{"id":1004651428,"date":"2023-03-15T06:39:11","date_gmt":"2023-03-15T14:39:11","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004651428"},"modified":"2023-03-20T05:38:05","modified_gmt":"2023-03-20T13:38:05","slug":"tale-of-two-sectors-public-market-outlooks-for-industrial-and-office","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/tale-of-two-sectors-public-market-outlooks-for-industrial-and-office\/","title":{"rendered":"Tale of Two Sectors: Public Market Outlooks for Industrial and Office"},"content":{"rendered":"
\"\"<\/a>

Todd Kellenberger<\/p><\/div>\n

Industrial and office REITs lagged the broader US REIT market last year. Industrial suffered from concerns over greater property valuation downside sensitivity to rising bond yields given the ultra-low cap rates on industrial assets. Office, on the other hand, saw the continuation of a structural de-rating that started five years ago. Current public valuations are telling a very different story about the outlooks for both.<\/p>\n

What Public Valuations Tell Us <\/strong><\/h2>\n

As of January 2023, consensus Net Asset Values (NAVs[1]<\/a>)  for office REITs had fallen 16 percent from the end of December 2021. The sector was trading at a 42 percent discount to NAV, implying spot capitalization (cap) rates of 8.5 percent on average for the sector. Meanwhile, consensus NAVs[2]<\/a> for industrial REITs were down 5 percent since the end of December 2021. The industrial sector was trading at a 2 percent discount to NAV or an implied spot cap rate of 4.3 percent [3]<\/a>.<\/p>\n

For office, this suggests public markets are pricing in a circa 30-to-35 percent decline in capital values from the end of 2021 and a bleak longer-term growth outlook. For industrial, the implication is that private real estate values are likely to hold relatively resilient despite the ongoing risk of cap rate expansion. This resilience, however, can only be justified by strong forward growth prospects.<\/p>\n

What REIT CEOs Tell Investors About Office<\/strong><\/h2>\n

In the office sector, after a disappointing 3rd quarter 2022 report card that saw a spate of earnings misses, guidance downgrades, and hefty dividend cuts from highly levered REITs, such as SL Green Realty and Vornado Realty, it was encouraging to see recent 2022 4th quarter results come in broadly in line. Improving utilization rates was another small positive, as \u201creturn to office\u201d momentum is improving amid a weakening job market.<\/p>\n

That said, the outlook remains murky. The sector remains highly levered with limited top-line growth. Earnings guidance is still coming in slightly weaker with funds from operations (FFO) expected to fall 7.5 percent in 2023 as higher interest costs bite into earnings. Leasing volumes remain light, occupancy is under pressure, and pricing power is weak. Meanwhile, a potential wave of loan defaults appears to have started with Vornado and Paramount Group discussing loan restructurings with lenders.<\/p>\n

The commentary from office REIT CEOs speaks for itself. Here’s Boston Properties CEO Owen Thomas:<\/p>\n