Office REITs

Those of you that tuned into the last episode of Late Night Finance will know that I took tiny positions in a couple office REITs, which I took the liberty to dump out subsequent to that zoom-cast (no, not a pump-and-dump, I promise).

Traditional valuation methods of real estate can use cash flow methods, capitalized costs of land/building, and gut instinct on where future market demand lies, but there is one universal truth and that is when vacancy rates are high, it is not a good sign of how much cash flow you can dredge out of a property.

We are starting to see downward pressure on various office properties (WSJ article), at least in San Francisco.

While the specific example in this article may be an extreme case (a mark-down of 80% or so from pre-Covid pricing), because mortgage and other secured financing is collateralized by real estate asset values, it stands to reason that many other office REITs are going to face issues with trust covenants of specific debt-to-asset ratios going forward.

Since real estate loans are a slow-moving process, it will take a sustained credit-tight environment to trigger more and more financial stress on these entities, but just like how Silicon Valley Bank and Signature Bank New York were the first canaries in the coal mine, it will be inevitable that we will see the first office REITs start to fall – the trigger will be forced liquidations of office properties.

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You are always early to the party. And the first to leave.