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The Office Sector Looks Like It’s Making a Comeback

Consider yourself lucky if you’re still able to work from home…

Over the past year, company managers have been pushing employees to return to the office.

Recent data from the Census Bureau Household Pulse Survey shows that less than 26% of households still have someone working remotely. That’s down from 37% in early 2021.

Job postings on LinkedIn listed as remote work have also dropped off from over 20% in early 2022 to just 9% today.

These are signs that the office sector is starting to stabilize.

But, as I’ve been telling you these past few months, not all offices are created equal. And some are thriving while others remain empty.

Today I’ll give you an update on the latest trends in the office sector. And I’ll show you how to play the rebound as workers head back to the office.

The Latest Office Trends

According to the building security company Kastle Systems, average office occupancy is still stuck at around 50%. It’s been hovering around that level for the past year.

But a report from real estate services company Jones Lang LaSalle suggests that Kastle Systems’ data is missing out on what larger landlords and higher quality offices are seeing.

They expect that office attendance will reach 55-65% by the end of the year.

And they expect occupancy to continue increasing as more companies force employees to return to work in person.

Since the end of 2019, office-based jobs have increased by 6.3%. But over that same time, companies have reduced their office real estate by 6.1%. In some cases, companies have suddenly found themselves with not enough office space.

But, companies aren’t looking for office space in the same places they used to.

Demand for offices in “gateway” cities like San Francisco and New York has increased by 2.6% since June. Meanwhile, demand for offices in secondary markets like Austin and Nashville is up 8%.

During the pandemic, many people moved out of the big cities and into the Sunbelt. Now, that’s where the jobs are and where demand for offices is highest.

Another big trend in the office sector is the “flight to quality.”

Companies are looking for newer, more modern buildings that keep employees happy and comfortable while they’re working.

Since the pandemic hit, offices built after 2015 have seen a net increase of 121.6 million square feet of leased office space. Meanwhile, older offices continue to lose tenants.

Newer offices are not just getting fuller. They’re also getting pricier.

In fact, the rental rates for trophy office properties are 13.3% higher than they were pre-pandemic.

Meanwhile base rental rates across the entire office sector (so new and old offices alike) dropped by 2% over the same time. This drop would be much larger if you removed newer office spaces.

It’s clear that demand for new, high-end office buildings is rising. But what about supply?

Office construction has fallen off a cliff.

Over the past three years new office construction has averaged 9 million square feet every quarter.

That has now fallen to 1.7 million square feet according to the latest report.

That’s a level not seen since the Financial Crisis.

And it means that record low numbers of new offices will be available in the coming years.

On top of that, developers have been getting rid of old offices at record rates.

Last year, over 20 million square feet of offices were demolished or converted into other types of real estate, like apartments. That’s double the pace seen from 2013 to 2019.

And this year is on track to reach a similar amount of disappearing office space.

Profit From the Office Sector Comeback

The imbalance in office supply and demand caused by the pandemic is rapidly reversing.

And when it reaches the tipping point, office rents and prices will start heading higher.

That’s why it’s a great time to consider investing in an office real estate investment trust (REIT) like Highwoods Properties (HIW).

Highwoods owns a portfolio of 28.5 million square feet of office properties. The average age of its offices is 20 years.

That’s well below the average age of buildings across the office REIT sector, which is 34 years.

This means Highwoods has more of the new, modern offices that are in high demand.

And Highwoods’ portfolio is focused on offices in secondary markets in the Sunbelt.

Its offices are in cities like Raleigh, Nashville, Atlanta, Tampa, Charlotte, and Dallas. These are the areas that are seeing the most jobs and demand for offices.

Highwoods yields 9.9% and trades at 8.4x adjusted funds from operations (AFFO). AFFO is a financial metric that shows how much cash flow is available to shareholders.

Highwoods has historically traded at 19.7x AFFO, which means that it is now trading at a 67% discount.

There will be winners and losers as America reevaluates how much office space it needs.

So if you’re interested in investing in the sector, Highwoods is one of the higher quality names with a portfolio of modern properties that will attract more tenants and command higher rents.

And now is the time to consider buying, because shares are extremely cheap and the sector is just starting to turn a corner.

For members of our Intelligent Income Investor service, we have another office REIT in our portfolio that is currently trading at an incredible discount. And this company’s unique office space niche has a much higher occupancy than most in this sector.

To find out the name of this company and learn more about our Intelligent Income Investor service, click here.

Don’t miss out. Profit from the office sector comeback.

Happy SWAN (sleep well at night) investing,

Brad Thomas
Editor, Intelligent Income Daily