Office REITs find an open door in the bond market

By Joy Wiltermuth

Office REITs join landlords in raising nearly $2.5 billion in debt, equity this week

Top owners of high-quality office properties were among a batch of public real-estate investment trusts that raised nearly $2.5 billion in debt and equity in the past week.

BXP, Inc., (BXP) formerly known as Boston Properties, borrowed $850 million in the corporate bond market, while Cousin Properties Inc. (CUZ) Inc. raised $500 million, according to BofA Global Data.

A total of $29 billion in fresh U.S. investment-grade corporate bonds were issued in the week through Thursday, per BofA Global, with trading levels narrowing about five basis points on average, indicating demand for the debt issuance.

All told, REITs raised almost $2.6 billion in debt and equity in the past week, with bond coupons in the 5% range, according to David Auerbach, chief investment officer at Hoya Capital Real Estate.

UDR Inc., (UDR), Kite Realty Group Trust (KRG), Regency Centers Corp. (REG) and National Health Investors Inc. (NHI) were other REITs that raised funds in the past week, he said.

"Clearly, at the end of the day, tenants want the best amenities in the best cities," Auerbach said in a phone interview Friday, adding that "all signs" suggest that "the debt and equity markets are open to these companies."

Volatility has been an issue again this year for the 10-year Treasury yield BX:TMUBMUSD10Y, a benchmark rate for real-estate loans. But bond yields for a select group of office REITs show a recovery from earlier spikes in 2024, according to BondCliQ data.

Real-estate investors have welcomed lower borrowing costs in recent months, spurred by expectations for the Federal Reserve to start cutting rates in September. The central bank two years ago began hiking short-term rates to the highest level in over 20 years.

The office sector has been the hardest hit part of commercial real estate in the wake of the pandemic. After a few tough years, however, the lending spigot has opened to more borrowers who need to refinance a wall of debt coming due at higher rates.

Signs of increased leasing activity in the office sector, plus some capitulation by landlords as prices sag, has Moody's this week estimating that a bottom could be near for the sector.

Auerbach said he hasn't heard of public REITs, unlike private landlords, looking to surrender some distressed properties to lenders.

"That will be an important focus over the next few months."

In the stock market, the S&P 500's office REIT subcomponent XX:SP500.40402040 was up 4.9% on the year so far and 14.3% higher from a year ago, according to FactSet.

Stocks SPX DJIA COMP were largely unchanged Friday, but on pace for big weekly gains.

-Joy Wiltermuth

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08-16-24 1236ET

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