While many US Corporations have been increasingly forcing their workers back to office, it seems that the hope for US Office Commercial REIT to rally closer to their NTA value per unit relative to the current depressed market trading price maybe dashed soon. The upside factor of interest rate cut and back to office mandate by the US Federal government and CEOs of US global corporations are being offset by the termination of office leases from rapid downsizing of the Federal government.
1. Interest Rate Cut by the Fed in 2024 Reduces Financing Pressure on Commercial REITs
The 0.5% cut in September followed by subsequent cuts of 0.25% respectively in Nov 2024 and Dec 2024 brought down US financing rate by about 1% overall. This also makes it more conducive to borrow funds either for CAPEX or purchase of commercial building.]
2. Weaker Bargaining Chip of Workers Due to Increasing Signs of Softness in US Labour Market
US labour market have been showing signs of weakening. US workers thus does not have the same type of bargaining power that they once did. So, when the head of various US Corporations start to exert pressure for staff to be physically back office to work, workers have to suck thumb and follow the new guidance. JP Morgan and Amazon are leading examples of corporations clamping down harshly on remote work and expected their staff to be back in office 5 days a week. The era of remote working may soon be a thing of the past.
Also, Donald Trump has ordered US Fed workers to be back office. This lead by govrnment example also boosted the ground for the private sector bosses to recall back their remote working staff. Therotically, this should drive back up demand for office space.
3. DOGE Targets To Cut Federal Government Office Leases
Recently, there was a discussion based on report by Trepp Research and Insights which mentioned that a sizable user of office space is the federal government which leased almost 150 million square feet of office space across the US and contributed rental income of $5 billion to the office commercial sector. While Fed workers have been asked to go back office, DOGE seems to be right-sizing the number of Fed employees. In fact, the federal government has already started terminating short term office leases and is eyeing for bigger lease cut.
Summarising, the dark cloud surrounding US Office REITs will not be over soon. The drag on demand and occupancies for office commercial may last for 4-5 years.
Hi Blade knight, I am willing to bet 02 office REITs will turn around and become 10% dividend yielders at their current price. As you would know, I have built a sizeable position in Prime US. It is safe from MAS regulatory limits and will not give div in 2025 to delever. However, if you look at underlying profits vs its effective interest loan of 5.2%, its EPU is about 2.4 US cents per year. If it gives out 90% payout ratio, I sense it is a 2.1 US cents yielder. KORE is the same where once CAPEX slows down, it is a 2 US cents yielder
ReplyDeleteHi Choon Yuan, yup...I have been following your various posts and portfolio picks. I am impressed with your anylatics in identifying good values in companies and also strong conviction in your stock picks which have reaped very good returns over the past 2 years.
DeleteI am still holding on to my stake in KORE. Was initially thinking of adding on to the US Office Commercial REITs when I saw the back to office mandates. But the DOGE cut on leases and a weaker US labour market givng me uneasy feelings on the sector outlook.
Hi, ChoonYuan. My standpoint is simple. I ask myself whether office space as an asset still provides the same utilities to users or it is an obsolete concept. This question is critical. And JP Morgan Jamie Dimon gave me the answer. He said without reservations that work from home extensively is bullshit. A corporate is dying slowly like that. Physical presence is still necessary. I just need that confirmation. US had experienced this wfh thing for 4 years. Conclusion is that a company is compromising productivity. I just need that confirmation. As long as it is proven to be inferior to working in office, then I don’t care about the employees’ efforts to fight back. A inferior thing is inferior. Federal government cutting office space is a bad news but it is not something fundamental and structural.
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