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Not too long ago, I said that restarting my YouTube channel was a good thing and in more ways than one.
In response to my latest video on US office REITs, a reader left a very thoughtful comment which I am publishing here as a blog for the benefit of readers who do not follow my YouTube channel.
In case you are wondering, here is the video.
Reader says to AK:
Reader says to AK:
Hi, yep, I agree. I sold out at a painful loss, and since then they have dropped further.
I misread it entirely, thinking that employees would be keen to get out of the house and back into the office cultures.
Well, that doesn't look like it will happen. This looks like it is a permanent shift in behaviour.
US Public transport is nowhere near the level of convenience in Europe and Asia, resulting in using private vehicles to commute. With no commute, it further adds to the attraction of WFH.
Also employees are able to move to states with lower taxes.
You mentioned that the vacancy rate was 14% (??). I think this is misleading, the physical occupancy level is more important, and I read this is in some buildings well below 60%.
Once the rental contracts expire over the next couple of years, they will renewed at a much lower space level.
Inflation is remaining very high in the US and Europe, interest rates, as you say, will almost certainly continue to rise throughout this year, all things being equal.
I also don't know if the office buildings can even be sold. They might turn into derelict blocks, reminiscent of the rust belt.
Maybe some can be repurposed into condos, but otherwise I can't think of a use for them.
Just my thoughts, FWIW.
AK replies to reader:
Working from homes (WFH) in the US instead of going back into offices does look like a structural shift and it is, therefore, more permanent than temporary.
You have also rightly pointed out that the public transport systems in the US are not well developed. I have tried them before on my yearly visits in my younger days and I was unimpressed with both buses and trains.
Nothing like Japan, Hong Kong or Singapore.
As for the vacancy rate I mentioned in the video, from my research, it is a national average.
I am inclined to agree with you that the number is probably much higher for some older office buildings which might not be as well positioned.
US office REITs are likely to continue struggling which is why if we want to invest in them for whatever reason, we want to look for those with strong balance sheets to see them to the end of the tunnel.
Thank you very much for sharing your experience and insights. Much appreciated.
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4 comments:
AK just followed up with another reply to the YouTube viewer/listener:
"I read your comment again and I get what you mean by physical occupancy now.
"Some buildings might be 90% leased, for example, but the tenants might not be working in the office but working from home.
"Once the leases expire, they might get downsized or not renewed at all. 🤔
Viewer/listener says to AK:
Yes. It's a problem coming down the tracks.
From Prime REIT latest presentation.
"Return-to-Office physical attendance reaching new record high, surpassing 50% for first time since start of pandemic,albeit unevenly across markets".
Fifty percent physical attendance looks pretty bad to me.... Hybrid work is probably going to be normal. So how many days a week in the office? Wanna take a stab? I guess 2.....
AK replies:
I suppose from a very low base, >50% can be considered a record high but I agree that the REIT seems to be grabbing at straws to make things look less bad.
How many days a week in the office? That's a tough one and your guess is probably as good as mine. 😅
For ireit the Berlin lease is up for renewal next year.
Do u think it will become another issue like Darmstadt Campus ?
Thank you for your comments.
Hi Wee ee,
It could but I think that the probability is lower because the Berlin office market is very tight and much deeper than the market in Darmstadt which is known as "Telecoms City" because of its heavy reliance on tenants from the telecommunications industry.
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