Investing in Office REITs | The Motley Fool

Office Real Estate Investment Trusts (REITs) own, manage, develop and rent office space that is rented to various tenants. These properties range from skyscrapers in the largest US cities to sprawling office buildings in the suburbs. This property is vital for businesses that use offices to support their operations.

Here’s a closer look at Office REITs, including how they work, their benefits, and risks, as well as some top Office REITs to consider in 2022.

Two people shake hands with an office skyline in the background.

Image source: Getty Images.

Understand Office 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. There is still a strong demand for office space in these areas, so that these office REITs can maintain a high occupancy rate and benefit from steadily rising rental prices.

Other office REITs are concentrated on large office campuses. They often rent entire buildings to a single tenant under long-term triple-net leases. Meanwhile, some REITs are focusing on specialized office real estate to support the needs of a particular type of tenant. These objects can be high-security buildings for government agencies, creative rooms for technology and media companies, or specialized laboratories for life science companies.

Many office buildings generate additional revenue from parking fees, while some large skyscrapers have an observatory that generates revenue from ticket sales. Many office buildings now also rent retail space to shops and restaurants.

Benefits of Investing in Office REITs

Most office tenants enter into long-term leases. The terms can range from five to 10 years for space in multi-tenant office buildings up to more than a decade for a single-tenant net lease. Long-term leases offer office REITs a relatively stable cash flow. They also help to cushion the effects of a recession, as office REITs don’t have to try to rent out all of their space during a downturn. Because of this, most office REITs have seen only a relatively small drop in rental income during the COVID-19 pandemic.

Meanwhile, the demand for office space is relatively permanent. 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. You have discovered that employee collaboration, coordination, and productivity can be improved in an office environment.

Because of their stability and longevity, office buildings tend to steadily increase in value. Their combination of steady income and appreciation makes them attractive Real estate investment for institutional investors such as pension funds.

Risks of Investing in Office REITs

With the ongoing pandemic, there is still a lot of uncertainty about what the future holds for offices. Companies have had to postpone their plans to return to the office amid concerns about more contagious and vaccine-resistant variants of the coronavirus. In the meantime, many office workers prefer to work remotely, which could force more companies to adopt some form of hybrid policy on a permanent basis and possibly reduce their need for office space in the future.

This could increase the risk of oversupply that often plagues the office REIT sector. Builders usually start building office buildings based on speculation and rely on them to secure tenants before completing construction. However, if developers build up too much supply, this can put pressure on occupancy and rental rates in certain markets.

Office REITs are also exposed to the risk of changes in interest rates. Office buildings are expensive, so REITs have to borrow money to acquire and develop these properties. When interest rates rise, they can increase interest expense if an office REIT uses floating rate bonds or has short term maturities. In addition, rising interest rates increase the return on lower risk investments such as bind. As a result, REIT stocks often fall when interest rates rise as REITs need to tighten Dividend yield to compensate investors for their higher risk profile.

3 top office REITs for sale

In early 2022, 22 were listed REITs focuses on owning office real estate. Here’s a closer look at the top three office REITs for investors to consider:

Office REIT

Ticker symbol

Market capitalization

Company description

Alexandria real estate stocks

(NYSE: ARE)

$ 34.3 billion

An office REIT with a focus on the life sciences sector.

Boston real estate

(NYSE: BXP)

$ 19.5 billion

This office REIT focuses on the major gateway cities.

Cousins ​​properties

(NYSE: CUZ)

$ 6.2 billion

An office REIT geared towards the sunbelt.

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

Alexandria real estate stocks

Alexandria focuses on specialized office space for the collaborative life sciences, ag-tech and technology industries. It has locations in key urban innovation clusters in Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland and the Research Triangle in North Carolina.

The company’s focus on collaborative space was a key differentiator during the pandemic. While many office tenants could easily allow their employees to work from home, some required in-person work in specialized environments. The pandemic has proven to be a boon to the life science sector as billions of dollars have been poured into space to fund research and development of diagnostic tests, therapeutics, and vaccines. This has fueled demand for laboratory space and increased occupancy and rental rates at Alexandria’s facilities. The company also had the opportunity to further expand its portfolio.

Boston real estate

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

Boston Properties has strategically benefited from growth regions and Sectors in the past few years. It has increased its exposure to tenants in the life sciences, technology, advertising, media and information industries. It has also expanded its presence in emerging markets, including increasing its exposure in San Francisco and entering Los Angeles and Seattle. It is a leading developer with $ 2.7 billion in active developments as of early 2022, including several life science projects. These developments will enable Boston Properties to further increase shareholder value in the years to come.

Cousins ​​properties

Cousins ​​Properties is focused on Class A office buildings in the rapidly growing Sun Belt markets. It has modern office buildings in Austin, Atlanta, Phoenix, Charlotte, Tampa, Houston and Dallas. Cousins ​​also has several additional office properties under development in many 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 significant migration from cold and expensive cities along the coast to cheaper and warmer cities in the sunbelt. Companies are also moving to the region due to the better business climate and the abundant labor pool.

The top office REITs concentrate on growing markets

The pandemic has impacted the office sector as more companies have allowed their employees to work remotely. There are growth zones, however, especially for Class A office and laboratory space and in the Sun Belt region. Office REITs that focus on these growth drivers are emerging for investors in 2022.