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Headwinds Looming Over U.S. Office REITs

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Ana Lai, Senior Director Real Estate, S&P Global Ratings, says the office real estate market in the United States is deteriorating, pressured by longer-term secular headwinds from remote working and near-term cyclical risks from a slowing economy and weaker job growth, and explains recent rating actions following a portfolio review of office REITs.

We expect office assets to underperform other real estate property types over the next two years given expected pressure to net effective rents and occupancy levels.

Growth for the rated office REIT sector will likely be muted overall, with relatively flat to slightly negative NOI growth projected in 2023

Growth for the rated office REIT sector will likely be muted overall, with relatively flat to slightly negative NOI growth projected in 2023 given our expectation for leasing activity to remain slow, with office landlords wielding limited pricing power.

Highlights

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  • Technology sector slowdown to curb demand for office space because technology has been a key demand driver due to robust growth
  • Tightening access to capital will hinder growth and increase refinancing risk
  • Aggregate debt maturities for our rated office REITs are $4.1 billion in 2023 and $3.7 billion in 2024 as of Dec. 31, 2022, representing 6.9% and 6.4% of office debt maturities, respectively
  • As debt maturities approach, refinancing costs will be significantly higher, and we expect credit metrics to deteriorate given higher debt costs and weaker earnings, with coverage ratios expected to decline meaningfully as issuers refinance their maturing debt at higher rates

Ratings Actions & Outlooks

  • Affirmed Issuer Ratings: Boston Properties Inc., Brandywine Realty Trust, Highwoods Properties Inc., Kilroy Realty Corp., Piedmont Office Realty Trust Inc., and Vornado Realty Trust
  • CreditWatch with Negative Implications: all ratings on Hudson Pacific Properties Inc., including our ‘BBB-‘ issuer credit rating
  • Lowered Issuer Credit Rating: Office Properties Income Trust to ‘BB’ from ‘BBB-‘ and the issue-level rating to ‘BB+’ from ‘BBB-‘
  • Negative Outlook: Boston Properties, Brandywine, Office Properties Income Trust, Piedmont Office Realty Trust Inc., and Vornado Realty Trust
  • Stable Outlook: Highwoods Properties Inc. and Kilroy Realty Corp
Ana Lai

Ana Lai, CFA, is Senior Director of Real Estate at S&P Global Ratings. An experienced credit analyst specializing in investment-grade and high yielding equities and corporate bonds, her coverage includes the REIT, capital goods, and retail sectors.

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