Investing In Office REITs The motley fool

Office real estate investment trusts (REITs) own, manage, develop and lease office space leased to various tenants. These properties range from skyscrapers in America’s largest cities to expansive office campuses in the suburbs. This real estate is crucial for businesses that use office space to support their operations.

Here’s a more in-depth look at desktop REITs, including how they work, benefits, and risks, and some of the best desktop REITs to consider in 2022.

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Understanding Desktop REITs

Most office REITs focus on a specific type of property, tenant or location. Some office REITs focus on multi-tenant office buildings in central business districts. Office space in these areas tends to remain in high demand, allowing these office REITs to maintain high occupancy rates and benefit from ever-increasing rental rates.

Other office REITs focus on large office campuses. They often lease entire buildings to a single tenant under long-term triple net leases. Meanwhile, some REITs focus on specialized office buildings to meet the needs of a specific type of tenant. These properties can include highly secure buildings for government agencies, creative space for tech and media companies, or specialized lab space for life science companies.

Many office buildings derive additional revenue from parking fees, while some large skyscrapers have an observatory that generates revenue from ticket sales. Meanwhile, many office buildings are also renting retail space to stores and restaurants.

Benefits of investing in office REITs

Most office tenants sign long-term leases. Terms can range from five to ten years for space in multi-tenant office buildings to over ten years for a net single-tenant office lease. Long-term leases provide office REITs with relatively stable cash flow. They also help mitigate the impact of a recession, as office REITs don’t have to try to rent out all of their space during a downturn. For this reason, most office REITs only experienced a relatively modest drop in rental income during the COVID-19 pandemic.

Meanwhile, the demand for office space has been relatively sustainable. Many companies have adopted a hybrid model that allows their employees to work from home more often, so most tenants continue to rent office space. They found that having employees together in an office can increase collaboration, coordination, and productivity.

Given their stability and durability, office buildings tend to gradually gain in value. Their combination of stable income and appreciation makes them attractive real estate investments for institutional investors such as pension funds.

Risks of Investing in Office REITs

Given the ongoing pandemic, there is still a lot of uncertainty about what the future holds for offices. Companies have had to push back plans to return to the office over concerns over the more contagious and vaccine-resistant variants of the coronavirus. Meanwhile, many office workers favor remote working, which could force more companies to permanently adopt some form of hybrid policy and potentially reduce their office space requirements in the future.

This could add to the oversupply risk that often plagues the office REIT industry. Developers usually start building office buildings on the basis of speculation, betting that they will find tenants before they complete construction. However, if developers build too much supply, it can weigh on occupancy rates and rental rates in some markets.

Office REITs also face interest rate risk. Office buildings are expensive, forcing REITs to borrow money to acquire and develop these properties. As interest rates rise, they can increase interest charges if an office REIT uses floating rate debt or has short-term debt maturities. In addition to this, rising interest rates increase the return on income from low-risk investments such as obligations. As a result, REIT stock prices often fall as interest rates rise because REITs have to rise. dividend yields compensate investors for their higher risk profile.

3 best office REITs to buy

At the start of 2022, 22 listed on the stock exchange REIT focused on owning office buildings. Here’s a closer look at the three best office REITs for investors to consider:

Office REITs

Stock symbol

Market capitalization

Company Description

Alexandria real estate actions

(NYSE: ARE)

$ 34.3 billion

A desktop REIT focused on the life sciences industry.

Boston Properties

(NYSE: BXP)

$ 19.5 billion

This office REIT focuses on the main gateway cities.

Properties of cousins

(NYSE: CUZ)

$ 6.2 billion

An office REIT focused on the Sun Belt.

Data source: Ycharts and company websites. Market capitalization data as of January 4, 2022.

Alexandria real estate actions

Alexandria focuses on specialist office space for the collaborative life sciences, agricultural tech and tech industries. It has campuses in key urban innovation hubs in Boston, the San Francisco Bay Area, New York, 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. While many office tenants could easily allow their employees to work from home, some have required in-person work in specialized environments. The pandemic has proven to be a boon to the life sciences industry as billions of dollars have been invested in space to fund research and development of diagnostic tests, therapies and vaccines. This fueled the demand for laboratory space, increasing occupancy levels and rental rates at the Alexandria facilities. It also provided the company with opportunities to continue to expand its portfolio.

Boston Properties

Boston Properties is the world’s largest publicly traded developer and owner of Class A office buildings, which are modern buildings in prime locations. She focuses on owning properties in six major coastal cities: Boston, Los Angeles, New York, San Francisco, Washington, DC and Seattle. The Offices REIT also has a large and growing portfolio in the life sciences area.

Boston Properties has strategically capitalized on growth regions and sectors during the last years. It increased its exposure to tenants in the life sciences, technology, advertising, media and information industries. It has also expanded its presence in growing markets, including increasing its exposure to San Francisco and entering Los Angeles and Seattle. It is a leading developer, with $ 2.7 billion in active development at the start of 2022, including several life science projects. These developments position Boston Properties to continue to increase shareholder value in the years to come.

Properties of cousins

Cousins ​​Properties is focused on Class A office buildings in the fast growing Sun Belt markets. It owns modern office buildings in Austin, Atlanta, Phoenix, Charlotte, Tampa, Houston and Dallas. Cousins ​​also has several additional office buildings under development in several of its existing markets and a new one in Nashville.

Cousins ​​Properties’ focus on the Sun Belt region has paid off during the pandemic. The region has benefited from a significant migration from the cold and expensive towns along the coasts to the cheaper and warmer towns of the Sun Belt. Businesses are also moving to the region due to a better business climate and abundant labor pools.

The best office REITs focus on growing markets

The pandemic has affected the office sector as more companies have allowed employees to work remotely. However, there are pockets of growth, particularly for Class A offices and labs, and in the Sun Belt region. Office REITs focused on these growth engines stand out among investors in 2022.

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