Caution Advised: Office REIT Outlook Remains Murky

While many investors have grown more optimistic around the prospects for improved performance within the office real estate sub-industry, we believe investors should remain cautious with more distress likely on the horizon. In a recent recording, CFRA Senior Equity Analyst Michael Elliott, CFA, provides a comprehensive analysis of the risks. He highlights why office REITs are not well positioned for a 'higher for longer' interest rate environment, pointing out that risks are elevated as mortgages need to be refinanced in 2024 and 2025. Elliott also discusses the expectation of negative funds from operations (FFO) growth in 2024 and limited signs vacancy rates will materially improve near-term due to the hybrid working model. Additionally, asking rental rate growth is misleading, with elevated free rent periods and high tenant improvement allowances leading to lower effective rents. Further, the conversion of office spaces to residential or other property types is proving to be complex, expensive, and time-consuming, contrary to what many investors expected.