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Is the Work-From-Home Wave a Boon or Bane for Office REITs?

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The one thing that has gained immense popularity amid the coronavirus pandemic is undoubtedly the work-from-home trend. Though prior to this virus outbreak, work from home was a concept in practice in just a few companies, it has now emerged as a megatrend and is set to remain so in the upcoming days.

However, the question that is now doing the rounds is whether or not this trend will cast a pall over office REITs.

Work from home has indeed been a savior in these unprecedented times, keeping offices operational despite the catastrophe that has brought the world to a standstill. Nevertheless, the success with this remote working model is also prompting a number of employers consider shifting a bulk of their employees permanently to work from home and lower their physical office space needs. Tech companies like Facebook FB and Twitter TWTR have already gone ahead with this remote working model. This is casting a pall on office REITs. Apart from the secular shift toward work from home, job losses too have been affecting office landlords ever since the pandemic started taking its toll on our lives.

Nonetheless, so far, it has emerged that office-using jobs have been comparatively more insulated than other sectors from furloughs and terminations. Moreover, despite the work-from-home model keeping us safe, the long periods indoors have gradually started to affect our mental and physical health. A large part of the working population is now keen to ditch isolation and return to the physical working space. With employees working remotely for more than three months now, employers too are finding it difficult to maintain a strong corporate culture.

Remarkably, when these physical working spaces finally reopen, the need for social-distancing measures will likely lead to a reversal in the densification trend, which has been going on for the past few years. The measures, in particular, will result in need for increased space per worker, and thereby, fuel demand for office space.

Moreover, office spaces catering to life-science tenants, medical offices and education services seem well poised to grow in the upcoming period, with tenants of these assets benefiting from the pandemic and witnessing decent growth. Also, office markets supported by the federal government will likely continue being resilient.

In addition to these, concerns are arising regarding public transportation to crowded urban locations given the severity of the pandemic. Particularly, with the New York City being an epicenter for the virus outbreak, there has been a total alteration in perception of public transportation and urban areas.This will likely result in a shift of demand from central business districts in main cities to suburban markets, low-cost urban markets or mid-sized or smaller cities. Also, even before the onset of the pandemic, there was a rising trend of relocation to the Sunbelt markets.

Finally, rent collection data for office REITs have been healthy, with 95.9% share of typical rent received in June, up from 94.7% in May and 94.3% in April, per a NAREIT report. However, the length of time for which office rent collections will remain decent would be determined by the rate of the broader economic recovery.

Stock Picks

Here we have picked four office REITs using the Zacks Screener. Apart from having robust fundamentals, these REITs have higher chances of market outperformance. Further, these stocks, each carrying a Zacks Rank #2 (Buy), are witnessing estimate revisions, reflecting analyst optimism.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Highwoods Properties, Inc. HIW: This Raleigh, NC-based REITowns, develops, acquires, leases and manages office properties. Its core portfolio consists of properties in the best business districts (BBDs) of Atlanta, Charlotte, Nashville, Orlando, Pittsburgh, Raleigh, Richmond and Tampa. The company recently announced that it has collected 99% of its June contractually required rents, maintaining the same level of collection with that of May and April. Moreover, the Zacks Consensus Estimate of $3.58 for current-year funds from operations (FFO) per share calls for an increase of 7.5% year on year. The stock’s long-term growth rate is projected at 4.8%.

Cousins Properties Incorporated CUZ: This office REIT, based in Atlanta, GA, engages in the development, acquisition, leasing, and management of Class A office properties throughout the high-growth Sunbelt markets of the United States. The Zacks Consensus Estimate for 2020 FFO per share has witnessed marginal upward revision over the past month, while revenues are projected to be up more than 15% year on year.

City Office REIT, Inc. CIO: Based in Vancouver, Canada, this office REIT focuses on acquiring, owning, and operating office properties in the United States. The company mainly invests in high-quality office properties in leading 18-hour cities in the Southern and Western United States. Besides having higher-than-average urban population growth, these second-tier cities have solid infrastructure, lower cost of living and lower cost of conducting business compared to first-tier cities. The Zacks Consensus Estimate for the current-year FFO per share moved 11% north to $1.11 over the past two months.

Corporate Office Properties Trust OFC: This REIT is engaged in the ownership, management, leasing, development and selective acquisition of office and data-center properties. The bulk of its portfolio is situated in locations that support the U.S. government and its contractors, most of which are engaged in national security, defense and information technology associated activities servicing. It also has office properties in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region. The Zacks Consensus Estimate for the ongoing year’s FFO per share moved marginally upward over the past week to $2.05. The stock’s long-term growth rate is pegged at 4.4%.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

5 Stocks to Soar Past the Pandemic: In addition to the companies you learned about above, we invite you to learn about 5 cutting-edge stocks that could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of the decade.

See the 5 high-tech stocks now>>

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Highwoods Properties, Inc. (HIW) : Free Stock Analysis Report
Cousins Properties Incorporated (CUZ) : Free Stock Analysis Report
Facebook, Inc. (FB) : Free Stock Analysis Report
Corporate Office Properties Trust (OFC) : Free Stock Analysis Report
Twitter, Inc. (TWTR) : Free Stock Analysis Report
City Office REIT, Inc. (CIO) : Free Stock Analysis Report
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