First quarter of next year—otherwise known as a couple of weeks from now—was supposed to be when the majority of workers returned to the office. But uncertainty keeps rearing its head, and that could play continued havoc with the values of office REITs.
As of November, the number working at home due to the pandemic was down to 11.3% of the workforce, or 17.5 million people. Previous government figures showed that 13% of wage and salary workers had arrangements to work from home at least part of the time. Depending on the overlap of these groups, that could mean upwards of a quarter of workers do their job from home at least part of the time., And that’s as a percentage of all workers, not just those who typically would be in an office.
The omicron variant of Covid-19 has only increased uncertainty, with some large employers again delaying their plans for a return to the office. Meta (formerly Facebook), for example, is keeping plans to reopen at the end of January, but will let employees delay their own return until as late as June. Lyft, to name another example, is opening its offices by February but not requiring employees to come in next year.
Uncertainty about office use undercuts the CRE subsector market. But a negative impact on office REITs hasn’t been tied strictly to the pandemic.
“Office REITs have seen weakening demand for some time, and in many cases, it started before the COVID-19 pandemic,” Matthew Frankel, a contributing analyst at The Motley Fool, tells GlobeSt.com. “This is especially true when it comes to traditional office properties—as opposed to life science or specialized office types—located in major, high-cost cities.”
“With the omicron variant of COVID-19, the renewed concern is that companies will delay their returns to office work again, and many will eventually get tired of the constant delays and simply pull the plug,” Frankel continues. “For example, New York City office REIT Empire State Realty Trust has seen its stock price drop by about 10% since the new variant started making headlines, and it’s not surprising given the uncertainty.”
“Yes, there is a lot of uncertainty about how the office is going to look, what we’re doing from the office, what we’re doing from home, and what that does for overall office space,” agrees Calvin Schnure, a senior economist from Nareit. “But the penalty investors have placed on shares of office REITs is pretty extreme given the performance of the sector. The overall real estate sector in 2020, if you looked in March last year, fell. But the S&P came back pretty quickly. REITs involved in digital communications came back right away. But the rest had a lag in recovery. The stock performance of the office REITs suggest that investors are worried about a far worse outcome than seems likely.”
Schnure thinks the more likely outcome is a combination of strategies. “It’s perfectly consistent to have a work from home policy and still have a need for office space as in the past,” he says. “The office is still going to be the hub of activity and businesses know that.”
The question is when will investors agree?