Risk-reward has turned slightly positive on office REITs, a contrast from the outright negative view Mizuho analyst Vikram Malhotra had three months ago, he wrote Wednesday in a note to clients.
Specifically, Malhotra points out that risk premiums at 730 basis points are near 2008-2009 financial crisis levels and the market is pricing in negative 10%-12% rent growth for the next 12 months.
“Q2 (is) shaping up to be a better leasing quarter than Q1 for most markets, Malhotra said, but “increased remote work and space reductions could mute the recovery.”
Even with strong job growth and leasing activity, vacancy rates continue to track higher. Every market is pacing at a Q/Q vacancy increase. The largest increases are on the West Coast, led by Seattle, San Jose, and San Francisco.
Office utilization, measured by card swipes, vs. a base of Q1 2020 shows New York City touching its highest level since March 2020, but still sits below 50%. Utilization in other markets mostly remains flat, with Austin at ~60% and San Francisco at ~35%.
Malhotra is sticking to barbell approach of owning select names including Boston Properties (NYSE:BXP), Kilroy Realty (NYSE:KRC), and Paramount Group (NYSE:PGRE). He continues to hold an Underperform rating on Hudson Pacific Properties (NYSE:HPP) and Vornado Realty (NYSE:VNO) and Neutral on Sunbelt names Cousins Properties (NYSE:CUZ) and Highwoods Properties (NYSE:HIW).
Of the analyst’s highest and lowest rated office REITs, Boston Properties (BXP), -22%, and Kilroy Realty (KRC), also -22%, fell the least in the past year as seen in this chart.
In checking the SA Quant system, only Kilroy Realty (KRC) rates a Buy; Hudson Pacific (HPP) ranks a Sell and Vornado (VNO) as Strong Sell.
SA contributor Justin Purohit points to Kilroy (KRC) as a quality REIT with a steadily growing dividend