Office REITs

We are short the shares of several Office REITs. We believe the demand for office space will stay very low as the workforce adjusts to hybrid working conditions. Most office leases are multi-year leases. As these leases burn off, we believe companies will demand less space. We think this presents a long-term problem for owners of office space as the demand for future office leases will be materially lower compared to pre-pandemic.

We think it's difficult to see how much value destruction there is in the financial statements of office REITs because their tenants are still paying their current leases. But, we have leading indicators that demand destruction is taking place, such as

1. keycard swipes by workers are running about 40% occupancy per day versus 80% prepandemic,
2. the amount of office space available for sublease is quite high,
3. we have seen several office REITs cut their dividends, and
4. we are seeing some banks noting problems with office buildings in their loan portfolios.

We think there is an especially acute problem in major gateway cities such as New York City and San Francisco, as the workforce does not want to return to commuting into these central business districts. But, we do not think there is a safe place to hide for owners of office buildings.