2024-02-19 09:41:19 ET
Summary
- Office vacancy rates are at a 30-year high.
- Share prices of the largest traditional office REITs are down 40-60% from pre-COVID levels.
- More bad news is coming; declines may reach 80% "blood in the street" levels.
- An entry point coincident with maximum pessimism, and the opportunity for significant alpha, may occur within the next 12-18 months.
Investment Thesis
The overall office vacancy rate at the beginning of 2024 was 18.6%, a 30 year high, reflecting both reduced use and increased supply.
Barry Sternlicht, CEO of Starwood Capital Group, is widely reported to estimate that what was a $3 trillion office property market is now worth only $1.8 trillion, incurring $1.2 trillion in losses. Commercial real estate in general and the office market in particular can expect years of bad headlines as these losses are realized by landlords and lenders.
Share prices for traditional office REITs, particularly the large and popular names with investments focused on Class A properties in the central business districts of a few metro areas, are trading at 40-60% below pre-COVID levels.
This may be a "blood in the streets" opportunity, but the blood may get deeper yet, reaching 80%+ declines. An entry point coincident with maximum pessimism may occur within the next 12-18 months....
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Office REITs: Blood In The Streets Is Not Deep Enough