The U.S. office real estate market is likely poised for a turnaround story in 2025. With the U.S. economy on a strong footing and interest rates easing though lower than anticipated, the demand for premium office spaces is on the rise. Return-to-office mandates are influencing this trend all the more. The downtick in prime office supply is ever-welcoming.
The above conducive factors draw our attention to two office REITs — SL Green Realty SLG and Vornado Realty Trust VNO. Before diving deep into the fundamentals of these stocks, let us first build up our insight into the favorable office REITs’ industry background.
Factors Contributing to an Uphill Demand for US Office Spaces
The U.S. economy is showing signs of resilience with expanding economic activity, lower unemployment and higher wage growth fueling consumer spending. Real GDP grew by 3% in the second quarter of 2024 and 3.1% in the third quarter of 2024. With the economy coming out of the doldrums and exhibiting greater confidence, the demand for office space is likely to be resurgent. Per a CBRE report, for the 11 largest U.S. office markets, the Tenants in the Market index has seen positive growth of 10 points from the year-ago period. This is reflective of a renewed interest in tenants due to a stable economic scenario.
Moreover, the Fed’s interest rate easing policies provide a much-needed impetus to the U.S. economy. The lower interest rates culminate in higher economic activity as they make business expansion plans more lucrative by making the availability of funds less pricey. Though this December, the Fed’s hawkish stance on future rate easing dwindled consumers’ enthusiasm as it came out to be lower than anticipated, it still provides some comfort and poses them on a better growth trajectory. The strong corporate performance and lower interest rates will aid in a rebound in hiring, resulting in high demand for office spaces.
Struggling through a period of lull over the past four years with the onset of COVID-19, premium office spaces in the United States are finally witnessing robust demand across the board. Backed by tenants' rising preference for quality office spaces with class-apart amenities to retain their top talent, the sector is buzzing with a renewed wave of interest from buyers. As per the Cushman & Wakefield Office third-quarter 2024 report, “Office occupancy of these assets in gateway markets is nearly 800 basis points (bps) higher than the overall office average.”
Many companies are increasingly adopting return-to-office mandates for their employees to enhance productivity and efficiency. This will accentuate the demand for office spaces.
Moreover, the supply of new prime buildings is finally pacing slowly, which is proving to be a boon in the oversupplied office market for a long time. Per a CBRE report, given this current situation, vacancy rates are expected to revert to a pre-pandemic average of 8.2% by 2027. Also, the sublease availabilities have been slowly receding.
2 Office REITs to Buy Now
SL Green Realty: This office REIT primarily acquires, manages, develops and leases commercial (mainly office) and residential real estate properties in the New York Metropolitan area, especially midtown Manhattan.
Given tenants’ healthy demand for premier office spaces with class-apart amenities, SL Green is well-poised for growth. Its long-term leases, like the 15-year lease signed this December by Alvarez & Marsal Holdings, LLC, and a diverse tenant base assure stable rental revenues. Its focus on an opportunistic investment policy to enhance its portfolio quality is also encouraging.
In November 2024, SL Green reinforced its dominance in New York City’s premium office market by entering into a contract to acquire 500 Park Avenue for $130 million. This iconic 11-story Class A office building is a strategic addition to its portfolio in the highly coveted Park Avenue corridor.
Over the past month, the Zacks Consensus Estimate for the 2024 per share has witnessed upward revisions of 2.9% to $7.83, suggesting a significant increase year over year.
SLG currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Vornado Realty Trust: VNO is the owner and manager of commercial real estate in the United States, with a portfolio concentrated in New York City, Chicago and San Francisco. The company's portfolio mainly includes office and street retail properties.
The company has a controlling interest in 555 California Street in the heart of San Francisco's Financial District and owns theMART in Chicago's River North District, which are iconic office assets in signature cities.
Last October, Vornado announced that the global clothing retailer Primark has signed a lease agreement for 78,760 square feet to open its first Manhattan store at 150 West 34th Street in THE PENN DISTRICT. VNO is redeveloping PENN 2, a 1,795,000-square-foot office building located on the west side of Seventh Avenue, at an estimated cost of $750 million.
Vornado’s premium assets in a few select high-rent, high-barrier-to-entry markets are likely to prosper amid healthy demand. Portfolio-repositioning efforts and a healthy balance sheet bode well.
VNO currently carries a Zacks Rank #2. Over the past two months, the Zacks Consensus Estimate for the 2024 FFO per share has witnessed a marginal upward revision to $2.16.
Here’s how both the stocks have appreciated in the past six months.
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Image Source: Zacks Investment Research
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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