Why Office Real Estate Is Now an Alpha Market with Phil Mobley of CoStar Group

Phil Mobley (00:00)
long-term, is it going to be Marvel or is it going to be Matrix? And by that, I mean, you know, in the Marvel universe with the Avengers, right? So you’ve got Iron Man and his, ⁓ his compatriots are playing with holograms and they’re talking to digital assistants and they’re flicking things all around with their, with their

hands while they’re talking and engaging and collaborating together. So maybe AI ends us up in a place like that where we’re all doing that sort of work. And ⁓ it’s sort of a utopian Jetsons kind of world. Or maybe it’s the matrix where the AI is doing all the cool stuff and we’re doing menial tasks while we’re sort of, know, plugged in and generating electricity. But that’s long term.

Scott Bursey (02:14)
Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host Scott Bursey. And today Pros, we are injecting some critical high octane data fuel into your strategy. We are talking about market foresight, analytic mastery, and understanding commercial real estate at an institutional level. Our guest is at the Epic Center of Market Intelligence, bringing the precise fuel

needed to navigate today’s complex commercial landscape. Please welcome Phil Mobley of CoStar Group. Phil, welcome to the show.

Phil Mobley (02:49)
Thanks for having me, Scott. It’s a pleasure to be on.

Scott Bursey (02:51)
Phil, we’re fired up to have you here in the studio. And here at the Real Estate Pros podcast, we love to see where the drive comes from. For our listeners getting to know you, walk us through your origin story, if you will. How did you start and where are you putting your feel right now?

Phil Mobley (03:10)
Yeah, so like very many people in this industry ⁓ who I’ve heard answer this very question, I sort of fell into commercial real estate by accident. I came out of grad school as kind of a data analyst and a market researcher, spent some time outside the industry early in my career, but then became part of a consulting company that performed market research for commercial real estate.

I was there for about a decade, ⁓ became an independent consultant for a couple of years after that, then moved on to a Prop Tech Firm That was a lot of fun. was, I had two hats at that firm. was the head of research. So I continued to do market research data from clients, from external sources, as well as from the software platform that we delivered.

⁓ But then also I got to try my hand at product development and that was a really fun time where I had a little team of software engineers and I, you I don’t know software. I don’t know how to code, but I had a pretty good idea of the types of solutions our clients needed. And so we worked together to speak those business realities into existence in software. So that was a lot of fun for.

period of time right up until about 2020 and then of course the world changed. So after that I went to a commercial brokerage firm as a head of national insight for the US and then from there about three and a half getting close to four years ago became part of CoStar’s market analytics group as our national office sector analyst.

Scott Bursey (04:56)
Phil, what really caught my attention about you was the way that you’ve been able to translate CoStar’s massive amount of market data into clear, high-level investment strategies that guide institutional capital. know, Phil, that ability to find the signal in the noise is pure investor fuel.

Phil Mobley (06:05)
Well, sure. mean, data is only as good as the story that you’re able to tell with it and as good as the insight that you can have to act on it. Right. And so, you know, we, as a team of market analysts, we don’t recommend strategies or assets to our clients, which include ⁓ not just investors, but certainly that’s a huge portion of them. But what we do

is we take that data, contextualize it, construct a ⁓ narrative that allows our clients to understand what’s going on, where things might be going, how to see not into the future with clarity, but at least to see the direction of travel. And then, you know, their part is to, of course, connect what they’re doing, their strategy, their tactics to that narrative.

⁓ and make use of the data as something more than just a spreadsheet or a chart.

Scott Bursey (07:07)
a real sense of direction.

Phil Mobley (07:09)
Yeah, absolutely. ⁓ I have styled myself on LinkedIn as an analyst and a storyteller or commentator. And so I think that’s at the core of what I do and what our whole team of market analysts does is we tell that story with the data because our clients are busy being real estate practitioners.

It’s not that they’re not capable of developing the story in the context, but their highest and best use is making it happen, right? We exist so that we can help them internalize that story and connect it to their business operations.

Scott Bursey (07:48)
Phil, let’s jump into the lightning round. What key piece of data intelligence gives commercial real estate investors the greatest edge?

Phil Mobley (07:57)
piece of data intelligence that gives them the greatest edge. I would say it’s a piece of intelligence that you may not be able to measure or calculate ⁓ from a spreadsheet, but I would say it’s your risk tolerance. ⁓ Your edge is going to come from, again, understanding that ⁓ narrative about where the market is going, understanding what kind of market it is, and then ⁓

how much risk are you willing to take on to generate the reward? And so I’ll give you an example from the office sector, which is what I specialize in. ⁓ I’ve been telling our clients, I don’t think this is a beta market. You cannot just find an empty piece of land or an available for sale office building and expect organic demand to fill it up for you.

