Office Market Panic Is Easing, But a Critical Period Looms
Dividend yield spreads on office REITs are plunging. But the broader office property sector doesn’t have an easy way out until interest rates fall.
Landlords will probably still find demand for marquee buildings in the nation’s central business districts.
Photographer: Amir Hamja/Bloomberg
The office market hysteria appears to be easing — at least if the performance of real estate investment trusts are any gauge. But the office market isn’t out of the woods yet, and risks could loom over the market for years to come if interest rates stay anywhere near current levels.
Consider where we’ve come from. The Bloomberg REIT Office Property Index has returned about 25% since its lows in late May, nearly three times the S&P 500 Index. Dividend yield spreads on office property REITs — a rough measure of perceived risk — have plunged back closer to historical norms from their highs after the banking crisis. In May, the spread just about grazed the post financial crisis peak. And since then, it’s plunged to 1.74 percentage points at the end of August — not quite “normal,” but close.