Office REITs: High Quality Properties Attract & Retain Tenants, Outpace Peers

Office REITs own and manage office real estate and rent space in those properties to a variety of tenants. While office properties can range from skyscrapers to office parks to individual buildings, REITs generally own higher quality offices located in central business districts. Offices play key roles in the fabric of our communities, forming the basis of local employment centers and helping support small businesses. They also typically provide significant funding for public services and infrastructure through property tax revenues.

Work-from-home trends have adversely affected office valuations and operating performance. This impact has been evident in the sector’s declining occupancy rates. Prior to the pandemic, in the fourth quarter of 2019, occupancy rates averaged 90.8% for office properties from open end diversified core equity (ODCE) funds from the National Council of Real Estate Investment Fiduciaries (NCREIF). In the third quarter of 2024, the average office occupancy rate was 81.5%.

The office sector should not be painted with a broad brush though, as performances across different quality segments have varied markedly. In general, newer, high-amenity, well-located properties have been leasing quickly, maintaining occupancy, and enjoying better performance than their peers. Reflecting the typically higher quality office properties found in REIT portfolios, data from Nareit’s quarterly REIT industry tracker offered a more positive occupancy rate picture than private market metrics. In the third quarter of 2024, REIT office occupancy averaged 86.3%.

The FTSE Nareit All Equity Index posted a total return of 4.9% in 2024. Despite challenges with property fundamentals, publicly-listed equity office REITs ranked fourth in total return performance among the 13 REIT sectors, realizing a total return of 21.5%. The office share of the FTSE Nareit All Equity REIT index as of year-end 2024 was 3.8%, making it the eighth largest of the 13 REIT sectors.

With the current housing shortage and many Class B and C office properties facing occupancy challenges, office-to-residential conversions are garnering increased investor interest. Gensler has developed a building analysis tool that helps determine if an office property is a viable candidate for residential conversion. After reviewing more than 1,300 buildings in 130 cities, Gensler determined that approximately 30% of these properties were suitable for conversion.

• 2.3 & 2.9: The Survey of Working Arrangements and Attitudes is a monthly online survey jointly run by the University of Chicago, ITAM, MIT, and Stanford University. Its November 2024 results indicated that, looking one year ahead, employer plans and employee desires for working from home averaged 2.3 and 2.9 days per week, respectively, for workers able to work from home.
• -30%: Green Street estimates that real net effective rent for Class B/B+ office properties has declined by 30% since 2019. Highlighting the quality divide, they also posit that trophy/Class A office assets may achieve positive real net effective rent growth by 2026.
• 405: Green building certifications are a useful tool for building owners to demonstrate their commitment to operating sustainably. Nareit’s 2024 REIT Industry Sustainability Report showed that 405, or 39.2% of total office buildings owned by REITs, were green building certified.

Below is a list of Nareit member companies from the office sector.