3 Office REITs to Sell Before the Commercial Property Crash

In early June, I read an article about Shark Tank star Barbara Corcoran’s thoughts about the current state of affairs for office space.

“No one really believes it’s going to turn the corner,” Fortune reported Corcoran’s comments. “People are staying home. Our best office buildings in midtown Manhattan are 50% occupied, and in most major cities or in secondary cities, we have a 20% vacancy rate. No one wants to take that chance.”

Corcoran believes it’s going to get worse before it gets better. A big part of why it will worsen is with defaults rising on real estate loans. That makes all but the best office-focused real estate investment trusts (REITs) off-limits. 

Even excellent companies such as, Brookfield Asset Management (NYSE:BAM), need help with some of their office holdings. In Brookfield’s case, its Los Angeles office portfolio is starting to implode slightly. However, investing in BAM gives you a diversified portfolio of alternative assets. 

With pure-play office REITs, you don’t. For this reason, I’d look at these three office REITs to sell.

Hudson Pacific Properties (HPP)

Hudson Pacific Properties (NYSE:HPP) recently cut its dividend by 50% to 12.5 cents a share. The Los Angeles-based company isn’t a pure-play office REIT. It also owns 90 sound stages in six global media markets. It recently acquired Quixote Studios for $360 million. Quixote owns 23 sound stages and a fleet of film production trucks and cast trailers. 

It’s hard to know if that’s a good or bad thing. After all, Hollywood is in the middle of a protracted writer’s strike. That can’t be good for sound stage rentals. So, while the long-term prognosis for film production is good, Hudson Pacific currently has two hot potatoes. 

The REIT’s office portfolio is primarily in Los Angeles, San Francisco, Silicon Valley, and Seattle. As Wolf Street mentioned on June 9, the office vacancy rates in those four markets are between 23% and 33%. 

The company had nothing but red ink since 2020. In the trailing 12 months ended March 31, HPP lost $57 million on $1.03 billion in revenue. Their stock is down 70% over the past year and 86% over the past five years. This is a falling knife you don’t want to catch. Stay away.

Vornado Realty Trust (VNO)

It’s been quite a few years since Vornado Realty Trust (NYSE:VNO) was involved with Toys ‘R’ Us. VNO bought the toy retailer as part of an investment group in 2005, and by 2018, it was liquidated while in bankruptcy proceedings

Vornado is the fourth largest office REIT by market cap. The company suspended its dividend for 2023. However, assuming business gets better, Vornado will restart their dividend in 2024. That’s a big if, according to Corcoran. 

The second-largest office landlord in New York City, it’s selling off some properties in the Big Apple to generate cash. However, as Wolf Street points out, New York Office towers are selling for much lower valuations than they did back in 2016. 

No dividend, no seller’s market, and a New York office market in the toilet suggests you might want to wait until the work-from-home trend completely dies down. So far, it’s not looking good.  

Further, even Mad Money host Jim Cramer doesn’t recommend Vornado.

“The management there is so strong, but the tug of war against New York is so bad I’m not going to recommend Vornado,” Cramer commented on May 25. 

Boston Properties (BXP)

In January, I included Boston Properties (NYSE:BXP) in a group of seven REITs that will be big winners in 2023. Boy, I was definitely wrong about that. But, seriously, BXP is down more than 18% year-to-date, 40% over the past year, and 55% over the past five. 

Swing and a miss. Not even close. 

I reasoned that BXP shares were cheaper from a valuation perspective then at any time in the past decade. You can’t blame a guy for looking for a good deal every now and again. 

However, what I also said explains why its share price is stuck in neutral.

“Wisely, it concentrates its properties in six markets: Boston (34.7% of total premier space in the central business district), Washington D.C. (19.9%), San Francisco (39%), Seattle (25.1%), and Manhattan (9.6%),” I wrote on Jan. 25. 

Unfortunately, office buildings aren’t getting enough leases signed, whether Class A or Class C. That’s not good news if you’re a shareholder. 

As Corcoran said, it’s likely to get worse before it gets better for the likes of Vornado.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

 

      

 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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