Finally Some Bullish News For Commercial Real Estate

By Aaron Levitt | December 10, 2013 AAA

While the commercial real estate market has been on fire since the depths of the Great Recession, not every sub-sector has experienced the same amount of growth. A sluggish economy has weakened hiring and kept unemployment at dangerously high levels. Naturally, this fact has hindered the owners of office buildings and their respective shares.

However, the recent bullish jobs report, along with factors have made the purveyors of cube-farms and other office buildings a potential growth engine once again. For investors, the office subsector could be a great place to park their commercial real estate dollars in the New Year.

Rising Jobs, Falling Vacancies

Too put it bluntly, the latest jobs report from the U.S. was a knock-out. November’s employment gain was the biggest in three months as employers added 203,000 jobs in the month. Additionally, October’s employment numbers were revised upwards to 200,000 jobs. All in all, the jobless rate dropped to a five-year low of 7%. That could signal that the U.S. economy has finally begun to seriously turn a corner and begin expanding again.

That’s extremely bullish news for the owners of office real estate.

So far in this business cycle, the office real estate investment trusts- like Brookfield Office Properties (NYSE:BPO) –haven’t experienced the same gusto that other real estate subsectors have had. Residential, medical and even retail properties have experienced high rent growth and cap rates as the economy has climbed out of recession. With jobs now returning to the U.S., the time could be right for the office REITs.

Already, some signs are pointing in that direction.

According to CRE researcher Reis (NASDAQ:REIS), vacancies at office buildings and parks declined by 10 basis points during the third quarter to reach 16.9%. On a year-over-year basis, the vacancy rate fell by 30 basis points, in line with last quarter’s year-over-year decline. Secondly, rents continue to rise. During the quarter, both asking and effective rents grew by 0.3%. This is now the third consecutive quarter in a row of solid rent growth.

But with unemployment finally ticking down, the office real estate subsector could see higher rent growth and declining empty workplaces. Analysts now predict that this trend with continue into 2014 and 2015 as the economy moves forward. Benefiting those firms who own and operate such properties.

Buying An Office Park

With analysts at CoStar (NASDAQ:CSGP) reporting that REITs are buying office properties twice as fast as they selling them, along with the positive jobs news, the time for the office subsector to shine is on. Investors may want to consider betting on the sector. The iShares FTSE NAREIT Industrial/Office Index (NASDAQ FNIO) tracks 33 different office based REITS. However, given the ETF's 26% weighting to industrial properties, poor assets under management and limited trading, investors may be better off in some of the individual names in the space. Here are a few picks.

The old saying goes “If you can make it in New York, you can make it anywhere.” Well, for office REIT SL Green Realty (NYSE:SLG) that adage is holding true. SLG is the largest owner of Manhattan office buildings with 74 premier properties under its wings. Those high demand office buildings feature a 95.4% occupancy rate as well as rising rents. SL Green managed to charge an average of $63.11 per rentable square foot for those buildings- up from $46.19 a year ago. That’s helped drive cash flows and dividends at the REIT. Currently, SLG yields 1.4%. Meanwhile, Empire State Realty Trust (NASDAQ:ESRT) allows investors to bet on other premier New York properties- including the iconic Empire State Building.

While New York and Boston-based office REITs- like Boston Properties (NYSE:BXP) –often command the highest rents, those in suburban markets could see the biggest jump from the recent jobs news and growing economy. That’s because these areas have seen less demand from new tenants as the Great Recession ended. REITs like Highwoods Properties (NYSE:HIW), Piedmont Office (NYSE:PDM) Parkway Properties (NYSE:PKY) make ideal selections as they focus on “second-tier cities.” Not to mention, they yield more than “premier” office owners.

The Bottom Line

For the office REITs, the recent bullish jobs news could finally be the sign for the sectors return to glory. For investors, the time to bet on the property subsector could be now. The previous picks- along with Liberty Property Trust (NYSE:LRY) –make ideal selections to play the office sectors rise in the new year.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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