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3 Office REIT Stocks to Grab as Labor Market Shows Resilience

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After three interest-rate cuts this year, with the latest in October, it is less likely that the Federal Reserve will announce another in its two-day policy meeting on Wednesday.

The rate cuts were implemented, earlier this year, to provide a boost to the U.S economy amid global economic slowdown, recession fears and the long-standing U.S.-Sino trade war. The unexpected solid November job report and strong consumer sentiment suggest that the rate cuts have been effective so far and no more cuts are required for the time being.

Particularly, last Friday, the Labor Department reported that non-farm payrolls surged 266,000, considerably beating the consensus forecast of 187,000. Moreover, the unemployment rate is back to this year’s low of 3.5% compared with October’s 3.6%. This is also in line with the lowest unemployment rate since 1969. Further, average hourly earnings were up 3.1% year on year.

The Fed’s neutral stance might not provide impetus to the REIT sector. However, companies in the sector have reduced sensitivity to interest rates by prudently managing their balance sheet and improving leverage levels. In addition, the recent volatility in the stock market induced by the political uncertainties and trade disputes indicates that the real estate sector will keep providing a relatively decent value to investors.

And given the resilience in the job market, encouraging macro-economic conditions and stable fundamentals, office REITs are anticipated to hold up well in the near- to mid-term. Further, it takes around six to 12 months for a change in office-using employment growth to affect the total office real estate occupancy level.

Fundamentals to Remain Steady

With the nation witnessing a historic economic expansion, the July-September period marked the 30th consecutive quarter of positive office absorption and the 40th consecutive quarter of office-using employment growth. This trend is expected to continue in the next year as well.

In fact, per the CBRE Group, Inc.’s CBRE 2020 outlook for the U.S. real estate market, office-using employment is projected to be up 0.3% or 45,700 jobs next year. Hence, continued job creation in the office-using sectors will boost leasing activities and absorptions, stoking office real estate sector growth in the upcoming period.

Technology Industry to Fuel Leasing Activity

The tech industry continues to be a major tenant of office landlords. Per the outlook, tech tenants accounted for 21.6% of the overall leasing activity in first-half 2019. Furthermore, as of mid-2019, nearly 4,000 tenants were looking for large blocks of office spaces, with tech tenants representing the highest percentage.

Looking ahead, the technical workforce is projected to shoot up 13.2% from 2016 through 2026. Thus, tech tenants will likely impact office demand significantly in the days ahead.

Emerging U.S. Office Markets to Witness High Demand

Additionally, the emerging U.S. office markets have become an attractive alternative to primary markets for large tenants, owing to relatively lower rental rates, high levels of modern office space as well as talented and educated workforce. And banking on this, a number of tech and finance companies have been expanding in emerging markets. This will propel strong positive net absorption and offer opportunities for new Class-A developments or renovations of well-situated Class B office spaces.

Our Key Picks

Given the factors discussed above, we believe it is an appropriate time to invest in some fundamentally-strong office REIT stocks. We have used our Zacks Screener to pick three top-ranked office REIT stocks, as these are well positioned to benefit from the factors discussed above.

Cousins Properties Incorporated CUZ: This Atlanta, GA-based company engages in the acquisition, ownership, development and management of Class A office and mixed-use properties throughout the Sunbelt markets of the United States. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

The funds from operations (FFO) per share estimate for 2019 moved up 2.1% in the past 60 days, suggesting 17.5% year-over-year growth. The Zacks Consensus Estimate for 2020 revenues of $733.15 million calls for year-over-year improvement of 19.1%. Shares of the company have gained 28.4%, year to date.

Kilroy Realty Corporation KRC: This Zacks #2 Ranked company owns, develops, acquires and manages real estate assets, consisting primarily of Class A properties in the coastal regions. Over the past month, the Zacks Consensus Estimate for the FFO per share for 2019 and 2020 moved marginally north to $3.83 and $4.08, respectively. This indicates year-over-year growth of 10.1% for this year and 6.6% for the next. In the year-to-date period, shares of the company have rallied 34.1%.

Piedmont Office Realty Trust, Inc. (PDM - Free Report) : The company engages in ownership, acquisition, development, redevelopment and management of commercial real estate properties primarily located across seven major office markets in the Eastern region of the United States. It carries a Zacks Rank of 2, at present. The current-year FFO per share is projected to witness 2.9% year-over-year growth. Also, the Zacks Consensus Estimate for 2020 FFO per share has been revised marginally upward to $1.9 in the past month, suggesting a year-over-year increase of 6.7%. The stock has appreciated 31.3%, year to date. 

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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