The REIT office sector is composed of REITs that manage and/or own office real estate. Revenues are earned from leasing space to commercial tenants and by managing office buildings on behalf of third-party owners. Office REITs invest in properties along a continuum, from all-urban to all-suburban, with each offering a specific mix of both at any given time. Office REITs can be further analyzed by a particular focus, such as offices for government agencies, high-tech companies or financial firms.
As of July 31, 2017, the office sector contained 26 REITs out of an industry total of 226. The market cap for the office REIT sector was $103,261.3M, compared to $1,121,408.2M for all REITs in the FTSE NAREIT index.
Office REITs and Economic Conditions
Office REITs usually prosper when economic conditions are strong because of competition for office space that drives up rents. A strong economy also means that office tenants can more easily pay the rent on time. On the other hand, a booming economy stokes inflation and thus leads to higher interest rates. When rates get too high for low-risk bonds, such as Treasuries, they compete directly with REITs for yield investors, which can put a damper on share prices. Like all REITs, office REITs must pay out at least 90 percent of taxable income as dividends, which means they must access the debt and equity markets if they wish to expand their portfolios. That’s another reason why rising interest rates can depress office-REIT share prices.
Sector Performance
According to REIT.com, the office REIT sector provided a cumulative return of 179.24 percent from September 2002 to June 2017. This works out to an average annualized return of 7.21 percent. This compares to a 207.53 percent cumulative return and 7.91 percent annualized return for all property REITs over the same period. The office REIT sector had a slightly higher annualized volatility, 11.77 percent vs 11.54 percent.
Office REIT funds from operations (FFO, a measure of operational cash flows) is a primary metric for assessing performance. For the 52 weeks ending on July 31, the average office REIT had an FFO/share of $2.23 and a Price/FFO estimate of $15.90. Annual FFO growth was 5.65 percent and the dividend yield was 3.91 percent. Total sector return was 2.79 percent year-to-date and 3.28 percent for one year. The average debt ratio is 36.9 percent.
Largest Players in Sector
The following is a summary of the three largest players (by market cap) in the office REIT sector:
- Boston Properties (BXP): With a market cap of $20.7B, BXP is the largest REIT in the office sector. Headquartered in Boston, BXP is self-administered and self-managed. It owns/manages 164 Class A office properties with a total space of 48.4 million square feet. The following table lists the REIT’s important characteristics:
| Characteristic | BXP |
| FFO/Share | $6.20 |
| Price/FFO | 19.49 |
| FFO Growth | 5.82% |
| FFO Payout (Q1 2017) | 42.21% |
| Total Return YTD | -2.73% |
| Total Return 1-Year | -12.99% |
| Dividend Yield | 2.48% |
| Debt Ratio | 31.10% |
| Long-Term Rating | A- |
- Alexandria Real Estate Equity (ARE): The Number Two office REIT has a market cap of $11.04B. It specializes in offering leases for office and research facilities in the life science segment. The REIT owns 166 properties with 1.6 million square feet of space.
| Characteristic | ARE |
| FFO/Share | $6.02 |
| Price/FFO | 20.14 |
| FFO Growth | 10.22% |
| FFO Payout (Q1 2017) | 95.24% |
| Total Return YTD | 10.72% |
| Total Return 1-Year | 11.18% |
| Dividend Yield | 2.84% |
| Debt Ratio | 32.70% |
| Long-Term Rating | BBB |
- SL Green Realty (SLG): The third largest office REIT has a market cap of $10.96B, consisting mostly of Manhattan office space. It holds interests in 127 NYC properties with 47.8 million square feet of rentable space.
| Characteristic | SLG |
| FFO/Share | $6.53 |
| Price/FFO | 15.81 |
| FFO Growth | 4.81% |
| FFO Payout (Q1 2017) | 50.35% |
| Total Return YTD | -2.56% |
| Total Return 1-Year | -9.81% |
| Dividend Yield | 3.00% |
| Debt Ratio | 36.30% |
| Long-Term Rating | BBB- |
In sum, office REITs offer competitive risk-adjusted returns. The moderate outlook for interest rates coupled with a fairly strong economy points to good results in this sector in the intermediate term.