The COVID-19 outbreak cleared out office buildings last year as companies pivoted to remote work to help slow the spread. Their ability to quickly adapt caused concerns that working remotely would replace the need for central offices in the post-pandemic world. Those concerns have weighed on office REITs, or real estate investment trusts, with the average one producing a total return of -18.4% last year, according to Nareit.
However, while companies have adapted to working remotely, most long for the day they can return to the office. That day appears to be fast approaching, given the current vaccine rollout. As companies return to their workspaces, it should take some of the pressure off office REIT valuations. Two that could get the biggest shot in the arm as vaccines allow office tenants to return in the coming months are Boston Properties (NYSE: BXP) and SL Green Realty (NYSE: SLG), making them stand out as top buys right now.
Betting big on a return to big cities
Boston Properties is the largest owner and developer of Class A office properties in the country. It owns a concentrated portfolio across five of the country's largest coastal gateway cities (Boston, Los Angeles, New York, San Francisco, and Washington, D.C.). While the COVID-19 outbreak hit many of those cities hard, Boston Properties expects them to bounce back post-pandemic.
A leading factor driving that view is that knowledge workers -- especially those in the life science and computer science industries -- tend to cluster in big cities. That's because they "have unmatched educational, cultural, and civic resources that attract the leading clusters of knowledge workers," according to comments by CEO Owen Thomas on the REIT's fourth-quarter conference call. Thomas further noted that "knowledge workers have more job opportunities and are more productive when working with others in clustered environments." That's why Boston Properties believes office demand in these cities will continue growing long after the pandemic.
The company is already betting big on that rebound by investing in a large pipeline of development projects. The REIT has $2.2 billion of development and redevelopment projects already under construction and plans to start more than $800 million of additional ones this year, mainly new life science developments and conversions. On top of that, it's formalizing relationships with private equity partners to help fund acquisitions.
Meanwhile, the REIT should see improvements in its existing assets as tenants return to the office, including higher rent collection from retailers and a rebound in parking fees. Add it all up, and Boston Properties stock has significant bounce-back potential after losing roughly a third of its value in the past year.
Betting big on its rebound
SL Green is Manhattan's largest office landlord. That concentration hurt it during the pandemic, given its outsized impact on Manhattan. However, it should benefit as that headwind becomes a tailwind in the coming quarters. That's already starting to occur, as SL Green has experienced a noticeable improvement in leasing activity and rental collection from retailers in its office buildings in recent months.
Meanwhile, the company worked tirelessly during the pandemic to enhance its financial profile so it can take advantage of opportunities to create value for its shareholders. It captured strong institutional demand for trophy properties by selling select assets at excellent values, significantly enhancing its financial flexibility. That enabled it to take advantage of the roughly 35% sell-off in its stock price over the past year to repurchase shares at a meaningful discount to the underlying value of its real estate. SL Green recently bolstered its buyback program by $500 million to $3.5 billion, which is a substantial amount, given its sub-$4.5 billion market capitalization.
The company was also able to increase its dividend for the 10th straight year and pay a special dividend from asset sales proceeds. Meanwhile, its enhanced financial position allows it to continue repurchasing stock, fund its development pipeline, and make some targeted acquisitions. These investments could pay big dividends as the New York City office market recovers post-pandemic.
Big-city offices aren't going away
While companies have adapted to remote work, this setup has certain drawbacks that have prevented them from operating at peak ability. Because of that, most companies expect to return to their offices this year as vaccines roll out and make it safer to work in congregate settings. That catalyst should give shares of Boston Properties and SL Green Realty a shot in the arm, making them great buys ahead of that recovery.