The Panic In The Office Sector Means Profits For Us


Source: 360 Park Avenue South

The panic in the office sector is raging on. Three years ago, 360 Park Avenue South – an attractive, modern Class A office building – sold for $300 million. Recently, the Canada Pension Plan Investment Board dumped its 29% stake in the midtown Manhattan office building. The price? One dollar.

It’s no secret offices have been in a tough spot lately. With sky-high vacancies and rising interest rates, many office owners are finding it more and more difficult to turn a profit.

And the pension plan’s desperate deal to get rid of office investments – at any price – is a sign the office sector is hitting rock bottom. But that spells good news for us. It means patient investors buying high-quality properties could score once-in-a-lifetime deals.

Today, I’ll explain why some office real estate investment trusts (REITs) are gearing up to go on buying sprees while other investors panic. I’ll also give you the name of one company that has already landed several incredible deals that could create massive value for shareholders – and a reliable income stream.

The Last Buyers Standing

Everyone is seemingly scared to death of offices. Even those brave enough to invest can’t get the money they need – banks don’t want to make loans on offices. That leaves REITs as one of the few buyers left for office buildings.

REITs still have money to invest and can get more – by issuing shares, selling debt, or making deals with private investors. And since they have high-quality, diversified portfolios, REITs can borrow money at lower interest rates.

While other landlords may neglect their properties or try to flip them for a quick gain, REITs are stable, long-term owners that maintain and upgrade their buildings. That helps REITs get better tenants. So when everyone else is getting rid of offices at whatever price they can get, REITs are picking and choosing the highest-quality properties and most attractive opportunities.

As I explained several weeks ago, tenants are choosing to lease the highest-quality offices they can find. That means the best, most modern offices have lower vacancies and earn much higher rents.

According to real estate broker CBRE, “premier” office buildings have a vacancy rate of 12.6%. That’s 30% lower than “non-premier,” offices which are 18% empty. Plus, “premier” offices have asking rents 37% higher than “non-premier” offices.

So office REITs have their choice for bargains in the sector right now. And the best ones know exactly where the research says to look. Which is where our opportunity to profit comes in, as REITs must pay at least 90% of their taxable income to shareholders. So the more successful a REIT’s operations, the better.

And one smart player is taking advantage of the dirt-cheap deals in the space right now.

A Smart Player Ahead of the Curve

One company that’s been buying up offices on the cheap is Boston Properties (BXP). Boston Properties is an office REIT that owns buildings in major cities like New York, Boston, San Francisco, and Washington DC.

88% of Boston Properties’ office buildings are considered “premier,” and the company is upgrading another 5% of its portfolio to reach “premier” rating. Boston Properties bought the 29% stake in 360 Madison Park South for $1. That boosts its ownership of the building to 71%.

Boston Properties has money available. And according to its CEO, the company is going on the offensive looking for deals while others are panic selling.

There may be too many empty offices now, but the market is starting to correct the imbalance. Fewer companies are offering fully remote work, and more are pushing workers to go back to the office.

Older offices are being converted to other types of real estate, like apartments. And new office construction has dropped off a cliff. So it’s only a matter of time before vacancies start going down and the sector recovers.

Boston Properties yields 6% and trades at 13x adjusted funds from operations (AFFO). That’s less than half its historical average of 28x AFFO (AFFO is a measure of how much cash is available for a REIT to pay dividends to shareholders).

So now may be a good time to invest in this office REIT that’s buying up premier properties on the cheap.

More By This Author:

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Brad Thomas is the Editor of the Forbes Real Estate Investor.

Disclaimer: This article is intended to provide information to interested parties. ...

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