The Future of Google Search

Summary

Motley Fool Money: The Future of Google Search
Release Date: March 27, 2025
Hosts: Dylan Lewis, Ricky Mulvey, Mary Long
Guests: Jason Moser, Anthony Chavon

---

1. Introduction

In this episode of Motley Fool Money, hosts Ricky Mulvey, along with guest Jason Moser and real estate expert Anthony Chavon, delve into a range of pressing topics affecting today's investors. From sudden tariffs impacting the auto industry to Google's struggle against AI competitors, and Robinhood's aggressive market strategies, the discussion provides a comprehensive overview of the current investment landscape.

---

2. Impact of New Auto Tariffs

The episode opens with a discussion on the looming 25% tariff imposed on cars entering the United States, specifically targeting fully assembled vehicles. At the time of recording (1:50 PM Eastern), major auto manufacturers are experiencing significant stock declines:

• GM: Down 7%
• Ford: Down 3%
• Magna International: Down 7%
• Tesla: Up 6% (Ricky Mulvey, 00:34)

Jason Moser explains the rationale behind the tariffs, highlighting the aim to boost domestic manufacturing. However, he points out the complexities involved:

"There can be thousands of parts that are coming from outside of the country... increased production costs, higher prices for consumers, disruption of supply chains... [it's] a frustrating time for investors."
(00:34 - 02:30)

Moser emphasizes the uncertainty surrounding the tariffs and suggests that management teams should communicate this uncertainty to investors, even if it means withdrawing quarterly guidance.

---

3. Google's Struggle with AI Competitors

Transitioning to technology, Ricky Mulvey introduces a Bloomberg Businessweek article titled "Google is Searching for an Answer to ChatGPT." The discussion centers on Google's challenges in maintaining its dominance in search as AI tools like ChatGPT and Google Gemini gain popularity.

Key Points:

• Google's search business accounts for about 60% of Alphabet's annual sales (~$200 billion in 2024).
• AI tools are attracting users away from traditional search engines.

Jason Moser compares the evolution of search to an expansion rather than a direct competition:

"It's just ultimately doing more for us, which is great... Google has at least 10 platforms with a billion or more users alone... it's something that Google will have to pay very close attention to."
(07:39 - 08:47)

Google's Strategic Pivot:

• Reassigned over 1,000 engineers (20% of the search engineering team) to focus on generative AI.
• Vision for search includes reduced prominence of the search bar, increased voice and visual search capabilities.

Moser views Google's pivot as necessary to stay competitive, even though incorporating new technologies presents its own set of challenges.

---

4. Robinhood's Aggressive Expansion and Fee Strategy

The conversation shifts to Robinhood's recent product launch, which includes:

• Robinhood Banking: Enhanced private banking features and more in-depth investing analysis.
• Fee Reduction for Robo Advisors: Caps management fees at $250 per year from the previous 0.25%.

Jason Moser highlights the potential threat to registered investment advisories (RIAs):

"The potential for your RIAs to come under threat with this... they have around 25 million active account holders."
(11:46 - 12:32)

Cash Delivery Service:

Ricky Mulvey critiques Robinhood's new cash delivery service, questioning its practicality and safety:

"I've never needed to have cash delivered to me. This just doesn't sound like a very good idea... the fees seem preposterous."
(13:21 - 14:30)

Everything App Strategy:

Despite skepticism, the hosts acknowledge Robinhood's stock performance, noting that the "everything app" approach is currently successful for them, unlike similar strategies by other companies.

Jason Moser advises caution, emphasizing the importance of focus:

"Ensuring you're delivering what customers want and managing it wisely... it's about balance."
(15:33 - 16:34)

---

5. Office Space Market Outlook

The latter half of the episode features a detailed analysis of the office real estate market with Anthony Chavon. Referencing a New York Times article titled "Signs of an Office Market Bottom the Worst is Probably Over," Chavon provides insights into current trends:

Key Observations:

• Class A Office Spaces: Likely bottomed out with high occupancy rates (90%+ for companies like BXP and Alexandria Real Estate Equities).
• Overall Office Market: Faces a "slow-moving train wreck" with vacancy rates around 20%.

