It’s been another tough year for office REITs, but there may be opportunities lurking.

It’s expected to be another tough year for office real estate investment trusts, but some asset managers say there may be a decent entry point in the sector for long-term investors.

“Office REITs are in a ‘darkest before dawn’ scenario heading into 2024. There’s no denying they’re cheap…but there are a number of headwinds facing office landlords,” says Portfolio Manager at Purpose Investments. , says Michael McNab. Email.

“I think a lot of investors forget that this was the hottest REIT asset class going into 2020,” he said. At the time, office vacancy rates were extremely tight and investors were flocking to the sector looking for monthly payments.

However, after the pandemic, McNab said he noticed that pedestrian traffic on Toronto’s PATH system, the network of underground passageways in the downtown core, was still very light, especially on Mondays and Fridays.

“The office is not dead, but I believe it has changed.”

The shift to working from home due to COVID-19 has ravaged the office market as many employers re-evaluate their office footprints. Companies are also considering reducing real estate holdings as a way to control expenses in response to the current economic downturn.

“The[work-from-home]trend has likely caused a permanent loss of 10 to 15 percent of demand,” said Maria Benavente, vice president and portfolio manager specializing in real estate at Dynamic Funds.

“We expect the market of haves and have-nots to continue.”

The domestic office vacancy rate rose from 13% in the third quarter of 2022 to 14.1% in the third quarter of last year, according to a September report from Colliers Canada.

Office vacancy rates have been rising for three-and-a-half years and are likely to continue rising in the short term as remote work remains prevalent, according to the report.

Meanwhile, average asking rents for offices are nearing an all-time high of $21.08 per square foot, primarily due to the removal of old office buildings and landlords negotiating concessions other than rent reductions. says the report.

John Duda, president of Colliers’ Canadian real estate management services division, said he expects a “moderate increase” in office space absorption by the end of 2024, but “doesn’t foresee a dramatic turnaround.” .

Part of the problem is the disconnect between what employers and workers want.

“It’s the imbalances in the job market that are preventing a more dramatic return to the office,” Duda said in an interview.

“Employees have a lot of power, but that means they’re not coming in and just saying, ‘I’m not coming in.'” But that’s starting to change, especially in the (downtown) core. This is becoming more evident in the department. The level of busyness has increased tremendously. ”

Slate Office REIT, Allied Properties REIT, True North Commercial REIT, and Dream Office REIT units have all declined between 62% and 85% since March 1, 2020.

Benavente said sentiment for the sector remains quite negative and the timing of the recovery is difficult, noting that Calgary’s office market was still struggling to recover from the 2014 oil price crash even before the pandemic. It pointed out.

“Office is a worthwhile investment. To get value, you need patience and tolerance for fluctuations,” she said.

“We think there is some value. However, investors need to be selective and focus on balance sheet, liquidity and dividend coverage. Many office REITs have been forced to cut their dividends, and sometimes We were even forced to cut the dividend by twice as much.”

Slate Office REIT, for example, suspended monthly distributions in mid-November to conserve cash. TrueNorth Commercial REIT cut its monthly dividend early last year.

Benavente said office REITs will do well as the economy begins to recover and businesses return to hiring mode. Banks also need to be more willing to lend to office landlords to stimulate activity in this area.

Mr McNab said he remained very cautious about the sector and hoped vacancy rates would improve. However, he thinks long-term investors may start “picking up” on higher quality companies, which could become better investments over time.

“Commercial real estate follows the simple economic laws of supply and demand…and right now, supply significantly exceeds demand,” McNabb said.

This report by The Canadian Press was first published Jan. 3, 2024.

Companies mentioned in this article: (TSX:SOT-U, TSX:DU, TSX:AP-U, TSX:TNT-U)