Challenges and Opportunities for Office REITs in the Upcoming Year

Expectations suggest that office real estate investment trusts (REITs) are about to face another tricky year. Despite the anticipated difficulties, there are some financial experts who identify potential opportunities for those willing to invest for the long haul.

Understanding the Current Market

Michael McNabb from Purpose Investments Inc. describes the upcoming period as the 'darkest before dawn' for office REITs. The sector is currently affordable but facing significant challenges. He recalls how before 2020, these investments were highly sought after for their attractive monthly returns due to low vacancy rates.

The ongoing impact of the global pandemic has seen a shift to remote work, leaving office spaces less occupied and pushing companies to downsize their physical presence as a cost-saving measure. This trend has led to a persistent rise in vacancy rates, reaching 14.1 percent nationally according to a report from Colliers Canada. On the other side, asking rents are nearing record highs with landlords offering concessions to attract tenants.

Market's Mixed Signals

The clash between employer expectations and employee preferences has slowed the return to offices, especially in the downtown cores. However, there are indications that this may be changing as employee influence on workplace location wanes.

Recent history hasn't favored office REITs, as evidenced by units in several prominent REITs plummeting since March 2020. With negative sentiment prevailing, and uncertainties about the timing of recovery, investors are advised to exercise patience and a focus on value, according to Maria Benavente from Dynamic Funds.

Some REITs have even had to cut or suspend dividends due to cash flow pressures. However, it's anticipated that with economic recovery and increased hiring, office REITs may bounce back, provided banks offer more supportive lending to landlords in this sector.

Investment Strategies in a Soft Market

Despite the challenges, there's a belief among experts that the situation offers good entry points for discerning investors focused on quality. McNabb suggests that a blend of caution and strategic selection might pave the way for rewarding investments.

Ultimately, the law of supply and demand governs the commercial real estate market. Currently, the balance tips towards an excess of supply over demand. Should this balance readjust favorably, office REITs could see a resurgence.

office, REITs, investment