What does "class A" mean? We couldn't find a good definition, so we sorted through 1,300 REIT office buildings and assigned A+ to D grades.
Our scores are preliminary and imperfect, but we think they might provide incremental consistency over traditional A/B/C ratings.
What went into our scores? Asking rent, % leased / rent roll stability, property age and quality, and floorplate size.
----- Primary conclusion -----
Our initial findings suggest that 60%+ of U.S. office REITs' properties are relatively solid. 90%+ leased with very respectable rent profiles.
Another 29% (B+) is in relatively good shape with near 90% occupancy and similar rents, despite inferior properties and more rollover.
However, there's a significant drop in quality in the B segment of the market, and although lower-quality properties may account for a minority share of REIT office portfolios, they could see very meaningful value declines.
Our quick guesses based on generic modeling...
-- Class A properties could easily be down 20% in value. That may seem light to many, but these properties typically benefit from in-place rent growth, rent roll stability, and NNN leases.
-- Class B+ properties could be down 30-40%. Similar to A- but less stable rent rolls and likely to see faster degradation and more capex costs.
-- Other properties (about 7% of the market) could be down 60%+ with 50-100 properties possibly worth nothing. i.e., capex and operating losses > future benefits. Some of these properties could be given back to lenders but many are unencumbered.
----- Sample buildings -----
Class A: 1 Vanderbilt // New York City // SL Green
Class B: 777 S Harbour Island Blvd // Tampa // Highwoods
Class C: 2812 Emerywood Pky // Richmond // Brandywine
----- Owners of the reviewed properties -----
-- Boston Properties
-- Vornado
-- SL Green Realty
-- Kilroy Realty Corp
-- Hudson Pacific Properties
-- Douglas Emmett
-- Highwoods Properties
-- Cousins Properties
-- Corporate Office Properties
-- Brandywine Realty Trust
-- Office Properties Income Trust
----- Hedge / Disclaimer -----
These scores aren't perfect. We started going through assets at the beginning of the summer and recently concluded draft ratings; at best, the information we reviewed is at least four months old. Also, our ratings are based on relatively simple inputs.
Special thanks to a group of our team leaders and contributors who spent their free time this summer wading through properties to complete this side project.
How does this analysis fit with your understanding of the office market?
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