REITs and the future of the office

Ask any Gen-Z what they prefer: An hour commute to work in a cubicle or a 5-second walk to their home office? Think carefully; the answer has significant implications for real estate investors — and the future of work.

The future of work involves fewer offices

In April, Airbnb announced a policy to allow workers to work remotely forever, while JPMorgan estimates that 40% of its 270K workers will work hybrid (both remote and office).

64% of employees would consider leaving their jobs if forced to return to the office full-time, which explains why new office demand remains at two-thirds of its pre-pandemic levels.

The lack of office demand is creating big problems for office landlords.

• 11% of U.S. office leases are expiring this year, and 30% of U.S. office buildings ($1.1 trillion) are at risk of becoming obsolete, per former Goldman Head of Real Estate Research Randall Zisler (BBG).
• Employers are scaling back – like NYC law firm Herrick Feinstein cutting 30-40% of their current space with several other firms making similar moves.

Making matters worse, commercial real estate firm Green Street thinks hybrid work could lead to demand falling another 15% over five years.

Are REITs worthy of being in your portfolio?

One of the easiest ways for investors to access real estate investments is through Real Estate Investment Trusts. REITs are public companies that own rent-generating properties like commercial offices, retail spaces or industrial buildings.

• Boston Properties (NYSE:BXP) — which owns office buildings in major U.S. cities – is down 6% in 2022 and offers a 3.6% dividend yield.
• Hudson Pacific Properties (NYSE:HPP) – owning west coast office and entertainment spaces – is down 18% in 2022 and offers a 4.9% dividend yield.

Financial advisors recommend having 5-10% of your portfolio in REITs — with the benefits of inflation protection and consistent dividend payments.

One analyst upholds that REITS “perform well in a rising rate environment,” — while another says REITs perform better during recessions (Fortune).

Investors: Not all REITs are the same

The pandemic has shifted demand towards states like Texas and Florida — and newer high-end buildings. But some can only do work in the office.

Kilroy Realty (NYSE:KRC) is a REIT focusing on office buildings for life sciences companies, making up ~30% of its net operating income.

• In 2022, Kilroy is down 11% — outperforming the S&P 500 –– which is even higher if you factor in its 3.45% dividend yield.
• $KRC is still down 30%+ from its pre-COVID highs – but has seen a substantial recovery with 90% of its real estate occupied.

Alternative strategy: Diversify. Some ETFs help investors diversify into a broad portfolio of real estate assets. One example is the Vanguard Real Estate ETF (NYSE:VNQ) which holds a diversified basket of REITs, including commercial, office and others.