"The worst is probably over for the best located Class A, highest quality office space... it's going to be more of a slow-moving train wreck."
(18:09 - 19:57)

Challenges for Office Landlords:

• High vacancy rates despite a strong job market.
• Necessity for significant capital investment to renovate older buildings.
• Increasing concessions like free rent or tenant improvements to attract and retain tenants.

Investment Perspective:

Chavon advises investors to be cautious with office REITs, placing them in the "two hard pile," meaning they are high-risk investments not suitable for most retail investors. He specifically mentions Alexandria Real Estate Equities as a more stable option due to its focus on life science tenants and strong balance sheet.

"For office REITs, I would probably lean towards Alexandria Real Estate Equities... their balance sheet is amazing."
(27:08 - 28:13)

---

6. Conclusion

The episode provides a multifaceted look at current investment challenges and opportunities:

• Auto Industry: Navigating new tariffs requires strategic management and clear communication.
• Tech Sector: Google's adaptation to AI competitors is crucial for maintaining its search dominance.
• Fintech: Robinhood's expansion poses significant competition to traditional financial advisors.
• Real Estate: The office space market remains divided, with high-quality properties faring better than the rest.

The hosts encourage investors to stay informed and cautious, highlighting the importance of understanding the underlying factors driving these industries.

---

Notable Quotes:

• "There is just so much uncertainty in regard to all of this tariff talk." – Jason Moser (02:30)
• "They have a company in ChatGPT taking eyeballs away from Google properties." – Jason Moser (07:39)
• "The fees seem preposterous, and I was just gonna ask that. It's like you get a service fee, but then on top of that, you probably gotta tip the guy." – Jason Moser (13:21)
• "I think that's something that's just changed the math... So I think the bifurcation between the skilled real estate operators and the, for lack of a better term, not so skilled operators will continue to widen." – Anthony Chavon (22:29)

---

This comprehensive summary encapsulates the critical discussions from the episode, providing valuable insights for investors navigating the complexities of today's market.

Transcript

[Anthony Chavon]

Foreign.

[Ricky Mulvey]

They'Re coming or they're a negotiating tactic. Who knows? You're listening to Motley Fool Money. I'm Ricky Mulvey sorting through this madness. With me today is Jason Moser. Jason, thanks for being here.

[Jason Moser]

Rick. Ricky, always a pleasure. My man. How are you?

[Ricky Mulvey]

Oh, I'm doing pretty well. You know who's not doing pretty well? These auto manufacturers. It's been a tough day for him. Jason?

[Jason Moser]

Oh, yeah.

[Ricky Mulvey]

Yes, at the time of this recording, which I want to preface is at about 1:50pm Eastern, 11:50am Mountain time, because we never get a shout out. A 25 tariff is coming for any car entering the United States. This initially targets fully assembled vehicles, but so far GM was down about 7%. Ford down about 3%. Auto parts supplier Magna International, which we'll talk about more in a sec. Down 7%. Tesla, hey now. Up 6%. You parse through this with me. Why are some American automakers so affected by this news? Tesla, notably not.

[Jason Moser]

So this is the ultimate goal here with, with tariffs. In this case, it's the, to boost domestic manufacturing more than anything, I think. And that could certainly have positive impacts, but it's obviously also a very complex issue with some potential negative consequences that come with it, at least in the near term. And when you consider how a car is built, right, there can be thousands of parts that are coming from outside of the country. And now that all of a sudden throws a lot of uncertainty in here. And so you look at some of these negative impacts with increased production costs, you could be looking at higher prices for consumers, certainly could be seeing disruption of supply chains as we're seeing, they see the potential for retaliatory tariffs and then obviously the negative impact on companies that use imported parts. And so I think a lot of this just comes from that, along with the fact that there is just still so much uncertainty in regard to all of this tariff talk. Right? It's just on one day off the next, this much, one day, that much the next. It's, it's, it's a frustrating time for investors. But I, I can imagine that if you're in, if you're in the auto business, it's, it's even more frustrating because you just don't know what really is going on.

