are pretty and lesser things are ugly. While that may be true in cars and fashion, income properties are, deep down, really only as good as the income they produce. When it came to office buildings, people lost track of this fact. They would see this big, towering monument of glass and marble and they immediately thought "that's a great asset". But the truth was that, all along, office buildings weren't really that great a bet. Look at the downtown areas of many older cities – such as Detroit – and you'll see that the natural evolution of office buildings yields often abandoned hulks. For every popular office in Manhattan there are 100 in other markets that are abandoned and covered in graffiti. Meanwhile, mobile home parks – although not the best-looking thing on earth – have steady revenues, lower expense ratios, and have no record of ever being obsolete.
Going with the herd vs. daring to be different
One thing about Glenn: he always followed the pack. He lacked the confidence in making loans to be a pioneer and would be the last person to take a risk. So having a love affair with office buildings was easy as all of his peers shared this same affection. Meanwhile, mobile home parks were a much more dangerous concept to Glenn because nobody else liked "trailer parks" and he didn't want to leave the safety of the pack. It's the same theory that the late Sam Zell so eloquently talked about in his book "Am I Being Too Subtle" in which he urged real estate investors to "when everyone else is looking left, look right". Zell was a huge believer in contrarian thinking and it made him the largest owner of office buildings, apartments and mobile home parks in the U.S. It's important to note that Zell sold off his office buildings back around 2006 but never sold a single mobile home park. He had no fear of being different.
The law of supply vs. demand
One feature of office building investments is the complete lack of control over new construction. They are constantly building new office buildings everywhere. The weight of that supply has always caused a cyclical nature to that sector, which included the period in 2000 when most of the office buildings in Austin were vacant (hard to imagine today). Glenn probably never much thought about zoning and the endless risk of new office buildings going up, but as a mobile home park owner I can tell you that the lack of new supply of mobile home parks since the 1970s is a huge reason that mobile home parks have always been one of the healthiest types of income properties.
Conclusion
It's remarkable that office buildings have become so valueless in such a short span of time. I'm not sure we'll ever again see in American history a hard asset that could plunge from $332 million to $8.5 million in less than a decade. But that's what's happened. And retail centers and hotels are not far behind, and with similar flaws that caused their decline. I'm glad I never followed Glenn's advice to select office buildings over mobile home parks as an investment sector.