Public office landlords are starting to report their first-quarter earnings — and investors and analysts are paying close attention to just how much rent they were able to rake in as tenants like law firms and advertising companies complete nearly a full month of working remotely.
Empire State Realty Trust — whose biggest property is the Empire State Building — drew in 73 percent of its office rents in April, compared to more than 92 percent for SL Green. Other office real estate investment trusts, like Columbia Property Trust, Paramount Group and Boston Properties are on deck to announce their earnings this week.
John Kim, an analyst at BMO Capital Markets, said Empire’s collection rate was underwhelming. And the firm said it was still weighing the vast majority of the 170 rent deferral requests it received.
“Empire was surprisingly low, I would say…I would imagine that number goes up, especially once there’s clarity when the shelter-in-place ends,” he said, referring to statewide orders that have kept nonessential businesses closed across the country.
A survey conducted by Nareit, an industry group representing real estate investment trusts, found that office landlords this month received almost all — 89.3 percent — of the rent they typically collect in April. That’s behind apartment and industrial owners, but ahead of healthcare and shopping center owners.
The data in that survey was from April 8 to 15. And some are wondering what rent really will look like down the road, amid government-mandated shutdowns, and the possibility that some landlords will allow struggling tenants to skip rent payments.
“The amount of forgiveness will be dependent on the relationships [landlords’] have” with tenants, Kim said.
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Todd Kellenberger, REIT client portfolio manager at Principal Global Investors, said he does not expect a material deterioration in rent over the coming months. But the ability for tenants to pay up also is largely dependent, at least in the short term, on whether they are able to secure relief from the government.
The ability for tenants to pay “could change, however, should the Covid-19 pandemic play out in a much more elongated fashion,” he said.
The office sector has been less impacted by the pandemic, unlike the retail and hotel sectors, service industries that rely heavily on bringing crowds together. But many are keeping an eye on office tenants and their ability to pay rent, as the economic fallout from the pandemic has led to layoffs and financial instability for white-collar workers — including those in the real estate industry — as well.
Among public office REITs, the recovery of the sector has its good and bad days, analysts said. But many office tenants — even if unable to access their spaces — have still been able to transition to working from home, which means they can still operate their companies.
But that lifestyle change also has underscored an emerging question: How much office space do businesses really need?
Kellenberger said the need for office space will not completely disappear. But some firms might make working from home a greater part of their businesses going forward.
“One has to think this might pose a structural headwind for the demand of office space going forward,” he said.
During its first-quarter earnings call last week, Blackstone did not break down its rent collections for April. But the Blackstone president Jonathan Gray said that question — will people want to work remotely permanently? — is out there.
“There will also be questions going the other way about will firms have the same density? Or will they spread out a little bit? I still believe in the fullness of time,” he said. “I mean, working at home, we’ve made it work, but we think it’s better [in an office]. We’re much more efficient when we’re together.”
Write to Mary Diduch at md@therealdeal.com