There's still a lot of uncertainty about the future of office demand. Employees have gotten comfortable working remotely and would prefer not to return to the office, at least not five days a week. Because of that, companies might not need as much office space in the future.

However, while employees prefer to work remotely, employers want them back in the office. Because of that, I think investors are overlooking the long-term recovery potential of the office sector. That's leading me to load up on office-focused real estate investment trusts (REITs) Cousins Properties (CUZ -1.22%) and SL Green Realty (SLG -3.26%).

Benefitting from a pandemic-driven tailwind

The pandemic accelerated several long-term trends, including migration to the warmer and cheaper Sun Belt region. People aren't the only thing moving south. Companies are increasingly relocating and expanding to the Sun Belt region because of its better business climate and to access its highly educated workforce. That's driving demand for office space in the region's largest cities.

Cousins Properties is a key beneficiary of this trend. The office REIT's asking rents are already 9% higher than their pre-pandemic level and 25% above the average for Class A office space nationwide. During the first quarter, the REIT signed 324,000 square feet of office leases, with rents on second-generation leases 15.4% higher than expiring lease rates on the same space.

With strong portfolio occupancy and companies continuing to expand into its markets, the REIT has 1.5 million square feet of active development projects it expects to complete over the next two years. These investments should help further grow its rental income. Meanwhile, Cousins has a vast land bank to support up to 5.1 million square feet of additional developments in the future as demand materializes. That sets it up for future growth and should help drive attractive returns for investors over the long term.

Gearing up for the recovery

While the pandemic has benefited office markets in the South, it hit large coastal gateway markets like New York City hard. However, the city has started to recover, though it has been uneven. One emerging trend is that office tenants are trading up to modern Class A office space from lower-quality properties.

That trend toward quality is benefiting SL Green. The company's same-store occupancy was 92.7% at the end of the first quarter, including leases signed but not yet commenced. The REIT believes it can boost that number to 94.3% by year's end as the recovery in office demand continues. 

Because of that recovery in top-tier office space, the REIT has started to go on the offensive. In April, it acquired its first office building since 2018, buying 450 Park Avenue for $445 million. SL Green is also building a new 1.4 million square foot office tower, One Madison, which it expects to complete by November 2023. It recently signed IBM as an anchor tenant for the building, with the tech giant agreeing to a 16-year lease for 328,000 square feet. That deal followed a 20-year lease with another tenant for 56,000 square feet. These leases showcase that modern office space in New York remains highly desirable. When combined with the recovery of its existing portfolio, these new additions will help drive growth for SL Green in the coming years. 

Getting in on the ground floor

Investors are largely ignoring office REITs these days due to the uncertain impact remote work will have on office space demand. That's causing them to miss out on the flight to quality in the sector, which is benefiting SL Green and Cousins Properties. That trend should enable those REITs to deliver higher returns, which is why I'm steadily buying more shares.