Office Real Estate in 2025++

[lnofeisone]

I couldn't find a topic, so here it goes: Office is probably the second most hated asset class behind O&G. Many companies are now pushing for a return to office (RTO). JPM is already there. Amazon is now going to RTO 5, and Bloomberg is at RTO 4. Concurrently, local governments support office rejuvenation (as most downtown areas tend to have offices). Then we have the DOGE...is it time to start picking up a basket of office names in the strongest markets (NYC, Boston, DC, SF)?

 

I think in 2+ years, we'll see the results of this remote work reversal. I don't think we'll go to pre-covid levels but more than today and that could have meaningful impact on some of these REITs. What does the board think?

[Gregmal]

What I've struggled with here all comes back to a few issues that kind of circle the same thing. What is the exact relationship between all this and its timeline for impact? Corporations and agencies can be wasteful...did they or do they have more office space than they needed? Most did. But youre on long term contracts in this space. Rate of change in terms of space usage over a 10-20 year lease...when did that lease start and how has its impact run its course? Each lease and floor of a building can obviously vary. If Amazon calls for a RTO, its to bring back existing capacity presumably, something they already have space for. But what about areas where they've already made an efficiency call? Why are they going to be in the market for more office space? What about the offices that they moved to Texas or Carolina? How does that impact my REIT in DC or LA?

 

I have a little HIW I bought when these crashed in 2022, but I just think theres way too many variables and if youre gonna play something like this, you want building specific clarity with a few assets such as ESRT or ALX. I couldn't imagine trying to keep a handle on 300 buildings or something. 

[Spekulatius]

I don’t have a clue about office demand , but I am surprised that WFH lasted as long as it did. It is generally a productivity disaster from my limited experience and long term it a team and employee cohesion disaster on top of that. However, you don’t need 5 days in office to get most of the benefit of working together back, 3-4 days suffice and even that could mean quite a bit reduction in demand compare to 2019 levels, enough to make 20% of office space dedundant.

[gary17]

11 minutes ago, Spekulatius said:

I don’t have a clue about office demand , but I am surprised that WFH lasted as long as it did. It is generally a productivity disaster from my limited experience and long term it a team and employee cohesion disaster on top of that. However, you don’t need 5 days in office to get most of the benefit of working together back, 3-4 days suffice and even that could mean quite a bit reduction in demand compare to 2019 levels, enough to make 20% of office space dedundant.

one weights reduced productivity against cost of maintaining a decent office in a inflationary environment and staff retention - likely attributed to why it has lasted as long as it has been 

[hasilp89]

5 hours ago, lnofeisone said:

is it time to start picking up a basket of office names in the strongest markets (NYC, Boston, DC, SF)?

April 2023 was a good time for it.

[lnofeisone]

1 hour ago, hasilp89 said:

April 2023 was a good time for it.

Do you have names you are looking at or picked up in April of 2023?

 

@Gregmal - I only pulled this up because some of the organizations in the DC area I know are starting to look for additional space. Some because they let their leases lapse after the pandemic, and some just happen to outgrow existing space and just have too many people with the RTO mandate. I think the investment case here would likely be geography-specific, though I'm debating if it's worth picking up a bunch of names or something broad like Boston properties. 

[Gregmal]

55 minutes ago, lnofeisone said:

Do you have names you are looking at or picked up in April of 2023?

 

@Gregmal - I only pulled this up because some of the organizations in the DC area I know are starting to look for additional space. Some because they let their leases lapse after the pandemic, and some just happen to outgrow existing space and just have too many people with the RTO mandate. I think the investment case here would likely be geography-specific, though I'm debating if it's worth picking up a bunch of names or something broad like Boston properties. 

Yea I think that would be the best way to take a stab if you’re inclined. Gotta be well defined regional bets. Probably focus on quality as well.

[Sweet]

60 minute did a piece on this a while back, it was based in New York and was explaining how banks were reluctant to call in their debt on some of the buildings.  Highlights that higher end quality real estate was doing much better than the older stock too if memory serves me right.

 

There is a new etf for this which baskets together a bunch of REITs with large exposure in this space - ticker ‘DESK’.  Posted some more on this here: 

 

Edited Sunday at 11:35 PM by Sweet

[hasilp89]

3 hours ago, lnofeisone said:

Do you have names you are looking at or picked up in April of 2023?

 

@Gregmal - I only pulled this up because some of the organizations in the DC area I know are starting to look for additional space. Some because they let their leases lapse after the pandemic, and some just happen to outgrow existing space and just have too many people with the RTO mandate. I think the investment case here would likely be geography-specific, though I'm debating if it's worth picking up a bunch of names or something broad like Boston properties. 

I bought vornado early in 2023 and added more on the way down, have sold a lot of it but still own some. To me it was quality real estate, decent debt structure and penn. slg has also done well plenty of others. nlop was probably the fattest pitch over the last few years but I whiffed.

[CorpRaider]

I think you can find a bunch of posts about office REITs on here from the last couple of years.  I think most are in a thread about office being obsolete (or something like that) in the general discussion, rather than a bunch of idea threads.  I remember JBGS, SLG, VNO, ALX, and PGRE.  SLG is up like 230% since april 23.

Edited Monday at 02:19 PM by CorpRaider

[moneyball]

I think when looking at office it's helpful to separate the market into NY class A and then everything else. For a number of reasons trophy NY is its own animal. We've still yet to see any real capital formation around all of the other office deals across the US that need to get recapitalized. Much of the early price discovery actually was "fake" in that they were sold to people who themselves were looking to make money from syndicating the deals, not from ownership. 

 

Given the extremely high replacement cost / replacement economics of office buildings, I believe for the best buildings we will see rents that exceed levels real estate investors could ever dream of five-seven years ago. In a lot of ways I think the QE cycle artificially lowered net effective rents and in addition to supply/demand we will witness this unwind with rents at the top end.

[lnofeisone]

6 hours ago, moneyball said:

I think when looking at office it's helpful to separate the market into NY class A and then everything else. For a number of reasons trophy NY is its own animal. We've still yet to see any real capital formation around all of the other office deals across the US that need to get recapitalized. Much of the early price discovery actually was "fake" in that they were sold to people who themselves were looking to make money from syndicating the deals, not from ownership. 

 

Given the extremely high replacement cost / replacement economics of office buildings, I believe for the best buildings we will see rents that exceed levels real estate investors could ever dream of five-seven years ago. In a lot of ways I think the QE cycle artificially lowered net effective rents and in addition to supply/demand we will witness this unwind with rents at the top end.

This is what I think as well. While SLG and VNO popped, the likes of PGRE and JBGS didn't get much love. The environment for both of these markets (NY and DC, and i know PGRE has a bunch of stuff in SF) is improving with workers being mandated to go back to work. This push is becoming very real and I'm trying to discern how meaningful this will be for the valuation of these names and more importantly, how fast. 

[brobro777]

https://www.ft.com/content/3dad95df-0760-4c15-b9a2-c98b6ea1d1df

 

My take is the demand for office will never be the same so you gotta find the right situation with the right assets at the right price... which seems difficult and risky and probably not worth it in terms of returns - maybe it's better to look for one foot hurdles like Old Man Buffett said

 

But then again I've worked from home since spring 2020 so I'm clearly biased haha