389. Why Smart Capital Is Still Betting on Office with Mike McDonald, JLL Capital Markets

Mike McDonald’s career mirrors the office market’s rise from a niche asset to a core component of institutional portfolios. After the mid‑1990s REIT boom, pension funds poured billions into office, driving cap‑rate compression and record valuations through 2019. COVID‑19 disrupted that trajectory, prompting a sharp reallocation: office fell from roughly 35‑38% of core allocations to about 15%, while industrial (rebranded as logistics) and multifamily (living) surged. This shift forced investors to reassess data and narrative around office space.

At JLL, McDonald helped launch a four‑tier classification covering the top 20 MSAs, separating premium post‑2015 buildings from older, lower‑quality stock. The tiering replaces vague class A‑B‑C labels with objective metrics, enabling clients to slice the market and pinpoint where true value resides. Competitors have begun adopting similar frameworks, confirming its market‑changing impact. By quantifying quality, occupancy, and tenant credit, the system provides a clearer risk‑adjusted view, countering the negative perception that office is a dying asset.

McDonald’s investment thesis hinges on three prongs: acquire tier‑one and tier‑two assets at dislocated cap rates and profit from future compression as capital returns; execute value‑add strategies on under‑occupied, lower‑tier properties to boost cash flow and stabilize tenancy; and pursue selective new development in growth markets where supply remains constrained. He argues that, unlike industrial and multifamily—now priced near perfection—office offers the greatest alpha potential over the next five years. For savvy capital providers, data‑driven office investments could generate outsized returns while reshaping the sector’s long‑term outlook.