A survey undertaken by analysts at JP Morgan could help to underpin a recovery in the US office market at some point, and provide some sort of a trough for the likes of Manulife US REIT (MUST), Keppel Pacific Oak US REIT (KORE) and Prime US REIT .
In the survey, JP Morgan received 3,657 responses from geographies as far apart as Europe (London, Madrid and Paris), United States (Atlanta, Austin, Boston, Los Angeles (LA), New York City (NYC), San Francisco and Washington DC [DC]), Americas (Ex-US) (Mexico City & Sao Paolo) and Asia Pacific (Hong Kong, Singapore, Sydney & Tokyo).
“Of the 3,657 responses to our survey, 79% said they were back in the office on a regular basis and for those that were back in the office on a regular basis, the most frequent response to the number of days per week - surprisingly, we think - was 5 days at 47%,” the JP Morgan report says. The next most common frequency was 3 days per week (22%) and then 4 days (17%).
Different cities in the US and Asia Pacific have different rates of return to office (RTTO). In the US, Boston (4.23 days), Austin (4.09 days), and NYC (4.01 days) lead. Unfortunately, the lowest RTTO cities are San Francisco (3.74 days), Washington D.C. (3.82 days), and Los Angeles (3.83 days). MUST owns office buildings in DC and LA. Both the properties, Penn (in DC) and Figueroa (in LA) are among the tranche 1 properties which need to be sold by June next year. The other tranche 1 assets are Centerpointe (Fairfax, Virginia) and Diablo.
Some of the reasons for high RTTO percentages in some cities is because of high tenant concentration. For Boston, financial services and life sciences could be helping office usage. Many business sectors are concentrated in NYC. Moreover, employers in NYC require their employees to be back in the office.
Cities in the JP Morgan survey include Tokyo and Sydney. ”Around 64% of Australian respondents reported that they were back in the office 3 days or more per week. This is 4% less than the global average, with more respondents from Australia (29%) returning to the office in 2024 than the global average (20%),” JP Morgan says.
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Unfortunately, Australians have a greater preference towards working from home (at 32%) compared to the global average of 27%. Nonetheless, employees are gradually returning to office.
The RTTO survey is likely to underscore some sort of trough for the troubled MUST as it looks to its disposition mandate. MUST also owns properties in Atlanta, Jersey City and Secaucus. Anecdotally, RTTO in New Jersey is prevalent throughout the state.
The three SGX-listed US S-REITs have suffered to the extent that two of them MUST and KORE, have stopped distributions per unit (DPU) till 2025 and 2026, and Prime US REIT has slashed its DPU. REITs can withhold distributions if they report a loss in their P&L statement.
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The reasons to suspend DPU were different for MUST and KORE. For MUST, following its IPO in 2016, its then manager embarked on an AUM expansion strategy that eventually led to over-leverage, and this subsequently turned into a disaster by end-2022 following declines in valuations of its office properties.
The reasons highlighted by KORE’s manager for suspending DPU were different from MUST’s but it will have compounded MUST’s problems. KORE’s manager highlighted a major difference between the structure and business model of US office REITs versus Singapore office REITs.
“US office requires a substantial amount of capital to build out and lease office space because the landlords, rather than the tenants, are responsible for funding the tenant improvements in addition to funding new or improved tenant amenities, leasing commissions and other costs,” KORE’s manager explained in a media release on Feb 15.
“This is very different from the Singapore office market. Therefore, office REITs that invest in the US require more capital investment than office REITs that invest in Singapore. Without the necessary capital investments, US landlords’ ability to retain tenants and attract new ones would be greatly compromised, thus leading to a decline in occupancies and net property income (NPI), resulting in valuations declining even more significantly,” KORE’s manager said.
All in, the JP Morgan survey would have provided scant relief for MUST's unitholders in the short term, but they could draw comfort that America is returning to office.
For Singapore, JP Morgan has an overweight on CICT where 37% of revenues is exposed to office, of which 94% is in Singapore. However, the report is cautious on Keppel REIT and Suntec REIT as "given concerns of negative carry from office portfolios & risk of elevated gearing from value declines".
In Australia, JP Morgan has an overweight on Dexus because of its "high quality offices, at attractive implied yields that should unwind as RTTO sentiment evolves". JP Morgan also like GPT group, one of Australia's largest REITs,
