Remote work threatens cash flows for office REITs

Companies signing fewer and shorter leases and might not renew them: report

National Insights /
Sep.September 10, 2020 07:30 AM
(iStock)

(iStock)

The rise of remote work puts cash flows for U.S. office real estate investment trusts at risk in the near and long term, according to a recent report from Fitch Ratings.

Trepidation about the future of the U.S. economy has led companies to sign fewer and shorter leases, which hurts cash flows for office REITs in the near future.

Moreover, the broader shift toward remote work — reflected by the moves of tech giants such as Google and Facebook — could reduce demand for new office space years down line and heighten the likelihood that tenants do not renew their existing leases.

Fitch anticipates a slight dip in net operating incomes for office REITs for the remainder of the year, followed by a rebound next year and growth in 2022 and 2023 as the economy and occupancy rates improve. Still, the report warns that “subdued” demand for office real estate could mean that the fruits of an economic recovery might not spread to the office sector.

The outlook for some REITs looks better than others, according to Fitch projections.

Same-store net operating income, or SSNOI, is expected to fall only 3 percent annually for Vornado Realty Trust, the second biggest commercial landlord in New York City by square footage.

For Mack-Cali Realty, a REIT that chiefly invests in suburban office properties, Fitch expects SSNOI to fall 6.9 percent in 2020. Fitch has given Mack-Cali a “BB” rating, which means bonds sold by the company are at “elevated vulnerability of default risk.” Bonds with ratings BBB are widely considered “junk” bonds.

Still, some mitigating factors might lessen the blow the pandemic has dealt to office REITs. Many office tenants are locked into long-term leases, so rent payments from existing tenants will likely be stable into the next decade. Only about 10 percent of office leases expire over the next few years, according to Fitch.

Social distancing will also likely contribute to the reversal of the decade-long trend of office densification as prospective tenants seek out bigger spaces.


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