Snapshots

Office REITs’ Q1 earnings indicate resilience in diversified gateways

May 10, 2023

Contributors:

With most public office REITs announcing earnings over the past two weeks, supplemental releases show a divergence in quarter-over-quarter leasing trends, with REITs that have the majority of their investments in East Coast gateway markets seeing leasing volume grow, while REITs with greater exposure to growth markets and tech-dominant gateways have seen a notable slowing of leasing velocity.

Out of the groups that have the majority of their holdings in East Coast gateway markets: SL Green, Vornado, COPT, Brandywine, Empire State and Paramount collectively saw 77% quarter-over-quarter growth in leasing volume, with only PGRE (who has the greatest Bay Area exposure among this set) saw leasing volume slow moderately quarter-over-quarter.

Remaining REITs that have greater focus on West Coast gateway markets or Sun Belt growth markets that saw strong activity during the pandemic are dealing with a sharper short-term slowdown in demand, collectively seeing leasing decline 34% quarter-over-quarter.

Outperformers within the lagging group typically have some of the same geographical trends taking place: Piedmont has large Sun Belt exposure but also close to 30% of holdings by book value in East Coast gateway markets; Franklin Street properties has significant exposure to non-Sun Belt secondary markets including Denver and Minneapolis.

High-quality trophy product and best-of-best locations are seeing the earliest recovery in the office market

Top markets have removed 5% of office stock since 2020, though redevelopment intensity varies geographically

Net effective office rents have increased since the pandemic in most major CBDs