There are a lot of questions about the future role offices will play in a post-pandemic world. Many people have embraced working remotely, at least part of the time, which could impact how much office space companies need. That uncertainty has kept the pressure on shares of most office REITs (real estate investment trusts).
On the other hand, many companies have found offices are the best place for mentoring, creating culture, productivity, and innovation. Because of that, they could see a renaissance as employees return in the coming months. That could boost the fortunes of office REITs like Columbia Property Trust (NYSE: CXP).
With that backdrop in mind, here's a look at the bull and bear case for buying shares of the office REIT right now.
The case for buying Columbia Property Trust
The central bull thesis for Columbia Property Trust is that companies will utilize offices as they had before the pandemic. While fewer employees will likely be in the office each day as some opt to work remotely part of the time, companies will still need space for them and to accommodate more social distancing in the future. Because of that, office occupancy levels should remain high, driving steady rent growth.
Columbia Property is starting to see evidence of this as demand for space in its office buildings is improving. The company signed 69,000 square feet of leases during the first quarter at rental rates that were up double digits from prior leases on existing space. That brought its occupancy to 94% of its total space as of the end of the first quarter.
In addition to that positive trend, the company received a buyout offer earlier this year at $19.50 per share in cash. It's currently going through a strategic review to determine its next step. Given the improvement in the office market in recent months, the company could receive a higher offer from that same group or another interested party.
The case against buying Columbia Property Trust
While demand for office space has improved as companies have more confidence that vaccines will enable them to bring their employees back to the office by this fall, there's still a lot of uncertainty about how much space they'll need. Because of that, Columbia isn't sure how much of its expiring leases -- which cover 7.5% of its rentable space -- it will be able to renew, leading it to peg its year-end occupancy rate between 90% to 95%. That's down from 97.6% at the end of March of 2020. Meanwhile, pandemic-related headwinds such as uncollectible rent, lower parking revenue, and other issues will put additional pressure on same-store net operating income (NOI), which it sees falling 3% to 5% this year.
The uncertainty surrounding future office demand has also cast a shadow over the company's development efforts. One of Columbia's near-term opportunities to create shareholder value is its nearly 2 million-square-foot development/redevelopment pipeline. Once delivered and stabilized, this additional space could add up to $40 million of incremental NOI. That's a meaningful amount for a company that has generated $222.7 million in NOI over the last 12 months. However, if it can't secure tenants for this space, it won't capture that full value potential.
Finally, the company's strategic review is a bit of a wild card. If Columbia opts for the existing take-private proposal, it limits the upside of new investors. Meanwhile, if it rejects that deal and doesn't accept another buyout offer at a higher price, it could put additional pressure on the stock price, which has already declined more than 17% since the start of 2020.
Too many unknowns
Columbia Property doesn't stand out as a compelling buy, given the unknown outcome of its strategic review. While it could receive a higher offer, it might also accept that bid or reject it. When combined with the uncertain future of the office and its development/redevelopment pipeline, there are too many downside risks. Because of that, investors seeking exposure to the office sector should consider buying one of these REITs instead.