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Office Landlord Stocks Outperformed The Market In Third Quarter

Office investors fearing the broader erosion of asset values can look to the stock market for a rare bit of optimism.

The sale of a 49.9% stake in 245 Park Ave. in Manhattan boosted investor confidence in the market.

The sector notched a surprising show of strength in the third quarter, outperforming the S&P 500 index for the first time since 2020 amid a broader stock sell-off. Resilience in office stocks is a turnaround from plummeting values during the height of the pandemic, but there are signs that investors continue to see real estate as vulnerable to high interest rates and shifting work habits.  

Office-focused stocks slipped 2.8% from July through September, a more modest decline than the nearly 3.7% drop across the S&P 500, according to Bloomberg. Real estate investment trusts focused on office space performed even better, only losing 1.5% of their value and outperforming all other real estate sectors. 

The slip in value of office REITs is relatively minor compared to the 8% decline in values across all REITs. Only data center REITS, which continue to see tailwinds but declined by 2.5% in the third quarter, held on to nearly as much value as office stocks.

SL Green Realty’s June sale of a 49.9% stake in the 1.8M SF office tower at 245 Park Ave. in Manhattan buoyed confidence in the market and helped boost the value of other office stocks, per Bloomberg. The sale valued the property at $2B and followed SL Green signing more than 85K SF of new leases at the building. 

“That may just be one data point, but it showed that at least one investor was willing to put incremental equity capital into an office building, and absorb a large amount of office-backed debt,” Bloomberg Intelligence analyst Jeffery Langbaum told the publication. 

Hudson Pacific Properties saw the biggest increase in value after jumping 58% during the third quarter, but the stock remains down 40% year-to-date. Vornado Realty Trust, a New York-based office owner, saw shares advance 25%. 

SL Green saw shares rise 24% in the third quarter, but a wave of short sellers in the firm’s stock and a broader sell-off last week signaled that investors’ confidence in the sector remains mixed. Roughly 26% of SL Green stock was sold short in late September despite the price rally and sale of 245 Park. 

Shortly after the quarter ended, real estate stocks swooned last week in the face of a strong September jobs report that saw nonfarm payroll employment rise by 336,000 jobs. Office REITs fell to their lowest intraday level since 2009 on Friday, per Bloomberg, amid fears that the Federal Reserve could again raise interest rates and add pressure to an industry already facing a debt repayment and liquidity crunch.  

Office stocks showed some signs of clawing back those losses in trading early Monday, with prices for SL Green, Vornado and Hudson Pacific all rising by at least 1.5% while the S&P 500 remained flat.

Through the end of September, U.S. office REIT stocks were still down more than 17% year-to-date after losing nearly 38% of their value in 2022, according to Nareit.