Is now the time to buy office REITs? 3 Specific Insights for Investors
MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
If you have been following the news on the commercial real estate sector, you have likely noticed that the office REIT market has taken a hit since the start of the COVID-19 pandemic. As many companies transitioned to remote work, the demand for office space dropped dramatically, causing many investors to shy away from office REITs.
What Are REITS?
REIT is an acronym for Real Estate Investment Trust. It is a category of investment vehicles that is subject to very specific sets of constraints imposed by law. The most important of these states that these vehicles must pay out at least 90% of their net income to shareholders as dividends each year, making them attractive as income as well as compounding vehicles. There are 225 registered, publicly-traded REITs in the United States at present.
Many of these REITs, in turn, have buckled down, consolidated their holdings of class A and A+ properties still in demand, and made preparations as conditions have allowed to recoup losses on lower office property tiers.
However, as with any market downturn, there are always contrarians who see an opportunity where others see a risk. In this case, some investors are beginning to take a closer look at office REITs and ask whether the market has overreacted to the pandemic`s impact.
One article published by Benzinga in late 2021 argued that there was then reason to believe the office REIT market could bounce back. The article notes that some analysts predicted companies would begin transitioning back to in-person work in the near future as COVID-19 vaccines become more widely available. Additionally, the article points out that office REITs have historically been strong performers, and that current valuations may present a buying opportunity for savvy investors. Clearly, the article was early in its prognostications, but this does not necessarily mean it was wrong on direction, in time.
On the other hand, other prognosticators as early as 2020 took a more cautious (and prescient) approach, noting that the office REIT market could face headwinds for some time. The article highlights the long-term shift toward remote work that was already underway before the pandemic and suggests that companies may be less inclined to lease office space in the future. This has largely proved itself up.
So, who is right going forward? As with any investment decision, there`s no way to predict the future with certainty. However, there are a few key factors to consider for investors interested in office REITs.
First, it`s worth taking a closer look at the specific office REITs you`re considering investing in. While the market as a whole may be down, there could be individual entities that are well-positioned to weather the storm and come out ahead. Real estate is not a monolith; it exists in many different smaller markets we mistakenly conflate to mean `the` market.
Second, consider the long-term trends in the commercial real estate sector. While it`s true that the pandemic has accelerated the shift toward remote work, there are still plenty of reasons why companies may want to lease office space in the future. For example, in-person collaboration and mentorship opportunities are often cited as major benefits of office work, and there are some indications that employees are eager to return to the office once it`s safe to do so. Additionally, industry titans such as Jeff Bezos and Elon Musk are set on bringing work back to the office more of the time, which weighs something of consideration.
Finally, it is important to remember that investing in office REITs (or any real estate investment, for that matter) comes with its own set of risks and challenges. It is important to do your due diligence and consider factors like interest rates, property management, and local market conditions before making any investment decisions.
We have identified three REITs that could lead the charge when and if the tide starts to shift on office work, for your consideration. As always, this is not intended to be used as investment advice and is for informational purposes only. This is not a solicitation to transact in any security or securities but is for your information and edification.
3 Ideas
1. Cousins Properties - NYSE Ticker CUZ
Cousins Properties specializes on Class A office buildings in Sun Belt markets that are expanding quickly. In Austin, Atlanta, Phoenix, Charlotte, Tampa, Houston, and Dallas, it is the owner of contemporary office buildings. Moreover, Cousins has a number of new office projects in Nashville as well as several others under development in many of its current markets.
The Sun Belt region has benefited greatly from Cousins Properties` attention during the pandemic. Significant migration from pricey, chilly coastal towns to less expensive, warmer areas in the Sun Belt has helped the area. Moreover, businesses are relocating to the area due to its favorable business climate and large labor pool.
2. Alexandria Real Estate Equities - NYSE - Ticker ARE
Alexandria specializes in providing customized workspace for the interdisciplinary life sciences, ag tech, and technology sectors. It has campuses in important metropolitan innovation hubs in Boston, Maryland, the Research Triangle of North Carolina, the San Francisco Bay Area, New York City, San Diego, and Seattle.
During the epidemic, the company`s emphasis on collaboration space has been a crucial distinction. Despite the fact that many office renters could simply permit their staff to work from home, some have demanded on-site employment in specific situations. The epidemic has proven to be beneficial for the life sciences industry as billions of dollars have flowed into the field to support the development of diagnostic tools, treatments, and vaccines. Due to the increased demand for lab space, Alexandria`s facilities are now more occupied and charging higher rent. In addition, it gave the business opportunities to keep growing its clientele.
3. Boston Properties - NYSE Ticker BXP
The largest publicly listed developer and owner of Class A office properties, which are contemporary structures in prime locations, is Boston Properties. It focuses on owning real estate in six significant coastal gateway cities: Seattle, Boston, Los Angeles, New York, and San Francisco. The life sciences sector of the office REIT`s portfolio is sizable and expanding.
In recent years, Boston Properties has strategically profited from rising markets and industries. It has broadened its exposure to tenants in the information, media, advertising, technology, and life sciences sectors. Curiously, it has increased its exposure to San Francisco and entered new areas including Los Angeles and Seattle, which seem contrarian at this point, but markets can be surprising. As of early 2022, it was a top developer with $2.7 billion in ongoing projects, much of which was in the health sciences. These changes put Boston Properties in a good position to keep raising shareholder value in the upcoming years.
At day`s end, the question of whether to invest in office REITs is a complex one with no easy answers. While some investors see a buying opportunity in the current market conditions, others are more cautious about the long-term outlook for the office REIT market. As with any investment decision, it`s important to do your research and make an informed decision based on your own financial goals and risk tolerance.
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