[Ricky Mulvey]

If you're in this spot where you're a business that's dramatically impacted by tariffs and investors want quarterly guidance, why wouldn't you withdraw it? At this point, you have no idea if these tariffs are going to come into effect, stay into effect, if they're A negotiating tactic. So if you're a leader at one of these companies, why are you issuing guidance at this point?

[Jason Moser]

I mean, I think that's a really good question. And kind of in many cases it doesn't really matter to me whether management offers guidance or not. I kind of feel like it's. We're better off without it, but. But we are where we are and investors typically insist on it and. And so we get it from most companies. I think. I think in this case, I think management would be wise to at least message the uncertainty if not withdrawing the guidance altogether. Now, there's some downsides that can come with that, right? I mean, there we go back to that word uncertainty and typ management team withdraws guidance. It's not a good sign. Now, it doesn't take a genius to realize that the tariff environment is making projecting these numbers very difficult to do for investors and for management teams at the companies. But I do think, yeah, there can be a lot to be said for a company getting out there kind of ahead of it and saying, we all kind of know what's going on here. There's a lot of uncertainty in this case. We provided you some numbers from a quarter ago. We just don't know the impact because I don't think really anybody knows the impact that these terrorists can have because we just don't know how this is all unfolding. So it is wise, I think, for management teams to continue to communicate and just communicate the truth in a case like this. I certainly understand withdrawing guidance altogether because it sure seems like it'd be difficult to project.

[Ricky Mulvey]

And then a lot of investors sort of on edge for Tariff Liberation Day coming up on April 2nd. Are you preparing as an investor? Are you breaking out the Traeger?

[Jason Moser]

How are you?

[Ricky Mulvey]

How are you celebrating?

[Jason Moser]

And you read my mind, Ricky. I'm feeling like I gotta smoke something on the Traeger. I mean, I. As an investor. Nah, it's a Sunday, I think, right. I'm probably just gonna be hanging home, hopefully enjoying some nice weather and yeah, I'm gonna maybe throw some ribs on there or get a big old pork shoulder or something.

[Ricky Mulvey]

I want to talk about this story. Cover story in Bloomberg Businessweek for April, which I really enjoyed. If I'm going to throw some mud, we also throw flowers on this show. Jmo by Julia Love, Davey Alba. The article is titled Google is Searching for an answer to ChatGPT and the thesis or the theme of it. The story is basically that Google has long had a tense relationship between the ads, business between the search business and now, you have AI answers coming in. And here's this tech giant struggling to adapt as more people on the Internet ask questions to chat Chat GPT. This is where we'll take first the Lynchian step. I mean, I, I've noticed for a few things, I'm using Chat GPT a little bit more than Google, especially with cooking. When you're looking around your, your kitchen and you're like, I got this, this and this. What can I put together to make it delicious? Can I sub duck fat instead of butter in this recipe? The answer is usually yes, by the way. Can I, can I pull that off? Chatgpt Incredible sous chef. Much easier than searching through the recipes on these long pages. But as an Internet user, are you using ChatGPT more than Google for anything?

