US Office S-REITs - DBS Research 2023-03-27: Rewards For The Brave

• The US office market remains in a state of uncertainty, impacted by both a structural shift (higher adoption of flexible working) coupled with cyclical factors (impacted by the hawkish Fed) at play concurrently. Leasing momentum has also quietened down with landlords offering higher incentives to attract/retain tenants, impacting cash flow growth.
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Silver lining amidst a gloomy outlook.

• Despite the gloomy outlook on the US office market, we see bright spots emerging. While we may be making an early call, we see some optimism due to
  1. lower competition from declining new supply;
  2. more landlords undertaking repositioning exercises and converting into other asset classes to reduce available supply; and
  3. - Read this at SGinvestors.io -
• These factors will likely need time to play out before the US office market can stabilise. However, we remain constructive on the medium-term outlook.

US office S-REITs track the industry trend of US Office REITs

• Similar to the broader industry trend of US office REITs, the US office S-REITs (i.e. Keppel Pacific Oak US REIT (KORE, SGX:CMOU), Manulife US REIT (SGX:BTOU) and Prime US REIT (SGX:OXMU)) submarkets’ optimism has declined, especially towards the end of 2022, reversing the strong start at the beginning of that year.
• Based on JLL’s 4Q22 US office market insights, the US Office S-REITs submarkets with a positive/improvement outlook contributes 21% to 60% of NPI / CRI vs 35% to 82% in 1Q22 and 49% to 74% as at end 2021.

Portfolio occupancy declined marginally to below 90%, except for KORE

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Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2023-03-27 SGinvestors.io

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