Good News Ahead? Office REITs Surge Over Rate Cut Hopes

The second week of July was outstanding for most real estate investment trusts (REITs). The Vanguard Real Estate Index Fund ETF VNQ was up 4.7% for the five days from July 8-12. The main catalysts for the rally were the June Consumer Price Index (CPI) declining by 0.1% and FED Chairman Jerome Powell's remark that there's a danger in holding interest rates up for too long.

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Certain subsectors are greatly affected by the direction of interest rates. Office REITs were trounced as interest rates were climbing between 2022-2023 and, conversely, are extremely sensitive to any news that might portend a decline in those rates in the future.

Therefore, it's no surprise that Office REITs would flourish during a week when the inflation news and FED pronouncements were positive. Seven of the top 13 REITS for the week were Office REITs and all seven gained 12% or more. Another half dozen Office REITs were up between eight and 11%. The top-performing Office REIT climbed a whopping 29.97%. Take a look at three of the best ones:

Peakstone Realty Trust 

Peakstone Realty Trust PKST is an El Segundo, CA-based, internally managed diversified REIT that owns and operates single-tenant office and industrial properties. Peakstone calls itself "America's Blue-Chip Landlord," and as of April, had a portfolio of 67 properties with 16.6 million square feet of space across 22 states in high-growth markets. 96% of its portfolio is leased with a six-year weighted average lease term (WALT). 65% of its tenants are investment grade, including PepsiCo, 3M, Amazon, and Keurig Dr Pepper. Peakstone had its IPO on April 13, 2023.

Peakstone has been quite volatile since its IPO and pulled back so much during May and part of June that it was extremely oversold on a technical basis by the end of June. So, it's unsurprising that the shares would bounce on any positive economic news. Yet, remarkably, Peakstone Realty led all REITs with a one-week 29.97% price performance without any company-related news influencing the price.

Kilroy Realty Corp

Kilroy Realty Corp KRC is a Los Angeles, CA-based diversified REIT that owns and operates 121 office, life science, and mixed-use properties on the U.S. West Coast and Texas. It also has more than 1,000 residential units on the West Coast. Its portfolio totals approximately 17 million square feet. Kilroy Realty is a member of the S&P Mid-Cap 400 Index. It has an occupancy rate of 85%. 

There has been very little recent news to influence price. On July 2, KeyBanc analyst Upal Rana maintained Kilroy Realty at Overweight and lowered the price target from $45 to $42.

Kilroy has had a tough year, with interest rates and lower occupancy rates hampering its performance. Before last week, its total return for 2024 was -20.65%. However, Investors have recently been viewing the commercial real estate markets as great bargains.

Now, all Kilroy needed to turn things around was some optimism about declining rates. And when it came, investors responded, sending Kilroy 12.87% higher for the week.

 Looking For Higher-Yield Opportunities?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Certain private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities and Benzinga has identified some of the most attractive options for you to consider. 

For instance, the Ascent Income Fund from EquityMultiple targets stable income from senior commercial real estate debt positions and has a historical distribution yield of 12.1% backed by real assets. With payment priority and flexible liquidity options, the Ascent Income Fund is a cornerstone investment vehicle for income-focused investors. First-time investors with EquityMultiple can now invest in the Ascent Income Fund with a reduced minimum of just $5,000.

Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings. 

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BXP

BXP Inc. BXP, formerly known as Boston Properties, Inc., is a Boston-based office REIT with 187 total properties with 53.5 million square feet, concentrated in five large cities: Boston, Manhattan, Washington, D.C., San Francisco, and Seattle. The firm calls itself "the largest publicly traded developer, owner, and manager of premier workplaces in the United States." Boston Properties is a member of the S&P 500.

As of the end of Q1 2024, Boston Properties had a 91.3% occupancy rate, which is favorable to its 90.4% occupancy rate in Q3 2023. About 8% of its office properties are in life sciences, which means little risk of its employees working from home. Its top 20 tenants include Salesforce, Google, Biogen, Fannie Mae and Bank of America.   

On June 14, Truist Securities analyst Michael Lewis maintained BXP with a Hold and lowered the price target from $75 to $67. On June 20, Morgan Stanley analyst Ronald Josey maintained Boston Properties at Equal-Weight with a $62 price target.

BXP was one of several REITs expected to perform very well in 2024. But in the first half of 2024, its total return was -11.90% as the Fed continued to send messages that interest rates might have to remain higher for longer. That was all forgotten last week as BXP blasted up 12.37% to close the week at $67.76 and exceed both analysts' price targets.

Investors in Office REITs are speculating that the Fed will cut rates at the September meeting, and if that happens, these REITs could perform exceptionally well for the remainder of 2024. However, the risk remains that an unexpectedly bad inflation report or two in the next few months could undo all hopes for that rate cut and take the wind out of the sails for the Office REIT subsector. But for now, things look promising.

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