Office and condo towers in downtown Montreal.Christinne Muschi/The Globe and Mail
Sorry, telecommuters. Obituaries for the office were premature. As vaccination levels soar and the limitations of remote work become more evident, a growing number of companies are planning at least partial returns to cubicle land. Investors should pay attention.
Some of the most direct beneficiaries of a return to the office would be real estate investment trusts, such as Allied Properties REIT, which lease prime office space in downtown cores.
More retail-oriented landlords, such as RioCan REIT, would also stand to gain if the return of office workers helps to re-energize downtown shops and restaurants and spur more demand for storefront spaces.
Both these REITs trade at reasonable valuations and currently pay unitholders around 4 per cent a year in distributions. Their shares have risen sharply in recent months but are still well below their prepandemic levels. They could climb further if the return to the office proves more vigorous than expected.
Some signs suggest it will be. The Globe and Mail recently reported on a flurry of companies, including TMX Group Ltd. and Intelex Technologies Inc., that are cancelling plans to sublet some of their downtown Toronto office space because more workers than expected are returning to their cubicles.
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In the United States, JPMorgan Chase, Goldman Sachs and Morgan Stanley have told employees to be back to their New York offices by fall. And Apple Inc. has told its staff it expects workers back in the office three days a week beginning in September.
“There is no consensus on how far the return to the office will go,” says Howard Leung, an investment analyst with Veritas Investment Research who follows the REIT market. “But there is a growing belief that some sort of hybrid model will become common, where people work from home part of the week and go into the office for the remainder.”
For REIT investors, this is all good news. A hybrid model suggests offices – and office landlords – will still have a major role to play in corporate life. The possibility that major employers will suddenly decide to abandon their workspaces en masse and go largely remote – a real worry for REIT investors a year ago – no longer seems realistic.
A hybrid model would reflect the mixed feelings many people have about remote work. Surveys show most workers enjoy not having to commute every day, Mr. Leung says. But many – including Mr. Leung himself – also miss the buzz and energy that comes from seeing colleagues and clients over lunch or meeting them for drinks after work.
Companies, too, have become more aware of remote work’s limitations, he says. Managers now realize how challenging it is to bring new employees into a company’s culture when there is no physical place for the newbies to rub shoulders with co-workers, strike up friendships and find mentors.
Working via Zoom becomes particularly tedious amid projects that involve constant close collaboration. Matters that could have been settled quickly prepandemic by walking a few feet and talking to a colleague for a few seconds now involve scheduling a call.
Mr. Leung notes that even the tech giants that paid the most enthusiastic lip service to the possibilities of remote work last summer have not abandoned the office. He recently compared lease commitments by the likes of Twitter Inc., Amazon.com Inc. and Shopify Inc. and found they actually ticked up in 2020 compared with a year earlier. While not all of these lease commitments were necessarily for office space, the lack of any dramatic reduction in commitments suggests that even companies well positioned to work remotely are not shedding vast acres of empty cubicles.
That bodes well for Allied Properties, which caters to a heavily tech-focused clientele that wants space in downtown cores. Mr. Leung says he’s “bullish” on the company. He puts its intrinsic value at $50 a share, significantly higher than the $44.65 level around which it now trades.
Mr. Leung is also optimistic about RioCan REIT, as a result of the stabilizing outlook for commercial real estate in general – and, more specifically, RioCan’s plans to add residential units on top of many of its urban retail properties. He has an intrinsic value estimate of $23.50 a share on the stock, now trading around $22.
Analysts at Canadian Imperial Bank of Commerce see things similarly. They rate both RioCan and Allied as outperformers with a target price of $23 on RioCan and $49 on Allied.
“A strengthening Canadian economy, the desire of workers to reinstate the line between home and work and signals from tenants all support stable prospects for the office asset class,” wrote Scott Fromson of CIBC in a June 22 report. He says Allied is particularly well positioned to capitalize on the “great office reverse migration” and names it as his top pick among Canadian office REITs.
What are the risks? A COVID-19 resurgence would play havoc with the outlook. A sudden increase in interest rates could also dampen enthusiasm for REITs. But if current trends continue, the sector looks likely to benefit from a reversal of the telecommuting trend of the past year.
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Ian McGugan