Quick Insights Into Office REITs

Office REITs

Snippets from the book "DIY Guide to Winning with REITs" 

Reputable financial institutions, commodity-trading corporations, banks and law firms have shown outstanding growth over the past ten years. These companies are typical tenants of Office reits, and they pay good money for their office rentals.

However, Office reits are highly cyclical and more sensitive to economic headwinds than their Retail reit counterparts. Take, for instance, the great recession period from 2008 to 2011; companies responded to the down slide by consolidating their branches, laying off employees and ceasing previously planned expansions. This led to a severe oversupply of rentable office space, thus causing all NYSE-listed Office reits’ unit prices to plummet.

During those dark years, the US government bailed out banks and injected huge amounts of funds into the markets. The US economy slowly began to recover; offices’ occupancy rose back to the 90% range and rental rates recovered. This led to an enormous rise in Office reits’ unit prices.

This goes to show that while Office reits can make compelling investments, their unit price can be volatile and thus not suitable for unit holders who get too emotional during volatile times.

As such, here are some pointers of which Office reit unit-holders should take note:

Office Quality

A “good” Office reit will have their office buildings located in notable business areas that are easily accessible by trains and buses. Other than these common traits, there is a trend that office buildings now have to be “green”, environmentally friendly and sustainable. Office buildings that are energy- and water-efficient, with a high quality and healthy indoor environment, integrated with green spaces and constructed from eco-friendly materials, will lead to a higher willingness from tenants to pay more for rental. Perhaps this new “green” trait is something reit investors like yourself should take into consideration when analyzing the asset quality of an Office reit.

Quality of the management

It takes time to know the management of any reit. Ideally, you want to have your reit managed by people who are focused on tenant retention as well as tenant attraction with the desire to maintain a healthy, long lease expiry profile that provides sustainable returns to unit-holders like yourself over the longer run.

Get your timing right

Given the cyclical nature of Office reits, it is important to recognize the stage of the economic cycle in which you are investing and do not make a mistake of being seduced by high rental income achieved during strong market periods. It pays to think like a contrarian.

In summary, Industrial, Hospitality and Office reits are inherently more risky than other reits due to their assets’ sensitivity to economic headwinds. The silver lining is that such volatility can offer gutsy investors the opportunity to buy these reits at a cheaper price and be duly rewarded during market upturns.

With that, we have covered all the basics that you need to know about reit investing. Once you understand the basics, it is time to build up your reit portfolio.

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