The coronavirus has impacted society in many ways, but one of the most interesting is how it altered the way people work. That has had a major impact on office real estate investment trusts (REITs), and not in a good way. More aggressive investors might be thinking that change brings opportunity, which may very well be true. But if you're looking at the office REIT sector, it probably pays to stick with the best. Here's why this one office REIT is the one to buy today.
When the coronavirus started to spread across the globe, there were a huge number of unknowns. What was clear, however, was that it spread easily in group settings, which led governments around the world to force people to avoid each other.
One way that was accomplished was by asking anyone that could to work remotely. A couple of decades ago, this would have been tough to achieve, but technology has advanced to the point that many people can, indeed, work from anywhere. This is especially true of knowledge workers -- and that's especially bad for office landlords.
Indeed, while many office REITs are still collecting rent on most of their properties, that doesn't mean that their tenants are actually using the offices. The fear is that workers won't need to, or want to, come back at all. Some major technology companies have announced that they will no longer use an office-centric business model, like Dropbox, while many more have delayed return-to-work dates because of new coronavirus variants like the delta variant. The longer the remote work trend persists, the more difficult the landscape will be for office landlords.
For most investors, and particularly more conservative types, this isn't the right environment for risk-taking. This is why sticking with an industry-leading name like Boston Properties (NYSE: BXP) is probably the best move today.
A lot to like
With a $17 billion market cap, Boston Properties is one of the largest office REITs you can buy. Just being big, however, isn't enough to make a company worth buying. Boston Properties is also one of the most diversified office landlords. Its portfolio is focused on large, gateway markets, including namesake Boston, as well as Los Angeles, Washington, D.C., New York, and San Francisco. It also just entered the Seattle market.
You can argue that southern and rural areas have benefited from COVID work shifts at the expense of major markets like the ones Boston Properties favors, but big cities are big for a reason, and history suggests that they will be fine over the longer term.
The real point here, however, is that Boston Properties has its fingers in enough pies that no one area will have a disproportionate impact on its business. You know that diversification is good for your portfolio -- well, it's also good for a REIT's portfolio.
But Boston Properties doesn't stop there,. It's also working to expand beyond traditional office space and into the life sciences office niche. And the offices it owns tend to be at the top end of the markets they serve (Class A in industry lingo), meaning they are modern and highly desirable for tenants. In downturns, companies often look to upgrade into such space if it is, or becomes, available.
On top of the fundamental business strengths that exist in Boston Properties' portfolio, it also has a rock-solid balance sheet. Notably, the company is investment-grade-rated and had $2.1 billion worth of liquidity at the end of the second quarter. So not only does it have the portfolio diversification to weather difficult times, it also has the financial strength.
On top of that, Boston Properties is working on a pipeline of internal growth projects that should keep it at the leading edge of the industry for years to come. Many of the projects it has underway today are 100% preleased, too, so they will strengthen the company's occupancy numbers as they come to market.
Company CEO Owen Thomas summed things up nicely during Boston Properties' second-quarter 2021 earnings conference call. When pressed for an industry overview, Thomas explained: "If you look at the recovery of the office companies relative to other property companies and overall industry, it's much lower. Clearly, the market is concerned, it's not just about Boston Properties, it's about the whole sector..."
If you are in that camp but see it as an opportunity to invest in an out-of-favor sector, your best bet is to stick with the largest, best-positioned players. Given the many positives outlined above, Boston Properties deserves to be at the top of your list.