It was just a short 19 months ago when the COVID-19 pandemic started and changed absolutely everything about everything. The unpredictability of the virus, coupled with a very real attempt at keeping infection as low as possible to preserve the fragile medical system in the United States, sent workers home. Many, primarily office workers, have still not really returned to their corner offices and donut-laden break rooms.
Given that offices are still largely in limbo, with large companies like Amazon, Facebook, Google, Microsoft, and even Starbucks kicking the can on reopening further down the road to January 2022, it's really anybody's guess when both companies and their employees will agree that it's safe enough for office life to resume.
With so much uncertainty in the office sector, it was pretty surprising that Oak Hill Advisors (OHA) decided to take a $326.5 million gamble on Workspace (OTCMKTS: WKPPF), a company that specializes in leasing office space. Oak Hill Advisors will be acting as a capital partner to help Workspace continue to grow its office space holdings.
"This investment in Workspace is exactly the type of opportunity OHA is focused on: partnering with a great management team with an excellent operating history and strong performance in a sector with strong secular tailwinds," Matt Borstein, partner and portfolio manager for Oak Hill Advisors, said in a press release. "We are looking forward to exploring additional investments together."
Why Workspace workspace works as space
Office space is absolutely a huge gamble right now, but the office spaces most in trouble are those located in busy urban areas, where decently sized footprints come at a premium and it's difficult to keep workers far enough apart to slow the potential spread of COVID.
These office spaces have seen a significant drop in value. As of March 2021, central business district offices declined 2.4% year over year, but, surprisingly, suburban offices have seen a 3.6% increase in the same time frame.
Despite the fact that no one seems to want to go back to work, some people do want to go back -- and they're going. Hybrid schedules are becoming popular with office workers, but so are suburban offices, where space is cheaper for companies to lease, and employees can get away from one another more readily. They're also closer to the places where a lot of employees live, making these less expensive, larger, newer structures super appealing to all kinds of businesses.
According to the Kastle Back to Work Barometer, offices reached a 36.1% occupancy rate as of the week of Oct. 6, averaged across 10 U.S. metropolitan areas. This is a 1.1% increase over the week prior and a 2.5% increase since the week of Sept. 15. All 10 metros saw increases over the prior week.
The Millionacres bottom line
With almost 10 million square feet of office and light industrial space across about 150 properties in five U.S. markets, Workspace expanding its share of the 2.7 billion square foot suburban office market just makes sense. This is an area the company knows well and has been investing in since 2015, with great success.
It's a win for Oak Hill Advisors, too. It formed a brand-new real estate unit in fall 2020 in hopes of taking advantage of an anticipated swell of distressed commercial property that the Federal Reserve managed to keep at bay. The investment in Workspace was the first endeavor of this unit, which has helped to combine Oak Hill Advisors' lending knowledge with Workspace's experience in suburban offices.
Somehow, Workspace signed 100 new leases and kept 99% of its tenants paying rent on empty space during the pandemic and through today. That's easily the most important number in this entire article. Even in a time when it would have been totally understandable for a company to stop paying its rent, 99% of Workspace's tenants didn't. It's a great sign that they have competent management and good spaces, and companies feel like they offer good value.
With prices of suburban offices still low due to so much uncertainty about the future of office work, it's the absolute ideal time for someone (Workspace) to go in and snatch up as much as they can. This partnership with Oak Hill Advisors makes Workspace one for investors to watch very closely in the coming months.
Office space may not be as sexy as electric cars and space tourism, but it's good for long-term growth and stability -- which is, frankly, the sexiest thing you can have in your portfolio this gray sweatpants season.