[Jason Moser]

Not really. I mean, I use Chat GPT some, but I, I find I actually use Google Gemini more. It's, it's been really fun incorporating these tools into our research work. And, and, and you're right that they're just tremendous tools that just give you a ton of information at your fingertips. Now I still do Google search quite a bit, and I think that's just maybe old habits die hard, right? I mean, the apps on my phone, it just is, it's easy to use. I mean, when it comes to recipes, Rick, you get to get to collect those recipes so that you got your little recipe box on your phone so you don't have to go searching around. You find a good recipe, you save it, and then you always have it there. Maybe you're talking about something else, trying to make something with what you've got and then that, that could be a little bit of a, of a different beast there. But I do think all of these tools are getting good. I think they're getting, they're, they're becoming very helpful. So I think that then it's just really about figuring out which one works best for your needs. Because, because again, they. Chat GPT isn't the only game in town, obviously. Very powerful and very, very good game. But, but I mean, there are other tools out, out there, and I think it just kind of boils down to sort of what habits you end up falling into and ultimately incorporating into your workflow.

[Ricky Mulvey]

I'm still building up my knowledge base. Cooking. Not everyone, not everyone has your cooking experience, Jason. I'm trying to learn as I go, and I got a Chat GPT to help me out a little bit.

[Jason Moser]

I got a few.

[Ricky Mulvey]

I've used your Mac and cheese recipe, though.

[Unnamed Guest]

Before.

[Jason Moser]

Oh, you've got a good, you've got a good one. It's a good one.

[Ricky Mulvey]

Back to business search in Google. All right, Google does a lot of things. It's got a cloud business, it's got a maps business, it's got some venture shots. But search, this is the, the writers describe it, the beating heart. This is true. It's about 60% of, of Alphabet's annual sales, about $200 billion in revenue in 2024. But now ChatGPT is becoming more popular, despite your preference for Gemini JMO. But when you look at this story, when you look at this trend, how big of a problem is ChatGPT proving to be for Google's business right now?

[Jason Moser]

I, I mean it's definitely an issue. And, and we, we see, I see this kind of as a bit like the evolution of search, right? It's, it's just ultimately doing more for us, which is great. And, and Google has definitely been, but, but this, this is becoming a far more competitive environment as we change our behavior and incorporate more of these tools into our day to day. Now I also, I wouldn't dismiss how strong Google is considering the platforms and the users, right? I mean they've got, they've got at least 10 platforms with a billion or more users alone, right? We're talking about Google search, Android, Chrome, gmail, Google Maps, YouTube, those kinds of things. And so I think it's something that Google will have to pay very close attention to. I mean, they have a company in ChatGPT taking eyeballs away from Google properties and onto Chat GPT's properties. And it just makes for a more competitive environment. Not that that's a bad thing. Hopefully it pushes Google to compete harder and come up with equally good solutions.

[Ricky Mulvey]

So here's how Google's trying to pivot. Number one, they got a workforce moving a little bit. So Google reassigned more than 1,000 engineers, about 20% of the search engineering team. They got 5,000 people doing search engineering over at Google. JBO. That's a lot. Anyway, they're putting a thousand of them on the generative AI efforts. And then there was a new vision sort of presented for what Google is used for, where the search bar becomes less prominent. Voice queries rise over time. And then also Google being used more for visual search. So the example given is that you're, you're at a coffee shop, you see someone with a cool pair of shoes, you take a photo of the shoes and you can find out what they are to go shopping. The dark side of this is that you're taking a photo of someone and finding out who they are in public. The veil of anonymity that you have when you go walking around is gone. Anyway, what do you think of this plan?

[Jason Moser]

I think it's, it's something that they ultimately have to do. Right. I mean, advertising is, is ultimately the core of this business. I mean, if you go to the 10k, you can see that 75% of total revenue comes from online advertising, and that was just in 2023. And that number has, has come down relatively significantly over time. I think 10 years ago it was over 90%. But as they add things like subscriptions and the cloud services side of the business, I think they're going to start learning how to monetize Gemini, you know, from, from a subscription perspective. And, and I'm sure we'll probably see advertising inserted into that in some capacity at some point as well. But plan is to not sit still. Right? I mean, they're going to be things that work and they're going to be things that don't work. But you don't know ultimately you don't try. And how we interact with technology is always evolving. So I would be much more concerned if they were just sitting still.

[Ricky Mulvey]

And then there's a lot of good stories in the article. I'm going to put a link in the show notes. I enjoyed reading it. I learned. Anything else in there stand out to you? It's okay if the answer is no, we can move on to the next topic.

[Jason Moser]

No, I think we can move on. I'm with you. It was a lengthy article, but just an enjoyable read. Kind of makes you think about what the future of Google is ultimately going to look like from a consumer's perspective.

[Ricky Mulvey]

Let's get to this Robinhood story. Robinhood with a big product launch yesterday, announcing Robinhood Banking. Basically this is going to allow users more private banking features, more investing analysis delivered to them. And then the big one that I think is going to make registered investment advisories sweat a little bit is they are collapsing the fees. So basically, if you have Robinhood as a robo advisor, they start at 0.25% of a management fee, but they cap it out at 250 bucks a year. And for a lot of registered investment advisories, when you have a wealth manager like that, they take a fixed percent of the fee, but that, you know, their fee grows as you put more, more money into the pot. Yeah, this seems like it would be a big problem for that business. When you were looking through those announcements Jamo, what were your takeaways?

[Jason Moser]

Well, I think that definitely was what stood out to me was the potential for your rias of the world to come under threat with this. Now, I mean, I guess it all kind of boils down to how good the product or service that Robinhood's providing actually is, right? I mean, but that's also something that you introduce and you iterate, and it definitely gives them the opportunity. I think they have, what, somewhere in the neighborhood of 25 million active account holders? Something. Something like that. And. And if you start looking at a product that they introduce that is legitimate and helpful, I mean, there. There should be plenty of room to. To continue to grow that number. But, yeah, that's. That's the one that stood out to me. The. The cash delivered to the doorstep is a little bit of a different one, Ricky. I'm not so sure about that.

[Ricky Mulvey]

Let's talk about that. Because in the announcement, they're talking about how unsafe it is to go to an ATM, mentioning the rise of ATM attacks growing by 600% over the past few years, and you're like, wow, I'm going to be attacked in an ATM? No, Jason, that is people robbing the ATMs themselves. So that's people going up with a truck, breaking open the ATMs and then stealing all the cash inside. However, if you're positioning this, it's a little bit different saying, isn't it so inconvenient to go to an atm? Don't you feel a little nervous when you're in a big city going to an atm? What if you could have physical cash delivered right to you at your doorstep? So there's a fee involved. It's like, I think the. In the demo, they gave a $7 tip, and then it's a $5 delivery. Fe quite a lot for, you know, like a 200 withdrawal. But anyway, have you ever needed cash.

[Unnamed Guest]

Delivered to your doorstep?

[Ricky Mulvey]

What do you make of this announcement?

[Jason Moser]

I. I've. I've not ever that I can recall needed to have cash delivered to me. This. This just doesn't sound like a very good idea, I tell you. Certainly wouldn't want to be the delivery guy. I mean, I can tell you that. I mean, unless they're going to supply, like, an armored vehicle or some sort of protection, I mean, work gets out that you're the cashman, someone's going to come looking for you eventually, right? That seems like it would be a risky proposition. And honestly, I mean, how much cash do we really need these days? I mean, it's just not how. It's not how money. I mean, I'm not saying people don't use cash. Don't get me wrong. I mean, of course they do. But the need for it, I don't think is the same because you have so many different ways that you can pay now. So you're like, oh, I don't have cash, but I could venmo you, or I could whatever cash app you, or something like that. The fees seem preposterous, and I was just gonna ask that. It's like you get a service fee, but then on top of that, you probably gotta tip the guy. And I mean, this tipping economy has gotten out of control, man. And all of a sudden you're. You're having to pay, what, 15 bucks just to get whatever cash you want delivered to you. It seems like. It seems like the juice isn't worth the squeeze.

