Office real estate investment trusts (REITs) own, manage, develop, and rent office space leased to various tenants. These properties range from skyscrapers in the largest U.S. cities to sprawling office campuses in the suburbs. This real estate is crucial for companies that use offices to support their operations.
Here’s a closer look at office REITs, including how they work, their advantages and risks, and some top office REITs to consider in 2022. Image source: Getty Images. Understanding office REITs
Most office REITsfocus on a specific property type, tenant, or location. Some office REITs concentrate on multi-tenant office buildings in central business districts. Office space in these areas tends to remain in high demand, enabling these office REITs to maintain high occupancy levels and benefit from steadily rising rental rates.
Other office REITs focus on large office campuses. They’ll often lease whole buildings to a single tenant under long-term triple net leases . Meanwhile, some REITs concentrate on specialized office properties to support the needs of a specific tenant type. These properties can include highly secure buildings for government agencies, creative space for technology and media companies , or specialized lab space for life sciences companies .
Many office buildings earn additional revenue from parking fees, while some large skyscrapers feature an observatory that generates ticket sale revenue. Meanwhile, many office buildings also lease retail space to shops and restaurants. Advantages of investing in office REITs
Most office tenants sign long-term leases. Terms can be five to 10 years for space in multi-tenant office buildings to more than a decade for a single-tenant office net lease. Long-term leases provide office REITs with relatively steady cash flow. They also help mute the impact of a recession since office REITs don’t have to try leasing all their space during a downturn. Because of that, most office REITs have experienced only a relatively modest dip in rental income during the COVID-19 pandemic.
Meanwhile, demand for office space has been relatively durable. Many companies have adopted a hybrid model that allows their employees to work from home more often, so most tenants continue to lease space in offices. They’ve found that having employees together in an office setting can increase collaboration, coordination, and productivity.
Given their stability and durability, office buildings tend to steadily appreciate in value. Their combination of steady income and appreciation make them attractive real estate investments for institutional investors such as pension funds. Risks of investing in office REITs
Given the ongoing pandemic, there’s still a lot of uncertainty about what the future holds for offices. Companies have had to push back their return-to-office plans over concerns about more contagious and vaccine-resistant variants of the coronavirus. Meanwhile, many office workers favor remote work, which could force more companies to permanently adopt some form of hybrid policy and potentially reduce their need for office space in the future.
That could add to an oversupply risk that often plagues the office REIT sector. Developers usually start constructing office buildings on speculation, betting they’ll secure tenants before finishing construction. However, if developers build too much supply, this can weigh on occupancy levels and lease rates in certain markets.
Office REITs also face interest rate risk. Office buildings are expensive, requiring REITs to borrow money to acquire and develop these properties. As interest rates rise, they can increase interest expenses if an office REIT uses floating rate debt or has near-term debt maturities. On top of that, rising interest rates increase the income yield on lower-risk investments such as bonds . As a result, REIT stock prices often fall as interest rates rise since the REITs have to boost dividend yields to compensate investors for their higher risk profile. 3 top office REITs to buy
In early 2022, 22 publicly traded REITs focused on owning office properties. Here’s a closer look at the three best office REITs for investors to consider: Alexandria Real Estate Equities
Alexandria focuses on specialized office space for the collaborative life sciences, ag tech, and technology industries . It owns campuses in key urban innovation clusters in Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and North Carolina’s Research Triangle.
The company’s focus on collaborative space has been a key differentiator during the pandemic. Although many office tenants could easily allow their employees to work from home, some have required in-person work in specialized settings. The pandemic has proven to be a boon for the life sciences sector as billions of dollars have poured into the space to fund […]
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