On July 12, 2023, REITsavvy is delighted to have received an invitation from Manulife US REIT (“MUST”) [SGX:BTOU] to attend an exclusive media-only session, where we will have the opportunity to hear directly about the US Office Market Update. Kenny Loh and Xavier Koh are particularly thrilled to be attending this event and gaining valuable insights firsthand.

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Highlighted Takeaways from the Session: Key Insights on US Office Market

1) Expecting strong momentum as companies encourage employees to return to the office

Currently, employee back-to-office attendance still remains low. Looking ahead, employers introduce new Return to Office (RTO) Mandates. Employers prefer their employees to be back in offices.

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2) Remote jobs openings declining

Companies now open up lesser remote jobs which might signal a preference for employees to be present in the office.

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3) Declining leasing activity in Q1 2023

Leasing activity shows a promising 37% increase from 2020 to 2022, but recent Q-o-Q decline of -10.7% signals waning momentum. As of now, the leasing levels have yet to fully recover to Pre-COVID Levels.

The rise in interest rates prompts occupiers to adopt a more defensive approach in leasing decisions.

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4) Lowest large-scale leasing activities for the recent quarter

It was surprising that Q1 2023 is the lowest leasing activities since the pandemic began. However, in Q2 prelim data, the leasing activities are picking up which might provide recovery signals even though it is still below the pre-pandemic average.

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5) Lease expiry remains high

The lease expiry within the office space remains high for the next few years. This is due to more short-term leasing deals that are done during the pandemic.

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6) Limited new office constructions which drive down the new office supply 

The reduction of new development was also due to increasing financing and production cost. In 2.5 – 3.5 years time, there might not be enough new quality development to absorb demand.

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Conclusion

The US Office Market faces several obstacles that impede its progress.

To envision a more favourable future for this market, we will closely monitor the following factors:

1. The actual end of the Interest Rate Hike by the Federal Reserve: This will enable investors and REIT managers to make more accurate forecasts regarding the expenses required to finance the current and future expansion of REITs.
2. Employers require additional time to determine the optimal blend of remote and physical work environments: This will allow them to make more informed decisions regarding longer lease periods.
3. Improvement in the valuation of US Office REITs through a more favourable leasing environment: This will occur when companies observe signs of their business picking up, leading to increased confidence and demand for office spaces.

During this uncertain period, it is prudent to invest safely and wisely by understanding the fundamental aspects of each REIT.