It's a clever idea when the market is going up, and a really dumb idea when the market drops underneath them. If they are locked into a very high rate, and the market goes down, which is always does at some point, then people will be questioning the decision since they would either need to force their companies to pay a ridiculous rate, or lose money trying to sublease it at market rate.

The last thing VCs need to be is a landlord.

I dont agree and landlord is hardly the word I would use for NNN lease tenant Management.

In a market downturn in a worst case scenario...this real estate has underlying value besides its immediate income producing potential. It will likely retain more value than their actual startup investments.

Source: Im a former commercial real estate leasing broker and former commercial real estate underwriter.

The high rent problem emerges only when the market is over-heated, and subsides when there's a correction.

Anybody doing that would almost certainly be buying high and left holding the bag when an economic downcycle arrives.

I disagree. The same way a VC expects a few investments to cover the rest...they only need one rrapidly growing company to cover a downturn.

Any VC fund that doesnt diversify their investments to cover market movements wont survive very long.

Plus, even with a bubble bursting, commercial real estate in prime locations will retain much of its value. It will definitely outperform the startup market.

Are we talking about owning or leasing and then sub-leasing?

VCs that plan to use LP money to own and operate a commercial real-estate project are likely to get a "no, thank you", as LPs have access to REIT sector with much better purchasing power, IRRs, cashflows and operator experience.

If the VC firm is leasing and then sub-leasing, the reverse selection bias works against it, as the rapidly growing company is going to be the one moving out the soonest, needing higher square footage and shopping around for entire floors (or buildings, or campuses) will give it much better rate per square foot.

With that said, if anybody was doing it, it would be A16Z, considering how much Silicon Valley land and commercial real estate belongs to Arrillaga family.