People who work there might not be excited about going back to work, but investors are.
Office real estate investment trusts, or REITs, are on track for their best year since before the pandemic. This is true even though business numbers show that hybrid work has a strong grip on the market.
Most of the time, stocks in this area are doing better than the S&P 500. An S&P 1500 subindex that tracks office real estate investment trusts is up an average of 25.4%. FactSet says that 2024 would be the best year since 2019 if they keep their wins through December.
On Wall Street, things are going well, even though offices are only half as busy as they were before the pandemic in March 2020.
Kastle, a property tech business, has found that weekly office attendance is 3.2% higher this year than it was this time last year. Utilization was 51% of what it was before the COVID-19 outbreak during the last week, which finished on October 9.
Nicholas Bloom, an economist at Stanford who studies work-from-home trends, said, “There hasn’t really been any change in work-from-home rates for almost two years now.”
Bloom thinks that attendance at work will stay about the same, unless there is a major economic or political event.
“For companies, hybrid is a big way to hire new people and keep old ones,” he said.
Richard Anderson, a REIT expert at Wedbush, said that investors think the worst may be over for the “beaten-down sector.” “There may be a hitting of the bottom of fundamentals.”
There are a few names that are doing especially well. The New York City-based REIT SL Green SLG 4.82% is up 74%. It calls itself Manhattan’s biggest office landlord. Highwoods Properties HIW 1.08%, which focuses on Sunbelt areas, and Vornado VNO 2.63% Realty Trust, which is based in New York City, are both up 58% and 54%.
Jeffrey Kolitch, who runs the $2.16 billion Baron Real Estate Fund, is an owner in REIT 3290 -1.53%. Aside from Equinix, the fund’s biggest interests are home builders Toll Brothers TOL 1.86%, Lennar LEN 1.85%, and D.R. Horton DHI 1.89%. In its most recent quarter, the fund put $48.9 million into Vornado.
Kolitch said that the fund has been “careful for a number of years” with office space.
Kolitch also said that things are looking up in some parts of the sector, even though it might not be clear from a quick look at badge-swipe data. He pointed to a study from February from commercial real estate service provider Jones Lang LaSalle JLL 0.21% to show that most of the empty buildings are in a small group.
“There are still discounts on buildings in the right geographic markets,” Kolitch said. “Over the next few years, that will become more and more clear.”
The head of the fund bought Vornado because it had investments in both New York City and high-end office builds.
Even so, the problems at the office probably aren’t over yet. Because most corporate leases last about 10 years, it will take several more years to see how many companies decide to downsize or move out because of pandemic workplace changes, said Wedbush’s Anderson.
But office REITs that own high-end buildings look like they will be able to weather the storm.
“If there’s going to be any asset class in the spectrum of office that’s going to survive, it’s probably going to be those that offer those great working environments, as opposed to the more run-of-the-mill cookie-cutter office product in the suburbs,” Anderson said. BXP BXP 0.90%, formerly known as Boston Properties, has exposure to high-end office space, he said.
Kolitch is keeping an eye on the office REITspace.
“Working in an office has its problems, but saying there aren’t any opportunities is way too simple,” he said.