[Ricky Mulvey]

I think it's the logical end. You know, we've started. You know, you tip at restaurants. That makes sense. Then you're tipping for takeout. Then you're tipping a little more for takeout. Then we're at a point where, for some, like, concession areas, they want you to tip for access to the concession area. And now we're at the base case, which is just getting cash. You leave a tip to get your cash.

[Jason Moser]

Jason? Yeah.

[Ricky Mulvey]

There is something interesting with this announcement too, though, which is that Robin Hood is moving to be this mega app, this everything app for. For. For finance. They're going to be doing money transfers, banking, investing, options trading, gambling, slash events, contracts, predictions, credit cards, cash delivery, which we just mentioned. And for. For as much fun we're having right now, the shareholders are laughing. Stocks more than doubled over the past year. So, you know, we've seen this strategy of being an everything app really not pan out for other companies, but so far it's working for Robinhood. Why do you think it's working for them? Where it's been, you know, sort of a losing strategy for other companies?

[Jason Moser]

Well, I mean, I think it's because they continue to focus on services that sort of parallel each other. Right. I think there's a lot of overlap there with the types of services that they're offering. So it's not something that's completely outside of their core competency. And I think that can also be a dangerous strategy. Right. You can lose focus or you start not executing on all fronts. And I think that would be, for me, the bigger risk there is if they try to do too much. And I think that's what some companies that have tried to get into that sort of everything app strategy, they maybe take on more than they can handle. Maybe they're doing things that they don't really need to do. I mean, I remember PayPal wanting to introduce stock trading into their app and I'm like, that's clever, but why in the world do I care about that? I've already got a brokerage where I do my buying and selling and plenty of people already have brokerages for things like that. So I think it's just a fine balance of making sure that you're delivering, delivering things that your customers want and delivering things that you think can attract new customers to your universe and then just making sure you manage it wisely.

[Ricky Mulvey]

Hey, leave some, leave some wings and.

[Unnamed Guest]

A beer for me for Liberation Day. I want to come over, might have some ribs. Appreciate your time and your insight. Thanks for joining us on Mountain Point 1.

[Jason Moser]

Always a pleasure.

[Unnamed Advertiser]

Trading at Schwab is now powered by Ameritrade, giving you even more specialized support than ever before, like access to the trade desktop. Our team of passionate traders ready to tackle anything from the most complex trading questions to a simple strategy gut check. Need assistance? No problem. Get 24. 7 professional answers and live help and access support by phone, email and in platform chat. That's how Schwab is here for you to help you trade brilliantly. Learn [e-mail] trading.

[Ricky Mulvey]

You know the office building story. Everyone's working from home and are all of these buildings going to go bankrupt? Well now we're a few years later and investors may be at peak pessimism. Motley fool senior analyst Anthony Chavon joined me to discuss the state of office space in one real estate operator that investors may want to put on their watch list.

[Unnamed Guest]

They don't ring a bell at the bottom, but there is a New York Times article that's suggesting they it may be close to that for the office market. That article ant is titled Signs of an Office Market Bottom the worst is probably over. You don't need to read the whole article. You're listening right now. So do you think this is true? Is the worst over for the office real estate market?

[Anthony Chavon]

I think the worst is probably over for the best located Class A, highest quality office space. But for the rest of the office market at large, I don't think it's going to be so lucky. I think it's going to be more of a slow moving train wreck if you will. We've just seen a permanent demand destruction with the rise of Work from home since COVID And despite recent headlines that employers are calling workers back to the office, the amount of people working remotely or hybrid isn't really going down. And now we see office vacancy rates that are around 20% today. And one thing to keep in mind is that office has always been a bet on job growth because there's always been a positive correlation between job growth and demand for office space. So that 20% vacancy rate looks even worse considering that we currently have a pretty strong job market with an unemployment rate around 4%. So I can't confidently say that the office market, broadly speaking, has bottomed when vacancy rates are still rising during a strong economy. But for the newer prime office assets with solid capital structures, I think we've probably seen the bottoming out process take place already. And one thing I think is interesting is that every year the Urban land Institute and PricewaterhouseCoopers, they collaborate on an emerging trends at Real Estate report. And one of the real estate professionals that they interviewed said something along the lines of 2025 will be a story of 20% vacancy rates, but we won't have enough space either because we have a shortage of office space that people actually want. And I think that sums up the state of the office market today. It's a bifurcation between class A office buildings and essentially everything else.

