Rich Pickings Among Bombed-out US REITs
US office eked out a mild 1.4% yoy increase in asking rent in 2Q22 despite a slowdown in leasing volume in 1H22. The average physical occupancy for the top-10 cities remains low at 47.4% as of Oct 22. US REITs have suffered the brunt of recent indiscriminate selling. Bargains have emerged with US office REITs trading at average P/NAV of 0.60x. BUY KORE (Target: US$0.80), MUST (Target: US$0.63) and UHU (Target: US$0.68) as they provide 2022 distribution yields of 11.2%, 13.1% and 12.0% respectively.
WHAT’S NEW
• Leasing momentum has slowed for the US office market. Leasing volume for the US office market has slowed for the second consecutive quarter and declined 9% qoq to 49m sf in 2Q22 (84% of pre-pandemic levels). Vacancy rate has inched higher by 0.1ppt qoq to 16.9%, a pandemic era high, with completion of 10m sf outpacing net absorption of 6.2m sf. Net absorption was only 7.3m sf in 1H22, a far cry from 19m sf seen in 4Q21. More tenants are sub-leasing their underutilised office space and sub-lease availability
rate has increased 20bp qoq to a record high of 3.9% in 2Q22.
• Suburban offices outperform downtown offices. According to CBRE, average suburban asking rent grew 1.3% yoy to US$28.33psf per year in 2Q22, compared with an increase of 1.1% to US$52.18psf per year for downtown offices. Downtown offices were affected by increased supply and the slow return of office workers. Vacancy rate for downtown offices increased 20bp qoq to 17.0% in 2Q22, rising above the 16.8% (-10bp qoq) for suburban offices for the first time in 20 years. Vacancy for downtown offices has risen by 6.2ppt during the COVID-19 pandemic, compared to a smaller 3.6ppt for suburban offices.
• Sun Belt markets most resilient. Demand remains strong for high-growth Sun Belt markets, such as Austin, Atlanta, Dallas/Fort Worth and Charlotte. Technology and life science hubs, such as San Jose, Los Angeles and Boston, are also growing nicely. Sun Belt markets have benefitted from in-migration over the past few years. Eight out of the top 10 markets in terms of office-using employment growth over the past 12 months are in Sun Belt markets, such as Austin, Dallas/Fort Worth, Atlanta, Nashville, Raleigh, Denver, Charlotte and San Diego.
• Sun Belt markets lead in physical occupancy. The average physical occupancy for the top-10 cities in the US remains low at 47.4% as of Oct 22. Sun Belt markets lead in terms of physical occupancy (Austin: 63.1%, Houston: 58.1% and Dallas: 53.7%). Many companies are moving from two days to three days per week in their hybrid work regime. Time spent on commuting is the biggest hurdle to employees returning to the office. Lately, inflation, which leads to higher costs of transportation, food and childcare, has led to a push back from employees who prefer to work remotely.
ACTION
• Carnage caused by panic after FOMC meeting and UK’s mini budget. US office REITs KORE, MUST and PRIME have succumbed to indiscriminate selling and corrected 31.2%, 41.8% and 40.1% respectively on an ytd basis. UHU, on the other hand, corrected by a smaller 23.3% ytd due to its resiliency. KORE, MUST and UHU provide attractive 2023 distribution yields of 11.2%, 13.1% and 12.0% respectively.
