The COVID-19 outbreak forced many companies to have their employees work from home to help slow the spread. This shift was only supposed to be temporary. However, a growing number of companies -- including tech giants like Facebook (NASDAQ: FB) and Twitter (NASDAQ: TWTR) -- plan to allow their employees to work from home permanently.
Because of that, there are growing concerns about the future of office buildings. With less demand for office space, occupancy and rental rates will be under pressure, which would impact the cash flows of companies that focus on owning office buildings, like leading office real estate investment trust (REIT) Boston Properties (NYSE: BXP). However, while the market seems concerned that the work-from-home trend will crush this REIT, other factors suggest otherwise.
How work from home could impact Boston Properties
Shares of Boston Properties have shed about 35% of their value this year, driven mainly by work-from-home worries. That's because the company has significant exposure to markets where work from home will likely rise in the coming years. For example, it gets 22% of its net operating income (NOI) from the San Francisco area, where many tech giants plan to allow their employees to work from home permanently. It also has lots of exposure to the New York City area -- 26% of its NOI -- which was hit hard by COVID-19. Because of that, there's a concern that the city will face a mass exodus. The company also has lots of exposure to other large cities, including its namesake Boston (34% of NOI), the Washington D.C./Northern Virginia region (a combined 15% of NOI), and Los Angeles (3% of NOI).
The company's portfolio currently boasts a solid 92.9% occupancy rate, backed by long lease terms that average 8.1 years. While 5% of its contracts expire this year and another 7% in 2021, most in-place rents are below the market average. In normal market conditions, the company would likely be able to lease this space to existing or new tenants at higher rates. However, the concern is that the COVID-19 outbreak could impact its ability to secure new leases as companies re-evaluate their need for office space.
Why the work-from-home fears seem overblown at Boston Properties
Despite the market's concerns, Boston Properties hasn't experienced too much impact from the COVID-19 outbreak. The company collected 98% of the office rent it billed in June and 97% of May's office rent. That's much better than most other REITs, which suggests that its tenants don't want to lose their space.
Further, the company has been able to continue signing leases despite the pandemic. For example, it signed new leases and renewals for 870,000 square feet of space during April and May. One of the highlights was a 400,000 square foot lease with tech giant Microsoft (NASDAQ: MSFT) at Reston Town Center in Reston, Virginia, which is an increase from the 165,000 square feet it currently leases in the region.
Companies like Microsoft continue to sign new office leases because the vast majority of their employees favor working in an office environment. A recent Gensler survey found that only 12% of U.S. workers want to work from home, just a slight increase from 10% before the pandemic. Further, the study found that most younger generations want to work in an office setting.
Overall, companies have found that efficiency, creativity, mentoring, and culture aren't easy to achieve in a work-at-home environment, which is why many will continue to provide office space even as they allow more employees to work from home.
Instead of having a detrimental impact on office demand, COVID-19 could have the opposite effect because it could force companies to reduce employee densification at their sites. For social distancing purposes, companies will need more space so they can spread their employees out. This factor should increase productivity in the long run since it should reduce the transmission of colds and the flu, which can keep people out of work.
Work from home won't crush Boston Properties
The market has grown concerned that the COVID-19 outbreak will drive an acceleration in working from home, which will impact office space demand. While some companies plan to allow more of their employees to work from home, most fully expect offices to remain central to their operations. That's what the bulk of their employees want, and it's a better setting to achieve their goals. Because of that, this trend won't crush Boston Properties. Instead, the office REIT is well-positioned to thrive, given its high concentration in markets where office space remains in high demand.
Unfair Advantages: How Real Estate Became a Billionaire Factory
You probably know that real estate has long been the playground for the rich and well connected, and that according to recently published data it’s also been the best performing investment in modern history. And with a set of unfair advantages that are completely unheard of with other investments, it’s no surprise why.
But in 2020 the barriers have come crashing down - and now it’s possible to build REAL wealth through real estate at a fraction of what it used to cost, meaning the unfair advantages are now available to individuals like you.
To get started, we’ve assembled a comprehensive guide that outlines everything you need to know about investing in real estate - and have made it available for FREE today. Simply click here to learn more and access your complimentary copy.