Shares of office real estate investment trust (REIT) Hudson Pacific Properties (NYSE: HPP) have tumbled more than 25% over the past year. Weighing on the West Coast-focused office landlord are concerns technology companies will continue working remotely in a post-pandemic world. That implies they'll need less office space, which would impact the REIT's occupancy levels and vacancy rates.
However, those concerns seem unfounded. That's becoming increasingly evident as tech companies sign new and renewal leases for office space in the San Francisco market.
Locking up leases
Hudson Pacific Properties (NYSE: HPP) currently owns interests in 50 office properties with 11.9 million square feet of space in several major West Coast markets. However, it's highly concentrated in the San Francisco Bay area, including tech-heavy Silicon Valley, which combines to contribute more than 60% of its ABR. That's a concern since the company has a significant number of leases expiring this year, at a time when the tech sector has quickly adapted to working remotely.
While the market has been worried about its ability to secure leases for this space, the REIT has steadily made progress. It signed 20 new and renewal leases in the San Francisco Peninsula and Silicon Valley markets during the fourth quarter, totaling 143,000 square feet of total space. Further, during its fourth-quarter earnings call in mid-February, the company said it saw a notable increase in small-tenant activity in those two markets.
That interest has translated into additional lease signings this year. The company recently reported it signed nearly 300,000 new and renewal deals in those markets over the past couple of months. The most notable is a seven-year renewal lease with Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google. The 207,000-square-foot-plus lease in Palo Alto's Stanford Research Park addresses the REIT's biggest lease expiration of the year. Further, these contracts have combined to reduce its remaining lease expirations to 7.5% of its ABR.
From a tailwind to a headwind
While Hudson Pacific still has a lot of space left to lease, it's optimistic that it can continue securing new contracts. One factor driving that view is the rollout of vaccines. CEO Victor Coleman stated on the fourth-quarter call that this "gives us a line of sight on getting our tenants and employees safely back to their offices. And as you know, we believe that for the vast majority of the companies, it's not a matter of if, but when" they return.
Coleman also explained: