Real estate investment trusts (REITs) focused on owning office properties were among the hardest hit by the pandemic. On average, office REITs produced a negative total return of 18.4% last year. Weighing them down was the quick shift to remote work by most of their tenants. Many investors worried that this would become permanent, resulting in lower occupancy and rental rates for office REITs in a post-pandemic world.
However, with vaccines rolling out and the pandemic subsiding, companies are making plans to return to the office. That includes banking giant J.P. Morgan (NYSE: JPM), whose CEO Jamie Dimon recently commented that he expects working in the office "will look just like it did before" by September or October. Here's why he believes that will be the case and what it means for office REITs.
The best way to work
At a recent CEO Council Summit by the Wall Street Journal, Dimon spoke about where he sees the economy heading. One of the topics he discussed was his expectation that companies would return to the office in a post-pandemic world. He asserted that working in a physical office was much better than remote work, noting the benefit of a better environment to preserve corporate culture, generate ideas, and compete for clients. That's why he's convinced that working in the office will be just like it was before the pandemic by this September or October. Dimon even quipped, "I'm about to cancel all my Zoom meetings… I'm done with that."
He's not alone in his view. David Solomon, CEO of investment bank Goldman Sachs, has called the work-from-home model an "aberration" that needs to be corrected quickly. That's why his company plans to start bringing people back to the office by the middle of next month. Other big financial firms like Citigroup, HSBC, and Wells Fargo are also planning for a more normal operating model in the coming months.
It's not just financial firms that can't wait for their employees to return to the office. Technology companies and their employees want to get back to in-person work too, with one tech tenant of office REIT Boston Properties (NYSE: BXP) stating, "We previously told employees that they could WFH (work from home) indefinitely. We polled employees, and the overwhelming response was that they want to come back to the office as soon as possible. We have now set a target of September for a reoccupancy and are encouraging those that want to come back to the office sooner to return."
Welcoming them back with open arms
These statements are music to the ears of office landlords who can't wait to see their buildings fully occupied again. That's because they'll see an immediate boost from a return of ancillary revenue from things like parking fees, improved rental collection rates from retailers in their buildings, and higher revenue from hotels they own. For example, Boston Properties could see a $130 million revenue bump from these additional sources over the coming year.
Meanwhile, as employees start returning to their offices, it will give their employers more confidence to sign new or renewal leases. For example, SL Green Realty (NYSE: SLG), Manhattan's largest office landlord, is already starting to see increased activity as the city fully reopens for business. CEO Marc Holliday noted this on the REIT's recent first-quarter conference call, saying, "This rising momentum resulted in our leasing 178,000 square feet during the first three weeks in April, bringing our year-to-date leasing results to 530,000 square feet, putting us well on track to meet or exceed our 1.3 million square foot goal for the year." As the company leases up more of its available space, that should give investors more confidence in its future.
Getting back to the way things were
There has been a lot of speculation about how the pandemic will impact office usage. While some companies are open to allowing their employees to work from home or utilize a hybrid model, most, including JP Morgan, expect a full return of in-person work by this fall. That outlook bodes well for office REITs, which should see an immediate boost in their ancillary revenue and a longer-term one from new lease signings. That should take the pressure off their beaten-down stock prices, making them attractive bounce-back investment opportunities.