Get back to the office… or else.
That’s the message Amazon boss Andy Jassy has for employees who refuse to go back to the office three days a week.
In a company question and answer session last week, he told them, “It’s probably not going to work out for you.”
The pressure for employees to work in the office – at least some of the time – continues to increase.
Even Zoom, the company that created the popular video conference software that powered remote work, is telling its workers to show up in the office twice a week.
That’s welcome news for the owners of office buildings.
But the office sector is still a long way from a full recovery. And there’s a growing divide as some office buildings attract the best tenants while others empty out.
Today, I’ll show you why some office real estate investment trusts (“REITs”) are doomed to struggle while others will thrive as Americans return to the office. And I’ll give you the names of three companies that have been unfairly punished by the office sector selloff. These will profit as offices recover.
Vacancy vs. Occupancy
In the aftermath of the pandemic, packed office towers have emptied out.
Building security company Kastle Systems says average office occupancy is now hovering at about 50%. And it’s been stuck at that level for months.
That’s an improvement over the 20% rate seen during the lockdowns. But it’s still not healthy enough to keep many properties afloat.
And a recent survey by real estate consultancy Knight Frank showed that nearly half of the world’s largest companies plan to cut the amount of office space they use over the next few years.
There is a bright spot though…
Real estate services company Jones Lang Lasalle reported that office leasing rates jumped by 11.6% in the second quarter. This broke a year-long trend of declines.
But this recovery is not the same across all offices.
Offices built after 2015 have seen a net increase of 112.5 million square feet of leased office space. Meanwhile, older offices continue to lose tenants.
Newer offices are not just getting fuller. They’re also getting pricier. The rental rates for trophy office properties are 11.6% higher than they were pre-pandemic.
These offices are typically newer, more energy efficient buildings built within the last decade with many amenities and located in prominent areas.
As tenants reduce their real estate needs and seek out more modern spaces for the smaller number of office-based workers, there is a flight to quality.
The office sector faces more challenges as the economy continues slowing down. But there are opportunities to invest in quality properties at a deep discount.
How to Profit from the Return to Office Trend
Here at Wide Moat Research, we’re focused on finding the safest income investments on the market.
As regular readers will know, REITs are companies that own income producing real estate. By law, they must pay at least 90% of their taxable income to shareholders.
That’s why REITs are one of our favorite ways to add rising streams of income to your portfolio.
The average age of buildings office REITs own is about 34 years.
Many of those could struggle to retain tenants as their leases expire.
But here are three names with newer, more modern portfolios that we like…
Boston Properties (BXP) – Owns properties located in gateway markets along the East and West coasts, in cities like Boston, Los Angeles, New York, San Francisco, Seattle, and Washington D.C. The average age of its portfolio is 15 years, and its properties are 90% leased. BXP yields 5.9%. BXP shares are trading at 13x Adjusted Funds from Operations (“AFFO”). This financial metric tells investors how much cash a REIT has available to give to shareholders. And BXP is at a 54% discount to its normal valuation of 28x AFFO.
Highwoods Properties (HIW) – Owns offices in Raleigh, Nashville, Atlanta, Tampa, Charlotte, and Dallas and other Sunbelt state cities. The average age of its buildings is 20 years and its portfolio is 89% occupied. HIW yields 8.3%. Its shares are trading at 10x AFFO, 47% below its normal valuation of 19x AFFO.
Cousins Properties (CUZ) – Owns a portfolio of offices Across the Sunbelt, in cities like Atlanta, Austin, Tampa and Phoenix. The average age of its offices is 19 years and they are 91% leased. CUZ yields 5.4%. It trades at 13x AFFO, 28% below its normal valuation of 18x AFFO.
There will be winners and losers as America reevaluates how much office space it needs.
If you’re interested in investing in the sector, stick to the quality names with portfolios of modern properties. These will attract more tenants and command higher rents.
Our favorite pick in the office sector has a best-in-class portfolio and a strong 13-year dividend growth streak.
This company has a sector-leading 94% occupancy rate on its portfolio. And the properties it owns are mission critical to their tenants.
It’s one of the few office REITs expected to grow rapidly over the next few years. And right now, it’s trading at a rare 23% discount.
That means it’s a great time to add this stock to your portfolio.
To get the name of this company, read on here.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily