It’s been exactly one month since I last wrote about office buildings. But there have been several interesting stories that have come out since.

On Monday, for instance, California Governor Gavin Newsom ordered state employees to return to the office. “All agencies and departments” are now expected to show up in person to work “at least four days per week by July 1.”

That is significant because California has, generally speaking, been slow to adopt the “back to office trend.” In San Francisco, for instance, office occupancy is around 44.8%. You can compare that to a national average of 54.2%.

That’s an obvious plus for office landlords, and not just for those who are renting directly to California’s government. Governor Newsom’s order could very well convince private businesses to start moving personnel back as well.

Then again, you have what’s happening on the federal level to consider as well.

President Donald Trump’s administration has not yet released a number of how many people it’s laid off. But it seems safe to say it’s quite high: probably in the tens of thousands, if not higher… so far.

That right there means less demand for office space, especially in the Washington, D.C. area. But even beyond that is the administration’s recent listing of hundreds of federal buildings it aims to sell.

On Tuesday, the Trump administration published a list of over 400 properties it considered “not core to government operations.” This was office space like the FBI headquarters and the main Department of Justice facility.

Admittedly, that list dropped to 320 mere hours later. And it completely disappeared yesterday morning, leaving most people who knew about it bewildered.

CRE Daily had this to say on the topic:

Despite the aggressive push, [General Services Administration] officials clarified that these buildings aren’t “for sale by any means” but that offers will be considered. Given the real estate market slump and bureaucratic hurdles, actual sales could take years to materialize – if they happen at all.

Based on the talk going around my real estate circles, though, I’m not betting that Trump changed his mind. There are many investors interested in pooling funds to purchase these properties. So perhaps a larger consortium reached out to make an off-market deal on at least some of them.

Regardless, it seems a safe bet that there’s further federal downsizing coming up. And while some of the affected properties might remain office buildings, some of them might very well be repurposed into residences or retail.

All told, it’s a changed office world since 2019. And we need to roll with the punches if we want to keep our money, much less make more.

A Deeper Dive Into the Office Sector

As investments, most office properties have been lousy. And I’m not saying since the 2020 shutdowns. I mean this year.

Out of all the real estate investment trust (“REIT”) segments, offices rank second to worst for year-to-date results:

Source: Wide Moat Research

This, of course, doesn’t mean it can’t recover from here. In fact, several well-respected institutions are betting they will. As I wrote on February 3:

… private equity juggernaut Blackstone (BX) President Jon Gray called a bottom to the global office market – “particularly in stronger markets and better-quality buildings.” That’s a big deal considering how U.S. offices have fallen up to 70% from their pre-pandemic peak.

Gray was even willing to put his money where his mouth was by buying up a Midtown Manhattan office property. And he stated explicitly that he was interested in expanding Blackstone’s office real estate holdings further in the near future.

This came just a month after Vanguard purchased more than 187,000 shares of Office Properties Income Trust (OPI), an office REIT.

Moreover, the list of major corporations bringing employees back to their physical desks is growing. Over the past year or two, Starbucks, General Motors, Walt Disney, Walmart, Dell Technologies, Amazon, United Parcel Service, International Business Machines, Meta Platforms, JPMorgan Chase, and others have eliminated or drastically altered their work-from-home policies, which clearly boosts office landlords’ bottom line.

I also have to point out key findings from Jones Lang LaSalle’s (JLL) fourth-quarter Office Market Dynamics report, where it found that:

  • Demand had nearly hit pre-pandemic levels.

  • Net absorption was positive for the first time since 2021.

  • Rent asking prices were growing, “despite lagging against inflation.”

  • New office supply continued to trend downward while existing supply continued to be converted and redeveloped into other property types.

Even so, here’s the consensus growth forecast for U.S.-based office REITs:

Source: Wide Moat Research

Boston Properties (BXP) looks set to thrive through next year. And SL Green Realty (SLG), Kilroy Realty (KRC), and Highwoods Properties (HIW) have solid prospects, too.

But overall?

The entire space looks underwhelming right now.

But that doesn’t mean there aren’t some hidden gems investors should keep an eye on…

Three Office REITs to Keep on Your Radar

I’m keeping an eye on Easterly Government (DEA) since it almost exclusively rents to federal and state agencies.

DEA was one of the REITs I recommended investors steer clear of for the time being back in December. And the stock did fall by almost 8% between January 1 and February 20 (although it has caught a bid since).

But giving it a closer look, I don’t think you can predict DEA’s collapse despite President Trump’s strong efforts to diminish the federal government. I’m not recommending it, mind you; but it is an interesting story to watch, nonetheless.

Easterly Government CEO Darrell Crate has said that “the federal government has recognized the value and efficiency of leasing versus owning its real estate.” In which case, DEA might not suffer nearly as much as expected this year.

Yet I remain concerned with its dividend payout ratio. 2024 was the third consecutive year DEA didn’t have the immediate cash flow to cover its dividend.

That’s rarely a sign of anything good.

Moving on to the king of the pack, Boston Properties reported 87.5% occupancy last quarter. That was 50 basis points down from the third quarter of 2024, and it’s set to lose several large tenants in the second quarter, too.

I expect occupancy to stabilize from there though, with new leases coming online after June. BXP’s pipeline is around 2.6 million square feet, at last check.

Moreover, lease rollover beyond 2025 is minimal, with just 3.8% of its tenants set to leave in 2026 and 4.4% in 2027. This suggests meaningful occupancy increases over the next few years.

I’ve always liked Boston Properties’ business model, which also includes life-science buildings. Management has done an excellent job managing risk and helping to navigate the challenged sector.

Really though, my interest remains in Carolina-based Highwood Properties. While its occupancy is also expected to fall this quarter from 87.1% in the fourth quarter, that should move back up to 86.5% by year’s end since it recently signed leases for four buildings.

Together, they could generate more than $25 million in net operating income.

I expect more interest going forward in this Sun Belt-focused REIT. That Southern swath of the country continues to attract new residents and companies alike. In fact, alternative asset manager Bluerock reported two weeks ago that the Sun Belt’s population should “grow at 22 times the rate of non-sunbelt regions” over the next 10 years.

So when I want sustainable office growth, that’s where I look.

Regards,

Brad Thomas
Editor, Wide Moat Daily

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