How to invest in office REITs
Here's a step-by-step guide on investing in office REITs:
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
Understanding office REITs
Most office REITs focus on a specific property type, tenant, or location. Some concentrate on multi-tenant office buildings in central business districts. Office space in these areas tends to remain in high demand, enabling these office REITs to maintain high occupancy levels and benefit from steadily rising rental rates.
Other office REITs focus on large office campuses. They'll often lease entire buildings to a single tenant under long-term triple-net leases.
There are also office REITs that focus on specialized office properties to support the needs of specific tenant types. These properties can include highly secure buildings for government agencies, creative space for technology and media companies, or specialized lab space for life sciences companies.
Many office buildings earn additional revenue from parking fees, while some large skyscrapers feature an observatory that generates ticket sale revenue. Additionally, many office buildings lease retail space to shops and restaurants.
Advantages of investing in office REITs
Office REITs have several positive investment characteristics. Some benefits of investing in the sector include:
- Durable rental income: Most office tenants sign long-term leases (five to 10+ years). These long-term leases provide office REITs with relatively steady cash flow. They also help mute the impact of a recession since office REITs don't have to lease all their space during a market downturn.
- Steady demand: Office space demand has been relatively stable over the long term. While many companies have adopted a hybrid model that allows their employees to work from home more often, they continue to lease office space. They believe having employees together in an office setting can increase collaboration, coordination, and productivity.
- Institutional demand: Given their stability and durability, office buildings are in high demand among institutional investors, such as pension funds. They often acquire office buildings from REITs or buy entire REITs, which boosts valuations across the sector.
- Capital appreciation: Office REIT share prices can increase as the value of their office property portfolios rises.
- High dividend yields: Many office REITs offer above-average dividend yields, making them attractive to investors seeking passive income.
- Diversification: Office REITs enable you to build a diversified portfolio of office properties.
Risks of investing in office REITs
Investing in office REITs isn't without risk. Here's a look at several of the risk factors investors need to keep in mind before buying shares of an office REIT:
- Uncertain future: There's still a lot of uncertainty about what the future holds for offices amid the rise in remote and hybrid work. This headwind has had the greatest impact on lower-quality office buildings and those in suburban locations.
- Oversupply: Developers usually start constructing office buildings on speculation, betting they'll secure tenants before finishing construction. If developers build too much supply, this can weigh on occupancy levels and lease rates in certain markets.
- Interest rate risk: Rising interest rates can increase interest expenses if an office REIT uses floating-rate debt or has near-term debt maturities. They can also increase income yields on lower-risk investments, such as bonds. As a result, REIT stock prices often fall when interest rates rise, as investors demand a higher dividend yield to compensate for the REIT's higher risk profile relative to bonds.
Factors to consider before investing in office REITs
Investors should evaluate a few things before buying shares of an office REIT, including:
- Property focus: Demand for office space has shifted since the pandemic, driven by the rise of remote and hybrid work. Many companies have upgraded their office space to Class A properties in urban city centers. As a result, rental and occupancy rates for premier properties have risen, while demand for lower-quality office buildings has fallen. Given these trends, REITs that own premium office properties have a competitive advantage over those that focus on suburban commodity office campuses.
- Financial strength: An office REIT must have a low dividend payout ratio and an investment-grade balance sheet to weather the industry's headwinds.
- Development pipeline: Investors should evaluate an office REIT's development pipeline to ensure it's building pre-leased properties that contribute immediate cash flow upon completion, rather than building on speculation.
Key Trends in Office REITs
According to JLL's (JLL -3.27%) latest U.S. Office Market Dynamics report, the office market is entering a new growth cycle. The report found that leasing activity reached a new post-pandemic high in the fourth quarter of 2025. Meanwhile, office sales volumes have risen for seven consecutive quarters, distress levels have been declining, and the construction pipeline is at a historically low level. As a result, vacancy rates are falling, which should drive better rental growth rates in the future.
