Fitch: Return-to-Office Delays No Imminent Risk to Office REITs

Fitch Ratings, New York, said long-term office leasing plans will not likely be affected even if U.S. corporations continue to delay their return-to-office plans.

But Fitch said it expects longer-term, secular headwinds related to flexible work and demographics to pressure office fundamentals, including occupancy rates and net effective rents. These headwinds could result in “uninspiring, below-average occupancy gains and net effective rent growth during the next upcycle for many core U.S. markets,” it said in a report.

“Temporary return-to-office delays are not driving lease terminations or a material shrinkage of office occupier space needs,” Fitch said. “The recovery of income generated from ancillary services such as employee parking and other amenities will be further delayed but is not a material credit effect. Most companies are planning to return employees to the office full time or transition to a hybrid work structure with physical office space needs that result in an improved work environment, despite successful work-from-home arrangements during the pandemic.”

The report said office sector rent collection has remained “fairly resilient,” even with widespread remote work during the pandemic, largely because tenants maintained ongoing operations and the office sector has long-term leases. Fitch called new supply in line with long-term growth levels in most markets but said demand will remain uncertain as tenants evaluate their needs after the pandemic.

Many companies with remote employees established return-to-office dates in September, but as coronavirus variants increase case counts, many have delayed their return-to-office dates. Still, “most office REITs have not cited a trend of tenants looking to reduce office space due to delayed return-to-office plans,” Fitch noted.

Some landlords and tenants are retrofitting office space with more space between workstations, more breakout rooms for privacy and collaboration and added amenities, the report said.

“Tenant leasing discussions are focused on long-term planning, as opposed to another wave of infections and local government guidelines,” Fitch said. “The discussions along with substantially improved leasing pipelines suggest return-to-office delays are not a material near-term risk for the office market, but overall sector occupancy gains could be subdued over the next few years due to the aforementioned headwinds and a dichotomy in performance between Class A properties and lower quality assets.”