The Investment Scientist

Reducing Risk Exposure to Real Estate

Posted on: May 18, 2023

Today I had a conversation with a friend of mine who recently participated in a conference with the mayor of Washington, DC regarding the dire state of the office rental market. The bottom line is that people love working from home, they are not coming back to the office after the Pandemic as initially expected. This means that companies and even government branches are not renewing their office space leases. The ones that do need a much smaller footprint. Developers are considering converting office spaces into residential homes, but that’s easier said than done since office buildings are constructed differently. 

On top of that, most real estate companies use debt financing and since last year, the financing cost has skyrocketed, thanks to the Fed. They are really caught between a rock and a hard place.

Most of my clients’ portfolios have about 7% exposure to the REIT (real estate investment trust) market, which comprises residential, specialized, commercial, industrial, office, and medical real estate. It’s a small consolation that the hardest-hit office sector accounts for only about 10% of the REIT market. However, all sectors are suffering from higher borrowing costs. These conditions are unlikely to improve soon, therefore I decided to reduce the exposure from 7% to 5% in our firm’s model portfolio.

Feel free to schedule a meeting with me whenever you have any thoughts, insights or concerns about this market and my decision:

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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