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Office Landlords Hype New RTO Mandates, But Their Values Are Still 'In The Tank'

The leaders of the country’s largest publicly traded office real estate owners have renewed their optimism that the latest push of companies forcing their workers back to the office will finally turn the tide of their troubled asset class.

But investors to this point haven't bought the narrative, with share prices hovering near cyclical lows and continued weakness in some companies' earnings statements.


“The companies are upset — the stocks are in the tank and it's a tough environment. There's still leasing going on, it's just slower,” Alexander Goldfarb, senior REIT equity research analyst at Piper Sandler, told Bisnow. “The tenants aren't under pressure, but if you have good space, it will get leased.”

Interest rate hikes, frozen capital markets and feeble leasing markets are causing major pain for office owners. Investors are responding; SL Green, the largest office owner in Manhattan, has seen its price come down about 36% this year alone. Other office-heavy REITs like Vornado and Boston Properties are experiencing similar hits.

Those prices, along with stubbornly sluggish office occupancy, made for a less-than-buoyant mood on first-quarter earnings calls in recent weeks. But company executives pushed hard on what they see as a waning public interest in working from home, and announcements from firms like JPMorgan and Amazon requiring workers to spend more time at the office. 

“We think we have seen the peak in work-from-home, more and more CEOs are now requiring their employees back to the office,” Vornado CEO Steven Roth said on the company’s call Tuesday. “With each passing week, the office buildings feel more like 2019, and we believe it's just a matter of time before everyone is back for good. New York City seems to be leading the country in this regard.”

Amid the stated optimism, Vornado suspended payments of dividends on its common shares for the rest of the year and is planning to purchase as much as $200M of its outstanding common shares through a new stock buyback program, moves Roth described as "going on the offense." Vornado’s share price is down roughly 34% from the start of the year.

It was a similar story on the other side of the country at Kilroy Realty Corp., a San Francisco-based office REIT with a 14M SF portfolio, as company Chairman John Kilroy assured investors of a spike in office usage though the first quarter.

"There's been another quantum jump, frankly, in San Francisco and Seattle and certain areas of LA ... over the last three months,” he said on his company's call last week. “I think there's another quantum jump ready to occur over the next three months or so with the big announcements like Amazon up in Seattle and some of the others in the Bay Area getting back to work."

At SL Green, which reported both rent and occupancy drops in the first few months of the year, CEO Marc Holliday described the market as in “slow and steady recovery” and suggested “overanxiety” is driving the firm’s share price down.

"Overly negative voices are overshadowing some of the positive signs that portend to a slow but steady recovery for a market that offers what employers want most: a highly educated, diverse, youthful and talented workforce," he said.

SL Green CEO Marc Holliday speaks at the topping out of One Madison Avenue in December 2022.

Vornado President Michael Franco took a similar stance, describing office negativity as a "whipping boy" for the media.

"That's going to continue, and that obviously has an effect on sentiment," he said. "It's gotten a bit extreme."

Antony Malkin, the CEO of Empire State Realty Trust, also told investors on his company’s call of a shifting “narrative” on work-from-home.

“According to the Department of Labor, New York City office use employment now exceeds pre-pandemic levels, and the narrative around in-office work has changed for the better,” Malkin said on April 28. “This is a cycle.”

The leader of the largest U.S. office REIT, Boston Properties, said the continued weakness in the leasing market doesn't reflect a broader shift away from office. 

“It's driven primarily by the economic slowdown, a cyclical trend rather than remote work, a secular trend," BXP CEO Owen Thomas said last week. "In other words, we believe the current leasing slowdown is cyclical and will recover along with economic conditions. Our clear evidence of this observation is our own leasing experience."

Nevertheless, BXP isn't looking to add many more offices to its portfolio, focusing its next rollout of capital expenditures on its life sciences portfolio and residential development.

April was particularly brutal on the office leasing front in New York City, with just 1.5M SF of office leases signed during the month in Manhattan, per Colliers data, marking a nearly 44% decrease from a year ago.

“The problem with office, especially like in New York, is you have 400M SF. Of that, 150M is competitive,” Goldfarb said. “Office definitely has a future and the future is modern, well-amenitized space that's convenient for commuters.” 

Still, the amount of space on offer in the city is staggering. Office availability hit a new record-high in the first quarter at 19.5%, said Savills Senior Director of Northeast Regional Research Marisha Clinton, and tenants are putting space on the market faster than it is being leased up.

"The big story and the big issue that's going on is the overall high availability rates," Clinton said. "The market remains highly, highly tenant-favorable, and there is a plethora of space options available to suit a tenant's budget and it's a better time than ever for tenants to take advantage of the concessions that owners are giving."

Tenants that are active in the leasing market are largely financial services and law firms, according to landlords and brokers, a turnaround from a tech-dominated leasing era in the lead-up to the pandemic. JPMorgan Chase's latest RTO missive — demanding at all managing directors spend five days a week in the office — was hailed as a meaningful shift in the narrative. 

“I wouldn't necessarily minimize what JPMorgan Chase is doing, especially right now, given what they've done recently in the news with the First Republic,” said Ramneek Rikhy, an executive vice president at CBRE. “We have a large client who was very open and flexible, and they're still very open and flexible regarding their office-work policy, but they're starting to think about maybe mandated a certain number of days.

She said more and more, companies are looking to formalize their workplace requirements. Still, recession talk, the banking crisis and questions about hybrid work continue to have a dampening impact on the market.

“You have a number of firms dealing with a number of external factors that have come to fruition that they don't have a lot of clarity around," she said. "And I think that is leading to everyone taking a bit of a pause.” 

Plus, this week, the Federal Reserve raised rates for the 10th time in just over a year, marking the fastest set of increases since the 1980s. The range now sits between 5% and 5.25%, the highest since just before the 2008 financial crisis.

“Having lived through the late 1970s, I think we're going to have a few more quarters like this,” Goldfarb said.