That’s not the kind of market we’re in. There have been some structural changes in demand, but also there are some changes in ⁓ projections for job growth that are primarily driven by external things like population demographics and immigration. Not to mention things like AI, which we can talk some more about in a minute if you’d like. But ⁓ what that means is if it’s not a beta market,

It’s an alpha market, an alpha market meaning what your secret sauce is, what your special blend of herbs and spices is, what you bring ⁓ is going to determine your success and you’ve got to succeed by gaining market share. So that is a little bit riskier, a lot riskier in some cases proposition than just riding the tide. ⁓

You know, there may still be segments of commercial real estate generally where you can make a good smart investment decision by riding the tide. But the office sector isn’t that right now. ⁓ It’s much more nuanced. And so I think the thing that you have to understand is your own tolerance for risk and your own ⁓ appetite for whether you want to sort of go with the flow or be contrarian.

Scott Bursey (10:11)
Absolutely, I couldn’t agree with you more on that, Phil. And now let’s go underneath the hood and see how this engine runs. Which ⁓ non-traditional, if you will, commercial real estate sector is showing the most surprising growth in your data.

Phil Mobley (10:27)
Well, I’m going to take a safe answer here because I’m not sure we can really consider this non-traditional or surprising anymore. But the very obvious answer is data centers. I mentioned AI before, but the investment in compute as well as data storage, that’s really driving our entire economy in some ways right now. And it’s certainly driving activity in commercial real estate.

my counterpart for the industrial sector produced a chart a week or two ago showing that data center construction spending has now outpaced spending on construction of logistics centers. And that would have been unthinkable, you know, even three or four years ago. ⁓ So that’s obviously the hot new trend, you know, sort of like maybe biotech lab space might’ve been three or four years ago.

Scott Bursey (11:23)
What’s your vision on where it may go?

Phil Mobley (12:00)
Well, it’s not my specialty, but you know, I think one thing that’s really interesting about it is that itself, it is driven by sort of and constrained by external factors, the biggest being electricity. ⁓ I was at a conference a few months ago where the one of the panelists pointed out that the energy intensity of a data center on a per square foot basis is it can be as high as 50 X.

that of a traditional office building. you can imagine ⁓ the implications of that. We’ve spent a lot of time, I think rightly, trying to make our buildings, our office buildings, our homes, et cetera, to make them operate more energy efficiently. And then data centers come along and they’re just at a different order of magnitude of energy consumption, even if they are very efficient for what they’re producing. So I think that’s…

That’s just an entirely different way of thinking about where the market can go.

Scott Bursey (13:03)
It’s a unique way of thinking, but I like it. In fact, I love it. As far as opportunities go on the horizon, as far as, you know, maybe a new offering or a part of the business that you’re looking to double down on. Could you walk us down that road?

Phil Mobley (13:19)
Yeah, well, we are, and I sort of alluded to this as well, if in fact the office sector in particular has become an alpha market rather than a beta one, it’s not the only segment of commercial real estate that is behaving that way. And so one of the things that we are being very intentional about is trying to look at things from new angles.

We’ve developed some tools to look at medical office specifically, to look at biotech lab space, to look at data centers, to look at single tenant net leased retail as distinct from just sort of the broader retail category. ⁓ So all of these much more micro segmented ⁓ areas of the market.

nuanced ways of looking at the data I think are going to be crucially important to our clients as they think about how can they generate alpha.

Scott Bursey (14:18)
single tenant at least a lot of people just don’t understand.

Phil Mobley (14:22)
No, and I’m one of those people when it comes to retail. I conceptually, I understand the caricature of the bond in a box, but of course, it is more complicated than that. There are different factors that you have to consider, ⁓ including sort of the quality of the occupier that you’re essentially investing in. ⁓ I think there’s a flavor of that in office, and I’m actually quite curious to see if that doesn’t.

drive the market forward in terms of new construction. We’re at historically low levels of new office construction right now, which even though we’ve got historically high overall vacancy as well, it’s actually getting pretty tight at the premium end of the market. So what happens when occupiers absolutely just cannot make do with the space that they have anymore? Well, one of the things that could happen is we could have

some ⁓ major occupiers say, you know what, I’m going to sponsor development of a new office building. I’m going to essentially commit to the space, bear that occupancy risk for a developer to build me some, you know, quite frankly, expensive new space. And we have an example of that recently with American Express committing to a new tower at Two World Trade Center in New York. So.

Maybe we’ll see something analogous to the single tenant retail market where that kind of thing happens all the time. And maybe we’ll see an acceleration of that in the office sector that sort of recatalyzes office development.

Scott Bursey (15:56)
That’s interesting, Phil. What would you like our listeners to know first about your business?

Phil Mobley (16:42)
Well, we are, our, our, ⁓ our mission is to digitize the world’s commercial real estate, ⁓ data. So we, we have any and all sorts of data that you could ever ask for, for, ⁓ in terms of occupancy and vacancy and leasing activity across all commercial property types, including multifamily. And even now with homes.com in the single family residential market.

