By Shaina Mishkin

Employees may not be excited about going back to the office -- but investors sure are.

Office real estate investment trusts, or REITs, are on track for their best year since before the pandemic, despite numbers that show hybrid work has a firm grip on business.

Stocks in the sector are mostly beating the S&P 500. The 12 office real estate investment trusts in a related S&P 1500 subindex are up an average 25.4%. If they hold their gains through December, 2024 would be the best year since 2019, according to FactSet data.

The good times on Wall Street come even though offices are being used about half as much as they were before the pandemic, which hit in March 2020.

Weekly office attendance measured by property-tech company Kastle is up an average 3.2% so far in 2024, compared with the same period last year. During the most recent weekly period, which ended Oct. 9, utilization was 51% of what was typical before the Covid-19 outbreak.

"There's really been no shift in work-from-home rates for almost two years now," said Nicholas Bloom, a Stanford economics professor studying work-from-home trends.

Barring an economic or political shock, Bloom expects workplace attendance to hold around recent levels.

"Hybrid, for companies, is a big recruitment and retention policy," he said.

But investors are sensing the worst could be over for the "beaten-down sector," said Richard Anderson, a Wedbush analyst who covers REITs. "There is, perhaps, a bottoming of fundamentals."

A few names are performing particularly well. SL Green, the New York City-based REIT that bills itself as Manhattan's largest office landlord, is up 74%. Highwoods Properties, which focuses on Sunbelt markets, and the New York City-based $Vornado Realty Trust(VNO-N)$ are up 58% and 54%, respectively.

One REIT investor is Jeffrey Kolitch, who manages the $2.16 billion Baron Real Estate Fund. The fund, which counts data center REIT Equinix and home builders Toll Brothers, Lennar, and D.R. Horton among its largest holdings, initiated a $48.9 million position in Vornado in its most recent quarter.

The fund has been "cautious for a number of years" about office real estate, Kolitch said.

But signs are brightening for certain parts of the sector, Kolitch added -- even if that isn't clear from broad badge-swipe data. Vacancies are concentrated in a minority of buildings, he said, pointing a February report from commercial real estate service provider Jones Lang LaSalle.

"Buildings in the right geographic markets remain discounted," Kolitch said. "That's going to become clearer and clearer over the next few years."

The fund manager bought Vornado because of its exposure to both New York City and high-end office buildings.

Still, the office problems probably aren't completely over. Because most corporate leases last about 10 years, it will take several more years to see how many companies decide to downsize or move out because of pandemic workplace changes, said Wedbush's Anderson.

But office REITs with exposure to high-end buildings look well positioned to weather the storm.

"If there's going to be any asset class in the spectrum of office that's going to survive, it's probably going to be those that offer those great working environments, as opposed to the more run-of-the-mill cookie-cutter office product in the suburbs," Anderson said.

BXP, formerly known as Boston Properties, has exposure to high-end office space, he said.

As for Kolitch, he's keeping an eye on the office REITspace.

"Office has its challenges, but it's a gross oversimplification to suggest that there just aren't opportunities," he said.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 20, 2024 04:00 ET (08:00 GMT)

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