Equity Research Analyst
I think we’ll get more clarity regarding the outlook for office real estate in the second half relative to the past several quarters. Despite the recent rise in COVID cases, we’re still looking at Labor Day as a key inflection point for corporates to bring their workforce back to the office, and I think with that will come more long-term decisions about how companies will use their space and how much they ultimately need.
However, I still see this as a multi-year process for corporates to figure out the answers to those questions; brokers we speak with are urging their tenant clients to remain flexible, and we believe many tenants will go through trial-and-error until they determine their optimal office footprint and how to design their space.”
Haendel St. Juste
Equity Research Analyst
We recently upgraded our view on the office REIT subsector to equal-weight from underweight, driven by positive developments in the fight against COVID-19, including increased confidence in a return to the office after Labor Day, recovery in non-office segments such as parking and retail, along with a strong pipeline of tenants touring office space and improved demand/leasing trends.
That said, the outlook for the sector is not without risks—both in the near-term and the long-term. We think our working assumption of a return to the office starting in the third quarter still holds, though emerging Delta variant concerns could delay some tenants. It is also important to note that for many, this ‘return to office’ will not be a full five days a week as many individuals and top management have recognized benefits that work from home bring, with certain companies allowing employees to continue to work from home indefinitely.”
Senior REIT Research Analyst
The outlook will likely be increasingly visible—and may not be as appealing as investors hope. Two market forces are shifting the foundations of this asset class. First, the secular trend of shrinking ‘employee occupancy’ was thought to have reached its limit, though now, the pandemic has moved the goal post. Many office dwellers are now “hybrid” workers and don’t need an office desk full-time.
Second, the pandemic abruptly reversed the multi-decade population migration to ever-larger, denser CBD locations, at the expense of the suburbs/exurbs. Many second-tier cities and dense suburban locations have seen an explosion of in-migration. The pandemic was likely only the “last straw,” however, added to high costs of living, friction costs in commuting, and now, health and well-being costs. We expect these to remain in place for some time, which could yield lower CBD asset values, higher suburban office values, a spike in suburban office supply, and an acceleration of adaptive re-use for older CBD inventory.”