Last week’s issue about the benefits of tenant concentration (you read that right, not “diversification”) struck a chord. Readers wanted more insight into these “high-quality” tenants that can drive meaningfully higher portfolio returns. The research supporting that article offers ways to screen for high-quality tenants, but we’ve got another ace this week - one that answers the question: How can you quickly identify tenants that will be a boon for your investments?

Three researchers recently examined office and industrial tenants that pay high rents - the very ones you want in your building - and found a ‘tell’: Had the tenant advertised open positions in the prior 12 months? If yes, it signals both tenant financial health and an ability to pay higher rent.¹

Specifically, for industrial assets, prospective tenants that sought talent one year before the lease commencement date paid 9.1% higher rent relative to similar tenants that did not advertise a job opening. For office the premium is 3.2%. The effects continue to hold but dissipate as you look at job postings from two and three years prior.

Ever intrepid, they went further in their working paper, focusing on two dimensions of the job openings tenants posted: high-skilled and low-skilled roles (they eliminated mid-skilled roles from the analysis). Low-skilled roles had a better chance of being replaced by automation like robots or computers. Example roles included services, administrative support and transportation jobs. High-skilled workers were not machine replaceable. Those roles required management skills and higher levels of education “and are concentrated in information technologies and financial industries.”

The thesis, which they found strong support for, was that employers seeking low-skilled workers saw less value in the space and would be less willing to pay higher rents. In contrast, employers with irreplaceable high-skilled workers would pay materially more for office or industrial space.

In fact industrial tenants seeking high-skilled employees in the prior year paid a 14.6% premium vs. those with no job postings. But premiums in office rents for these firms was similar to the average at 2.8%, likely because office tenants skew higher-skilled to begin with. The important flipside - tenants posting only low-skilled roles paid no rent premiums at all vs. those with no postings.

The study reviewed nearly 5 million online job advertisements between 2010 and 2020 in Atlanta, Houston and Miami, cities with significant bases of high- and low-skilled office and industrial labor. Surprisingly to us, high-skilled jobs are actually the norm: they accounted for more than 50% of the job postings studied, while low-skilled postings accounted for about 20%. The authors suggest this may be a bias in their method “given career websites are historically for high-tech positions.”

As helpful as this can be in office and industrial lease negotiations or in targeting assets for acquisition, we wanted more. Specifically, we wanted an increase in high-skilled job postings to be a leading indicator for rent growth in an MSA. The researchers tested that and determined you can’t forecast rent growth from aggregate job-posting data; job posting trends explain less than 10% of what happens with rents.

A quick digression - the fact that job-posting data couldn’t explain rent trends is notable to us. Fundamentally we - and nearly everyone investing in real estate - associate job growth with rent growth. And there is a body of research tying job growth to good real estate outcomes, but this study’s findings and other research we’ve seen recently make us wonder. For example, we’ve previously written about income growth (not job growth) being a huge determiner of apartment rents. We will be looking for good research to write about here connecting employment growth to real estate outcomes. If you know where to find great work on this, please share.

Back to today’s topic, let’s address WFH, which became big after the study period. Obviously this isn’t a factor for industrial space. Regarding office, as we’ve written about, WFH is predominately a high-earner phenomenon, suggesting employers of high-skilled workers need less space as WFH grows. But just because these firms may not need as many square feet of office as they did, that doesn’t mean Class A demand falls apart nor that they will not tolerate high rents. Current events suggest robust demand for the best Class A space. So our guess is WFH may diminish the office premium slightly, but it likely still holds.

The take-away is pretty straightforward: Looking at job postings from office and industrial tenants - those in an asset you’re considering acquiring or in one you own - is like a cheat code for gauging how easily they will accept rent increases. The less replaceable those advertised roles are by technology, the more valuable that tenant will be on your rent roll. If you want to sharpen this skill set and want to know what roles are at risk of being replaced, start with this from the Bureau of Labor Statistics.

Who: Link Street Capital

What: Family-office-focused advisory firm that matches clients with screened real estate investment opportunities.

The Sparkle: More than any other fundraising channel, family offices are opaque and idiosyncratic. It’s often impossible for sponsors to get in front of them without knowing someone close to that FO, even if the sponsor’s deal is a perfect fit. Link Street has spent years slowly cultivating trusting relationships with what they call “institutional” family offices - ones that have real estate expertise on staff and that do direct deals. The result is an engaged investor base eager to look at deals Link Street sends. That trust stems in part from Link Street’s careful vetting: Less than 10% of deals Link Street reviews get sent to a family office for consideration.

Desert ants don’t get lost.

Even in featureless landscapes, they navigate using sunlight, polarized light, and something like an internal pedometer to track distance. Scientists proved it by outfitting some ants with stilts and others with stumpy legs. The long-legged ants overshot their nest; the short-legged ones stopped short. It’s called path integration, and it’s as elegant as it sounds

Researchers have since built AntBot, a robot that mimics this method using sky cues and step length to get around without GPS. Nature figured this out 130 million years before we did.

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Bonus nerd-out - Wired

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