A forced surge in Americans who were able to work from home (WFH) during the COVID-19 pandemic ended up being mostly a success for those people lucky enough to be able to do it. At the same time, WFH has raised the issue of what companies are going to do with all that unused office space.
Recent research suggests that they’ll be able to use it. According to survey data from staffing agency Randstad, 78% of people globally want to go back to their pre-pandemic workplaces either part time or full time. Fully 75% of the more than 27,000 people surveyed said they would be willing to be vaccinated if that were a requirement for returning to the job.
Goldman Sachs analyst Caitlin Burrows on Tuesday published a report on U.S. office real estate investment trusts (REITs), resuming coverage of five firms ranging in valuation from around $17.7 billion to $4.4 billion.
Overall, Burrows writes, Goldman Sachs “believe[s] corporate America’s return to the office over the coming six months, coupled with strong office employment growth, will support gradual occupancy recovery and ultimately market rent growth.” For the near term, occupancy rates are expected to remain under pressure “given lower retention and recent leasing activity, plus sublease availability.”
Over the next 12 months, multiples for the sector remain lower than they were in January of 2020, notwithstanding that since November multiple expansion of 64% is the second-highest among all sectors (retail leads). In the same period, all REITs have experienced multiple expansion of 28% and the S&P 500 has improved by 12%. Office REITs have been trading at a discount of 26% to the REITs in general, a wider discount than the historical average of 7%. Burrows is cautious, however, because Goldman Sachs thinks the “discount versus REITs overall may persist over the medium-term given uncertainties related to office demand.”
The smallest (by market cap) of the five office REITs rated by Goldman Sach’s analyst, Hudson Pacific Properties Inc. (NYSE: HPP) was one of just two to get a Buy rating. Burrows assigned the stock a price target of $35, implying a total return of 28.1% to the current price including a 3.6% dividend yield.
All of Hudson Pacific’s properties are located on the west coast, with 66% in San Francisco and 18% in Los Angeles. A new 3.8 million-square-foot development in Los Angeles is expected to be ready for occupancy in the first quarter of next year and is 100% pre-leased to Google.
Goldman Sachs projects funds from operations will rise by just 1.6% in 2021, but jump by 11.9% in 2022 and rise by 4.7% in 2023 (average annual growth of 6.1%).
Hudson Pacific’s stock traded down less than 1% in the late morning Wednesday, at $28.94 in a 52-week range of $18.62 to $30.97. The consensus price target is $31.21, and the average daily trading volume is about 1.2 million shares.
With a market cap of $5.41 billion, SL Green Realty Corp. (NYSE: SLG) is the second-smallest of the REITs included in the firm’s coverage resumption, and it is the only other to earn a Buy rating. Burrows assigned it a price target of $91, implying a total return of 23.9% to the current price including a 4.8% dividend yield.
Unlike Hudson Pacific, 100% of SL Green’s properties are located on the east coast and all are located in New York. A new building in Manhattan is expected to be 90% leased by the end of this year (by SL Green) and fully leased by the end of next year (by Burrows). Another New York City property is expected to be finished by midyear.
SL Green stock traded down nearly 2% Wednesday, at $77.10 in a 52-week range of $40.35 to $79.59. The consensus price target is $74.73, and the average daily trading volume is about 1.2 million shares.
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