{"id":11057,"date":"2023-11-08T11:06:49","date_gmt":"2023-11-08T11:06:49","guid":{"rendered":"https:\/\/infundpros.com\/markets\/weworks-bankruptcy-wont-kill-office-reits-other-factors-matter-more\/"},"modified":"2023-11-08T11:06:50","modified_gmt":"2023-11-08T11:06:50","slug":"weworks-bankruptcy-wont-kill-office-reits-other-factors-matter-more","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=11057","title":{"rendered":"WeWork’s Bankruptcy Won’t Kill Office REITs. Other Factors Matter More."},"content":{"rendered":"
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<\/p>\n<\/figure><\/div>\n

\n WeWork\u2019s<\/span>
\n bankruptcy is the latest blow to the battered office sector. But the outlook for the economy and interest rates are far more important in driving the stocks., analysts said.<\/p>\n

On Monday night, the office-sharing firm WeWork (ticker: WE) filed for protection from creditors under Chapter 11 of the federal bankruptcy code. The company, once valued at $47 billion, was hurt by a combination of the work-from-home trend that emerged during the pandemic and pressure on the company\u2019s finances from higher interest rates.<\/p>\n

\n

Dylan Burzinski, head of office sector research at Green Street, a commercial real estate analytics firm, said WeWork\u2019s bankruptcy is \u201cclearly a negative\u201d for the office sector, but added: \u201cI would describe it as more of an incremental negative to a sector already facing prominent headwinds.\u201d<\/p>\n

Those headwinds include hybrid office arrangements, the work-from-home trend, lingering debate about whether the U.S. will have a recession in 2024, and what the Federal Reserve will do with interest rates in the coming months.\u00a0<\/p>\n

\u201cWeWork is just another mole to whack for the office industry,\u201d said Richard Anderson, a manager director at Wedbush Securities, a financial services firm, where he leads coverage of real estate investment trusts. <\/p>\n

For office REITs, the post pandemic work environment has meant that many companies need less space, which has dented demand. And after years of steady growth, technology companies have been laying off workers and giving up millions of square feet of office space. <\/p>\n

Office buildings across 10 major cities are only 49.6% filled with workers, according to Kastle Systems, a security company. In New York, the figure is 48.9%, and in San Francisco, 41.9%.<\/p>\n

Vikram Malhotra, co-head of U.S. REITs research at Mizuho Americas, said that in the main cities such as New York City, San Francisco and Washington, D.C., WeWork represents about 1%-2% of occupied office stock. \u201cThere will be excess supply hitting the office markets,\u201d he said.\u00a0<\/p>\n

But the far bigger driver of share performance for office REITs, such as
\n BXP
\n (BXP), the nation\u2019s largest, and
\n Vornado
\n (VNO), is interest rates and economic growth.<\/p>\n

\u201cUltimately, for office space, the underlying demand is office-using jobs\u2014so you need the economy to start producing more office jobs,\u201d said Malhotra. \u201cThe other factor is remote work and the return-to-work theme. I think frankly that\u2019s a bigger deal than WeWork in itself.\u201d<\/p>\n

Late last week, shares of office REITs climbed as bond yields fell sharply. On Thursday, the yield on 10-year Treasury notes fell by 0.122 percentage point to 4.668%, marking three consecutive trading days of declines, the longest streak since the end of August.<\/p>\n

Interest rates, said Anderson, \u201care a powerful force\u201d in the office sector. \u201cTenants\u2014users of office space, the customers of the REITs\u2014are looking ahead and saying, \u2018I don\u2019t know where this economy is going. I don\u2019t know where interest rates are going. I\u2019m not going to commit right now or I\u2019m going to take a lot longer to commit to space and maybe I\u2019m going to commit to less space when my lease expires.\u2019\u201d<\/p>\n

High interest rates are a problem for landlords. Many office owners have billions of dollars of floating- and low-interest-rate mortgages that will likely need to be refinanced at much higher rates in the coming years.\u00a0<\/p>\n

\u201cOnce we get some clarity on the macro environment, namely interest rates, I think that helps tenants breathe more easily,\u201d said Anderson. \u201cIt helps the REITs because they have to finance the capital that goes into these buildings. And everyone wins if we get to a point where we have a better understanding of where interest rates are going.\u201d<\/p>\n

REITs are popular with income investors because they\u2019re required to distribute at least 90% of their taxable income to shareholders, giving them bondlike characteristics. At the same time, REITs are capital-intensive and have underperformed. A pause in the Fed\u2019s rate hikes would a welcome respite for the sector.<\/p>\n

Write to Lauren Foster at lauren.foster@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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