Year-to-date as of Feb. 27, the SNL U.S. REIT Office index had outperformed the S&P 500 by nearly eight percentage points, providing a total return of 8.7%.
This strong performance may serve as an indication that investors are gaining confidence in a sector that has underperformed over the last few years.
In its Office Outlook report from the fourth quarter of 2013, Jones Lang LaSalle said that 2014 would be “the year of a diversifying and expanding office recovery.”
“Vacancy levels over the past 12 months declined 40 basis points to 16.6%, the lowest rate in five years,ˮ the report noted.
It went on to state that 76 percent of the markets it tracks reported higher rents in the 2013 fourth quarter compared to the third quarter, and 82% displayed year-over-year rent growth.
Based on the firm’s “clockˮ for the U.S. office market — an image used to visually represent the phases of the real estate cycle — 33 markets were positioned beyond six o’clock, signaling that those markets have “hit absolute bottom and leverage for tenants has stabilized and even started to shift back to landlords.ˮ
REITs with heavy exposure to markets in this “rising phaseˮ may be well-situated to capitalize on this position of strength due to increasing occupancy levels and asking rents.
According to Reis Inc. data as of Feb. 25, for office markets with at least 10 U.S. REIT-owned office properties, the New York office market had the highest occupancy levels at year-end 2013 and demanded the most from its tenants on a dollar-per-square-foot basis.
The market, which is home to 91 U.S. REIT-owned office properties, had occupancy of 90.1% and an annualized asking rent of $61.79 per square foot.
Despite this strength, the Jones Lang LaSalle report noted that the 2014 forecasts for the New York market are ““ositive, but tepid.ˮ
It stated that the overall job growth may slow, and that the city’s financial sector growth may be tempered due to the full implementation of Dodd-Frank and the Federal Reserve’s move to taper.
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