[Unnamed Guest]

I'm thinking of the empty sort of office parks I've seen in some of the exurb suburbs around here in Denver and when I was visiting back home in Cincinnati. One concern from earlier in the pandemic is that a lot of these office loans would go delinquent, especially in the class B space you're talking about work from home stays, stays forever, which is partially true. Like many things, it's partially true, partially untrue, and a lot of these buildings would end up being scooped up by bankruptcy investors. But then the question is, what do you do with an office park that folks aren't interested in leasing? How's that turned out? How's that storyline turned out now that we're five years away from that? True, Partially true, Totally false. What's happening?

[Anthony Chavon]

Yeah, so I'll go with the easy answer and I'll say partially true. Delinquency rates for office assets, they're, they're still high and they're still rising. So there's definitely some distress, but I don't think that distress has matched the market's expectations. You know, if we go back roughly two years ago, everybody was concerned about the debt maturity wall for commercial real estate and in particular, office space. But office landlords, they, they still have access to a lot of liquidity, and they've been able to extend and pretend, as the industry likes to say. So they've extended and modified a lot of their loans with the hope that office fundamentals will recover in a few years. And the capital markets have also been cooperating with them as well. With interest rates are now down, credit spreads are historically tight, and there's tens of billions, if not hundreds of billions of private equity capital looking to either acquire distressed assets or lend capital to landlords to strengthen their capital structures. I think we've all heard of private credit talk out there, and I think that this is part of that. So, you know, we'll see where office delinquency rates head from here. But with so much liquidity out there so far, I think it's been much more of a, a controlled demolition rather than a, than a collapse.

[Unnamed Guest]

Well, let's focus on the positive side, the class A office spaces, and there's a couple that I've looked at. One is BXP, which says that they are about 90% leased. That's well above the 20% vacancy rate that you suggested. I'm mixing math here. That would suggest 80% leased for the, for, for normal office spaces. It's the largest publicly traded workplace developer. You also have Alexandria Real Estate equities, which operates buildings for large pharma science companies. And they're at about the same, although they note that 89% of their spaces are leased or negotiating. I think that's an important distinction. But when you're looking at these streets specifically, why are you seeing demand so strong there?

[Anthony Chavon]

Yeah, so I just think it goes back to the, the flight, the quality we've been talking about, you know, employers and employees, they want to be in, if they're going to be in the office, they be in the best assets and in the best locations. They want modern, highly amenitized buildings. You know, buildings that have a lot of natural sunlight, efficient H Vac systems, easy to get to locations. And I think most of BXPS and Alexandria's properties provide that. Like if you're a pharmaceutical company, you probably want to lease space from Alexandra Real Estate because they are the premier owner of lab space in the best locations and they know how to operate these assets better than anyone. You know, in the past, the skill of the real estate operator or the management team probably didn't matter much because, you know, interest rates are going down every single year and that caused asset prices to go up. That math doesn't quite work anymore. So I think the bifurcation between the skilled real estate operators and the, for lack of a better term, not so skilled operators will continue to widen. We've seen that dynamic take place for shopping malls recently, and I think we'll see that in office too.

[Unnamed Guest]

When I'm looking at these high occupancy rates, I do wonder, like, how is the, what's going on with the rent growth? So are the renters getting a lot of concessions to fill up the occupancy here? Like, what kind of concessions are these renters getting?