⁓ We’re in multiple geographies across the world. Most of what we have in the commercial sector is the US, Canada, the UK, but we’re moving into Europe, moving into Australia as well. So that is our mission, is to make that data accessible. And then with the market analytics team in particular, to add the additional layer of contextualizing it.

so that our clients at a high level can understand the story of what’s going on in these various markets, not just the main direction of travel, which is really important. And that’s what you see in sort of the general business press. But what are the cross currents? What are the eddies? The maybe slight nuances in terms of how

particular sub market or a type of subtype of property may fit into that overall narrative. That’s what our group does.

Scott Bursey (18:16)
And integrating the data into this ⁓ would be, I’m very curious, what is the most critical metric for assessing the long-term stability of secondary market investments today?

Phil Mobley (18:31)
⁓ you know, there are all sorts of traditional metrics that you can look at. You can look at what’s the ratio of new construction to existing inventory. You can look at the rate ratios of, ⁓ to absorption. What would the net move in net increase in demand for various space? But I think interestingly in this kind of market, and part of this is just a function of what’s become available. ⁓

from a technological perspective, but more and more, think understanding what drives real estate means understanding some non-traditional data sources. Not all of which are part of the data that our own company collects and gathers, but there are things that as a team of market analysts, we are paying attention to. So for example, 10 years ago,

No one was paying attention to how many people were badging into office buildings or to what foot traffic was like in office buildings. And they might’ve been paying attention to it in terms of retail space, but for office, that wasn’t really relevant. Well, now it’s hugely relevant. It’s hugely relevant to understanding the kinds of buildings that will actually show resilient demand and have shown resilient demand over the past few years. So,

that sort of nuanced secular data, know, venture capital investment. ⁓ That was a huge part of understanding what was happening in the world of biotech space five or six years ago and then going back further than that. That’s still relevant today, but certainly that had tremendous implications for the development of labs. I sit in Boston and

Life sciences labs are a tremendous part of the real estate story here. ⁓ More recently, that type of venture capital investment has been just tremendously concentrated in and accelerating in investment in AI. And so that’s actually important right now to the recovery of the general office sector, especially in San Francisco, San Jose, New York, where

⁓ Companies are growing very quickly and they’re taking on ⁓ relatively large amounts of space, even as they still today have relatively few people, but are looking to add quickly. So those are the kinds of things that you have to pay a lot of attention to.

Scott Bursey (21:01)
Phil, your insights are gold. What last words could you give our listeners as far as AI is concerned?

Phil Mobley (21:08)
well, I, got this question from a client a couple of days ago and I, and I said, the way I think about this is long-term, is it going to be Marvel or is it going to be Matrix? And by that, I mean, you know, in the Marvel universe with the Avengers, right? So you’ve got Iron Man and his, ⁓ his compatriots are playing with holograms and they’re talking to digital assistants and they’re flicking things all around with their, with their

hands while they’re talking and engaging and collaborating together. So maybe AI ends us up in a place like that where we’re all doing that sort of work. And ⁓ it’s sort of a utopian Jetsons kind of world. Or maybe it’s the matrix where the AI is doing all the cool stuff and we’re doing menial tasks while we’re sort of, know, plugged in and generating electricity. But that’s long term.

And I don’t think either of those is terribly likely as an extreme.

I tend to be a little more optimistic. So I think something on the Marvel side is where I think we will end up. But again, that’s long-term. Shorter term, it’s about how much can it continue to prop up the economy in terms of the enormous investment in data centers, yes, in hiring, in advancing the technology. Will they actually grow in?

to that amount of funding that they’ve received and in turn that amount of space that they have invested in. Will they hire the people to fill up those office buildings? ⁓ Or at least in the short term, will we sort of teeter into a recession because it turns out we don’t get immediately the gains that many people are banking on with their investments. And I kind of analogize that to the dot-com bust, right?

We had a lot of promise with the internet in the late 90s, very early 2000s. And then things went south for a while. It was a disappointment in the near term. But the internet has turned out to be pretty useful in the long term. And so we could see something similar where ⁓ we slide down into some temporary disillusionment with AI in the short to medium term.

before things ramped back up in the way they did with the internet. So I think it’s useful to think about what is actually happening now. What are the long-term possibilities? Kind of what are the scenarios? How likely are those? And then what are the paths to get there? I think that’s a useful frame for what AI could mean for the economy, but for commercial real estate as well.

Scott Bursey (23:49)
Phil, you have absolutely brought the fuel today. And for those of our listeners that would like to follow your journey or collaborate with you, what is the best way for them to reach you?

Phil Mobley (23:59)
Sure, ⁓ I’m active on LinkedIn, so you can just search for Phil Mobley on LinkedIn. I still do have an account on X, formerly known as Twitter. I’m not as active there anymore, but that’s @philariousrex. And if you want to reach out directly, my email address is [email protected].

Scott Bursey (24:21)
Phil, thank you so much for joining us today.

Phil Mobley (24:23)
Absolutely, thanks for inviting me. It’s been fun.

Scott Bursey (24:25)
and to our listeners, appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Phil, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you on the next episode, everyone.