This year’s commercial real estate market is in a tough spot. High interest rates and remote work’s newfound permanence in corporate culture combine to make commercial real estate a tough sell. As a category, U.S. REITs fell 50% since 2021, with commercial real estate suffering the most.
Although some real estate sectors are bouncing back, like residential mortgage REITs, commercial real estate remains in a slump. Critical geographic sectors like Silicon Valley and Manhattan are seeing record-high vacancy rates as fewer corporate clients elect to renew leases. In some cases, companies are even terminating leases early to cut costs in a high-rate climate.
But taking advantage of a turbulent commercial real estate market isn’t just about shorting REITs. That’s certainly an option, but additional opportunities exist for investors willing to take on more risk.
Sell: Boston Properties (BXP)
Commercial and office REIT Boston Properties (NYSE:BXP) owns and operates almost 200 properties throughout the Boston, New York, and San Francisco areas. Unsurprisingly, this REIT is the most affected by the commercial real estate slump. True to form, its share price declined nearly 25% over the past year. But the pain likely isn’t over.
In fact, average office occupancy is still 50% below pre-pandemic levels as workers push (and mostly get) a remote-centric office culture. In New York alone, office real estate values dropped 45% in 2020 and continued falling to a record-setting $453 billion loss. Likewise, San Francisco commercial real estate remains 30% vacant, a trend doubtlessly accelerated by the massive crime wave affecting the city.
And yet, this represents only two of Boston Properties’ core sectors. BXP’s funds from operations, an alternative to earnings per share for REITs, are declining steadily. They marked at $1.86 per share in its most recent filing, compared to $1.94 the previous year. Although the report surprised analysts, beating expectations by about 3%, it did little to assuage their concerns.
Today, analysts remain overwhelmingly bearish on BXP, with most calling the stock a hold. But, this recommendation is hinging on hopes of interest rate improvement. Yet, as the Fed announced this week, higher rates are here to stay – which doesn’t bode well for Boston Properties.
Buy: WeWork (WE)
This stock pick might come as a surprise considering it’s admittedly terrible performance in recent years. But WeWork (NYSE:WE) is uniquely positioned to capitalize on two key factors in today’s commercial real estate market.
Those would be vacancies and remote workers’ need to physically relocate away from their home. Workers typically face far more distraction at home than in an office setting. More remote workers are trending towards establishing their own “office away from home” to remain productive.
True, WeWork is in terrible shape as it faced delisting in past months, raised bankruptcy concerns. Late last month, a team of institutional investor giants, including BlackRock (NYSE:BLK) began exploring restructuring options in a bid to save WeWork. If entities as monolithic and forward-thinking as BlackRock believe WeWork has a future in today’s commercial real estate market, despite gross mismanagement, this may be an opportunity for retail investors to jump in pre-acquisition.
Today, WeWork is priced at the bottom of the barrel, with its stock hitting a 0.03 price-to-sales ratio. Hinging investment hopes on a possible buyout isn’t usually a good play. Still, WeWork’s price is tough to beat considering its potential upside in the changing remote work world.
Buy: Newmark Group (NMRK)
When major corporations face major difficulty, third-party consultants are usually called in to navigate shifting winds. And Newmark Group (NASDAQ:NMRK) is one of the few commercial real estate firms positioned to take advantage of of that trend. They’re uniquely positioned in the short term. Even if their clients go bankrupt or dissolve commercial real estate holdings, Newmark still collects hefty advisory fees.
And Newmark is the primary player in the space, evidenced by their recent advisory role to BlackStone (NYSE:BX) as they explored selling opportunities for a hefty commercial real estate portfolio. Newmark is also priced to buy, trading at a 0.94 price-to-book ratio (meaning it trades lower than its net assets). That alone makes NMRK a value play at today’s prices.
An executive commitment to shareholder value reinforces Newmark’s value status. The company both issues dividends and runs a comprehensive buyback program. Today, Newmark’s total yield is 13.60% and 66% payout ratio. This clearly makes this advisory firm a compelling opportunity to diversify your commercial real estate investment strategy.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
