Valuations of Office REITs
Loking at the valuations of some of the high quality office REITs (BXP, Kilroy, SLG) I am curious what others think needs to turn for investor focus to shift towards publicly traded office REITs.
Using BXP and KRC as examples, the inverse correlation to the 10yr is evident as both companies saw a decent pop in share price in mid-September when the 10-yr almost hit sub 4%, and again in mid-late October when it did hit sub 4%.
On the other side, we’ve seen liquidity come back to office, both in equity sales and debt capital markets (at strong valuations), concurrently with the surge in office leasing in NYC and SF.
Given BXP’s FFO per share in 2025 was only ~2.3% below full-year 2019, curious how much more sentiment around office needs to improve for investor interest to come back to REITs - or are they expected to lag other sectors until if and when rates come down?
I recognize other factors come to play as fund managers consider buying shares (i.e. BXP cut its dividend and analysts had several questions about SLG’s dividend).
Side note - what’s preventing someone like a BX taking one of these folks private at current valuations. Understood that market-caps are higher than some of the buyouts more recently, but still seems like a compelling opportunity?
Lots of questions and look forward to hearing from you all. Thanks.
Based on the most helpful WSO content, here are some insights into the valuation dynamics and investor sentiment around office REITs like BXP, Kilroy, and SLG:
Interest Rates and Valuations:
The inverse correlation between office REIT valuations and the 10-year Treasury yield is a key factor. As you noted, when the 10-year yield dipped below 4%, there was a noticeable uptick in share prices for BXP and KRC. This suggests that investor sentiment is highly sensitive to interest rate movements, as lower rates improve the relative attractiveness of REIT dividends and reduce the cost of capital for acquisitions and developments.
Liquidity and Leasing Activity:
Recent improvements in liquidity for office assets, both in equity sales and debt capital markets, coupled with a surge in leasing activity in key markets like NYC and SF, are positive indicators. However, the bifurcation in performance between high-quality, modern office spaces and older, commodity spaces remains a challenge. Investors may still be cautious, waiting for sustained leasing momentum and clearer signs of recovery in these gateway markets.
Dividend Cuts and Sentiment:
Dividend cuts, such as BXP's, and concerns around SLG's dividend stability can dampen investor confidence. REIT investors often prioritize stable and growing dividends, so any perceived risk to payouts can weigh heavily on valuations.
Private Takeover Potential:
The idea of a private equity giant like Blackstone (BX) taking a high-quality office REIT private is intriguing. However, the challenges include:
Outlook and Sentiment Shift:
For investor focus to shift back to office REITs, several factors likely need to align:
In summary, while there are positive signs like improved liquidity and leasing activity, the sector's recovery is still tied to macroeconomic factors like interest rates and investor confidence in the long-term viability of office demand. Until these align, office REITs may continue to lag other sectors.
Sources: I'm long office properties, I'm long office properties, How do Public REITs raise capital for new acquisitions?, Real Estate Q&A
I’m currently adding some positions. Throwing Cousins in there too (CUZ). The sell off yesterday is ridiculous. We all know the jobs data is fake, and the odds for a rate cut in June will shift back to likely in no time. Also these REITS have just gotten beaten down the last 3 years, office has already hit an inflection point. Markets like NYC and Dallas are already fully back. 590 Madison traded at a sub 6 cap. Cousins bought 300 S Tryon in Charlotte last week for a 7.3 cap. RTO is getting better. Yes the class B assets are screwed but the quality office REITS own the good stuff that will prosper. Market will self correct eventually.
To answer your other question, I’m sure there may be some more take privates, thought it’s more likely to be a private equity firm doing it. A BXP doesn’t need or want to add crap assets/mid tier assets that need a super heavy lift to its portfolio. That’s for opportunistic funds .
Thanks, and good add on CUZ.
On the take-private comment, I meant to ask what’s preventing a PE firm like Blackstone to take a BXP/SLG private.
if you think the jobs data is fake and the jobs situation is worse than it appears, why would you be long office reits?
I just personally think that was the partial cause of the sell off. Interest rate cut prob for June went down a decent amount after the report was released. Also regardless, class a trophy assets have proven to do well the last few years in this frozen job market.
The market can stay irrational longer than you can stay solvent. And once they start cutting dividends it can be a death spiral.
But I do generally agree with the 'value' play in office, on an asset basis not necessarily a REIT/public basis. There are actually deals out there with very positive leverage, and you can enjoy the gasp cash flow and cut rents to keep renewals.
I think everyone during a ~15 year bull run got so obsessed with 'oh I have to buy at X and sell at 1.5X' for this to make sense - and it did for 15 years because there was always a bigger fool. Well that doesn't work now because you have no visibility into the future market / buyer pool.
It sounds very old fashioned and not sexy, but if you have the right capital (not saying that's easy) then buy/hold/cash-flow makes sense. It just doesn't work on the high-octane fund model, which is what 95% of conversations here focus on. In the grand scheme of RE investing history, I think that PERE was an aberration (due to interest rate environment) and we're reverting to the mean of this asset class.
/rant over
great write up. i agree
Yup, don't think this resondated on the other "RE is doomed" threads. Take a look at Blackstone's Link industrial co for example, selling like crazy in this cycle but should still be a huge long-term platform. They probably still have capital sitting in older closed end funds? Wonder how that one and some other operators tied up with short/long term capital will stabilize over the years to come. Ares also made a big push last cycle?
Agreed.
Bang on, we're in an environment for certain asset classes in certain markets that you can buy and assume zero capital appreciation and flat rents yet still generate low to mid-teens returns
I think BXP and KRC are getting hurt by occupancy. BXP said occupancy was turning a corner and it didn't. KRC had -15% lease spreads in their latest earnings. The sunbelt reits seems better, but they are trading way down this past month.
My best guess is that the office reits don't trade up until we see rent growth in their markets. We won't see rent growth until there is higher occupancy. So until then, it's a holding pattern. It would be smart if some of these guys MERGED to create a BXP competitor, but recent capital allocation trends suggests mgmt teams are protecting their jobs instead.
Whenever I look at small publicly traded REIT's, it's never made sense to me. Their overhead for what they do is in insane. So many employees/execs/personnel just living off these investors. When you're a $100M REIT, your SEC compliance is a MASSIVE percentage of every dollar of NOI.
Comp for some of these management teams is wild, too. I forgot which REIT they were referring to on the promote podcast, but I think one of the execs was getting the equivalent of a ~1% AM fee on NAV as their individual comp.
I've never been more bearish on office (even when accounting for COVID). Why? Look at the tenant mix of most of these buildings. The tech company? They're getting disrupted. The law firm? They're going to downsize and move across the street. The accounting firm? Every year more will get automated away. Now, that's not even my biggest concern. When I want to sell a building in 5 years, the outlook for many of those companies will be worse. Every single tenant you have on the rent roll, with the exception of very few, are now all credit risks. This is even before we talk the bad fundamentals in almost every market.
If you believe that, then you also need to believe that the world is probably well and truly f***ed for the next little while, and nearly all asset classes except the public stocks of AI companies are uninvestable.
If employees at tech firms, law firms, accounting firms and other white collar jobs are going to be displaced, then - multi-family assets will feel pain as rents decrease due to unemployment and outmigration from cities, industrial assets will decline as people's spending power reduces drastically, same with retail and hotels. So then what do you invest in?
Not quite, all I am saying is your credit risk has increased significantly relative to other real estate asset classes. Unless adequately paid for that risk, pencils down. The super core assets are well-protected. It's the other 90%, you should be worried about.
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