American life is returning to its pre-pandemic norm in many ways, with big demand for travel and restaurant reservations nearly bouncing back to 2019 levels.
There’s one area that still hasn’t gotten back to normal and probably won’t anytime soon — the office building space. This not only has implications for workers but also real estate investors who might have been tempted to jump into the beaten-down sector.
“I think remote work is going to be a permanent feature,” Jonathan Litt, founder and chief investment officer of Land and Buildings, a real estate activist hedge fund, said on Yahoo Finance Live (video above). “I think there’s going to be a real struggle for traditional landlords.”
There are numbers to back that.
Property-technology services firm Kastle tracks key card entry to office buildings. It’s “back to work barometer” for the week of April 18 showed just 42.8% of workers were going into their offices on average across 10 metropolitan areas. That’s down from nearly full capacity prior to the pandemic, and up from a low in the mid-teens in spring 2020.
Among those 10 areas, Austin has the highest occupancy, at more than 62%, and Silicon Valley’s San Jose has the lowest, at nearly 32% — the latter not surprising given the tech industry’s shift to more permanent telework.
Meanwhile, New York City’s stood at 37.1%. According to Litt, the city’s market is particularly challenged compared to other cities.
“Unfortunately, companies that own older office buildings in Manhattan, such as Empire State (ESRT), which owns the Empire State Building, are really poorly positioned,” he said. “They’re going to struggle with getting rents up. In fact, rents are going to be down and their expenses are going up.”
Instead, Litt suggested, a company like WeWork might fare better in this environment.
“In this period where you have uncertainty about what it’s going to look like — and WeWork (WE) either offers you a month-to-month or if you’re larger business, a one-year or two-year lease — that’s a good way to go, and you can see how your business develops after that,” he said.
There are indications that New York office rents are improving.
Asking rents for Manhattan commercial properties rose by the most since 2014, according to a report by real-estate services firm Colliers. The 3.1% boost was driven by special factors, including “the addition of several large (100,000 square feet and above) blocks of above-average priced space in both new construction and existing product.” Conversely, vacancy rates remained at a near-record of 9.7%.
Conventional market wisdom holds that real-estate investment trusts (REITs) are a good bet when inflation is rising. Both Litt and REIT Academy Managing Director Jonathan Morris stated that investors do need to be somewhat selective in this type of environment.
“It has been a port in the storm for a lot of investors when inflation comes around,” Morris said on Yahoo Finance Live.
REITs in which tenants sign long-term leases are preferable in the current environment, he said, and recommended warehouse owners and companies like his former employer, Boston Properties (BXP). (Litt’s firm holds Rexford Industrial Realty, a Southern California firm whose shares have climbed 49% in the past year.)
“You want to own inflation-protected real estate,” Litt said.
Litt added that, “not all real estate is inflation-protected,” an idea he expanded upon in a recent white paper.
One of the key criteria, according to Litt, is rising rents — and both warehouse owners and some housing companies fit the bill.
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