As vaccination rates increase, office vacancies are expected to decrease, boosting the fortunes of real estate investors large and small who have a stake in those spaces across the country.
The market already is seeing that effect, with the performance of real estate investment trusts (REITs) as just one good example.
According to Nareit, the 19 office REITs it tracks posted year-to-date returns at 15.09% and a dividend yield of 3.42% through May 31, a sharp recovery from the -18.44 those equity trusts posted in total return for 2020. That compares favorably to the 11.71% and 0.78% in year-to-date return and dividend yield for the S&P 500 through June 18.
But those overall figures can mask big differences in individual markets. Investors -- whether in individual properties or through real estate investment trusts (REITs) and other equity instruments -- would be well served to pay attention to such factors as the type of property involved and, this being real estate, where the heck it sits.
New York led the way down; shorter commute times lead the way up
Information and analytics provider Trepp’s June office research report provides this highline takeaway: Class A space near major transportation arteries -- including highways and public transportation -- are recovering more quickly, and in some cases, major metros are still showing an occupancy decline.
The report says that between March 20 and April 2021 "notable occupancy declines" were led by New York City (-2.32% decline in occupancy); Minneapolis (-2.30%); Washington, D.C. (-2.27%); Houston (-2.22%); and Bridgeport-Stamford, Connecticut (-2.16%).
"Looking ahead, the rebound across office markets will vary depending on the location and type of building it is as the rift between the 'haves' and 'have nots' becomes more prominent. High-end properties closely located to major transportation hubs are likely to see a faster and more complete recovery while landlords with outdated facilities will be forced to play catch up," the Trepp report says.
The report goes on to note that "firms on the hunt for new office space will prioritize class A options featuring up-to-date amenities that will make it worth the trip for employees, just as buildings near public transit will also fare better considering the strong push towards reduced commute times."
No death of the office here
The Trepp researchers note that pandemic-induced changes -- such as hybrid work models and the need to reconfigure office space to accommodate social space -- may suppress asset values in the near term. As for the idea that downtown central business districts are a dying breed, Trepp gives it the same mild stink eye as do other recent reports.
"Concerns about the 'death of the office' or 'death of gateway cities' have largely been overblown," the researchers write. "Younger employees jump starting their careers still broadly prefer to engage with colleagues in-person, and major urban cores, boasting diverse amenity offerings and cultural attractions, will continue to attract top talent."
And that alone should help attract investment dollars.
Some room to breathe …
Trepp looks at office space use and re-use through the lens of commercial mortgage-backed securities (CMBS). The report says that only about $40 billion, or 27.5%, of that total balance will mature through 2023. That means many borrowers will be getting some breathing room.
"The overwhelming bulk will be up for refinancing in 2024 and after, at which time the office segment would have had ample time to recover and settle into its post-pandemic state, while population and employment gains continue to offset losses from the rise in hybrid and remote work," the Trepp researchers write.
The Millionacres bottom line
Like with everything else, the pandemic’s full impact on office space will be felt for years to come, and companies will be continuously reevaluating their space needs as work models evolve and leases come up for renewal.
And that’s not all. There was a lot of collateral damage felt among commercial real estate owners and their tenants when office space got washed out during the pandemic -- especially among retailers and restaurants that occupy space either under the same roof or nearby -- and how much collateral gain there will be remains to be seen as well.
While a general upward trend is already underway, it still behooves savvy investors to appraise their own markets in as precise granularity as they can. Beginning with the right town -- not to mention the right part of town -- is a nice start, and reports like this can help get the search underway.