The pandemic has had a significant impact on the U.S. office market. However, some markets have fared better than others. Three metros that have stood out for having the best office market metrics during the past year are Tampa, Miami, and Dallas.
That bodes well for office REITs (real estate investment trusts) with heavy concentrations in those Sun Belt cities. Three that own properties in some of those cities are Cousins Properties (NYSE: CUZ), Highwoods Properties (NYSE: HIW), and City Office REIT (NASDAQ: CIO). Here's a look at why that puts them ahead of rival office REITs.
Standing out amid a challenging period
The U.S. office market has experienced a notable decline in occupancy over the past year. The vacancy rate has risen from 13% in early 2020 to 15.8% during the first quarter of 2021. That has put pressure on rental rates as asking rent growth has slowed from 3.4% to 2.6%, though effective rent is much lower as office owners use concessions to keep and attract tenants.
However, some cities have experienced lower declines in office occupancy and rental rate changes. A ranking by the Newmark Opportunity Index showed that Tampa, Miami, and Dallas stood out as weathering this storm better than others. Tampa experienced the smallest increase in vacancy among the 22 markets Newmark ranked. Meanwhile, Miami was only one of two office markets to see flat to declining sublease availability, suggesting that tenants maintained their contracted space. Finally, Dallas is seeing a flood of company relocations and expansions as they take advantage of its strong business climate.
Solid exposure to these top office markets
Cousins Properties owns office space across seven Sun Belt markets, including Tampa and Dallas. The REIT currently gets 8% of its net operating income (NOI) from Tampa -- where it controls 21% of the class A office market -- and 3% from Dallas. The REIT should benefit from the continued migration trends as businesses relocate and expand in those two fast-growing Sun Belt markets. It's in an excellent position to grow in both markets, owning enough land to support more than 1 million square feet of new office space in Dallas and 170,000 square feet in Tampa.
Highwoods Properties owns properties across eight primarily Sun Belt markets, including Tampa, at 13% of its annualized rent. The company is actively expanding its portfolio in the city, investing $71 million to build another 150,000 square feet of space. In addition, Highwoods controls enough land to construct an additional 1.4 million square feet of office space in Tampa to support future growth as more companies relocate and expand in the metro area.
City Office REIT owns properties across eight southern and western cities, including Tampa and Dallas. The REIT currently gets 17% of its gross rent from Tampa and 10% from Dallas. City Office REIT has benefitted from Tampa's strong office market. It secured a 93,000 lease during the first quarter, including an eight-year 78,000-square-foot renewal and a 15,000-square-foot expansion. The starting rate on the renewal is 2.5% higher than the current rate, while the lease will benefit from 2.5% annual increases. The REIT still has some available space in both cities, positioning it to continue growing its income as the office sector strengthens.
Location, location, location
Location is vital to successful real estate investing. That's why Cousins Properties, Highwoods Properties, and City Office REIT stand out. They own properties in some of the best office markets, positioning them to benefit from lower vacancy rates and above-average rent growth as offices spring back to life in the future. Because of that, these REITs could outperform their rivals.