Where do contrarian and value investors look for investment opportunities with North American benchmarks at or near record highs? Though there are many sectors that are flat or slightly down, few are significantly off their peaks. One exception is office real estate and the REITs that own office space.
The story is similar in the United States. Columbia REIT defaulted last year, former billion-dollar-plus REITs such as Office Properties Income Trust have fallen below US$100-million in market cap, and even heavyweights including BXP are badly bruised and battered. Second, REITs tend to carry a lot of debt, and the office space sector is no exception. This debt has become more expensive since 2022 when interest rates started rising in earnest to tackle inflation. The combination of lower rents and higher vacancies on the one hand, and high debts with rising interest rates on the other hand, is a terrible combination for any business.
Despite the warts, the industry is interesting, and here at Contra the Heard we are investigating, researching and watching. Those interested in the space may want to consider either buying a best-in-class operator such as Allied Properties or BXP with a strong-enough balance sheet to weather continued pain, or wait to see organizations lower their vacancy rates, increase rental rates per square foot and stabilize their income statements.