[Anthony Chavon]

Yeah, so I mean, this is probably one of the biggest problems, I think, for office landlords. Like before we even get the concessions, I think it's important to note that a majority of office buildings were built before the year 2000. So a lot of the office product that's out there is just functionally obsolete in the absence of major renovations that bring these properties up to a post pandemic standard. So landlords need to invest a ton of capital, capital that's quite speculative in nature, just to make sure that their buildings are more desirable to prospective tenants. And then if those investments ultimately work out and the landlord signs a lease of the new tenant, then we get to the concessions. And those can include things like free rent, which can range anywhere from a few months of free rent to two years of free rent, depending on how long the lease term is. Landlords are also offering things like tenant improvement allowances, free parking, lower security deposits. It can really be anything. And those concessions add up. There's an article from the Wall Street Journal that I read a few years ago that mentioned that office rental rates, when adjusted for inflation and tenant concessions were actually negative from 1997 to 2021 in the 50 largest office markets in the US so these concessions can be quite meaningful.

[Unnamed Guest]

There's two ways to play this game. There's the institutional investors, the private equity folks that are scooping up super distressed assets at pennies on the dollar, hoping they can rent it out a little bit and make a profit. US retail folks don't have that option. You have to pick up the publicly traded real estate investment trust. If you're looking at this space. Are you looking at this space or is this a better game for those institutional folks?

[Anthony Chavon]

Yeah, so I think this would probably be a better, better game for the institutional folks. I think my advice to people looking to Invest in office REITs is to have a very big too hard pile, as Warren Buffett and Charlie Munger would say. And don't be afraid to say no to potential opportunities because if you look at some of the office REITs out there, many of them have underperformed for decades. And even before the pandemic, these office REITs weren't exactly great investments over long periods of time. Moving forward, I still see this as a challenge asset class. It's highly cyclical, it's highly capital intensive, and it's highly leveraged. Those three things are not a great combination. And then there's the huge question mark about demand. Personally, I just don't think the risk reward opportunity is that appealing, especially compared to other real estate sectors like industrial REITs which have been beaten up recently, or even mall REITs which are performing very well. So there's just too many unanswered questions for office for me. So I'm putting this one into my two hard pile.

[Unnamed Guest]

All right, I might have to change the final question because I was going to ask you if you had a favorite office read. I've been looking at Alexandria Real estate and BXP and you know, they're both of them are at about 10 times funds from operation per share price, basically the earnings multiple for real estate companies. Do you have a favorite office REIT or do you want to close out talking about an industrial REIT or a mall REIT that might be better for the retail folks?

[Anthony Chavon]

No, no. So, so I would actually say out of, out of all the office REITs, I would probably lean towards Alexandria Real estate equities because they are the, they're the go to landlord for premier lab space and their office assets. They're clustered in the largest life science markets in the US and they lease their properties to the highest quality tenants. And work from home is still a risk for this type of asset class. But these life science tenants, they generally need to be in their office at least part of the time. So I like that aspect to it. There's also some supply risk to lab space as well. But here's the thing that I really like about Alexandria. Their balance sheet is amazing and they can weather a lot of these risks. I think it's something like 30% of their total debt maturities don't come due until 2049 or later, so that's a long time from now. And one thing I really like about them is they just recently issued debt at a lower interest rate than their current dividend yield. So I think that's a pretty good sign that this one's trading at a, a pretty beat up valuation.

[Unnamed Guest]

It's a good place to end it. Anthony Schmidt, thank you for your time and your insight.

[Anthony Chavon]

Thanks for having me.

[Ricky Mulvey]

As always. People on the program may have interests in the stocks they talk about. And the Motley fool may have formal recommendations for or against Stone Buyer. Sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards. And are not approved by advertisers. Motley fool only picks products that would personally recommend to friends like you. I'm Ricky Molecule. Thanks for listening. We'll be back tomorrow.