The U.S. office sector has underperformed the real estate investment trust market as a whole. Learn more about unemployment and commercial real estate.
The office sector has made gains, but has still underperformed the broader real estate investment trust market so far this year, according to industry experts who blame the weakness primarily on slow job growth.
The office sector has returned 12.63 percent from the beginning of the year through Nov. 8, according to a statement released last week by the National Association of Real Estate Investment Trusts or NAREIT. That’s up from 1.9 percent over the same period in 2011. Performance may be improving, but doesn’t come close to the 16.53 percent return for the equity real estate investment trust sector so far this year.
“Slow labor market growth in 2012 has led to little new demand for office space, which inhibits office owners from enjoying high rent levels and has somewhat counteracted the positive effect of minimal new supply coming online in 2012,” Jason Lail, manager of the real estate research group at SNL Financial, told REIT.com. At the same time, the vacancy rate for office space ticked down to 17.1 percent in the third quarter of 2012, down from 17.2 percent in the second quarter, and rents edged up to $28.23 from $28.17 over the same period.
A trend to reduce “space-per-employee” may cool demand for office rental space, according to NAREIT, while new construction activity is expected to bring 3 million square feet of new office space on the market by the end of 2013, and add another 1.5 million square feet thereafter.
The overall real estate investment trust sector is a popular option among affluent investors seeking to diversify their portfolios away from more traditional products, such as stocks, bonds and cash accounts. A real estate investment trust is a corporation that owns real estate assets, such as rental apartments, or mortgage bonds. The trust generates income by renting or leasing its property or loaning money to third-party real estate endeavors.
A real estate investment trust enjoys a special tax status that exempts the trust from corporate taxes, but requires the trust to distribute at least 90 percent of its profits to shareholders as dividends. The payouts enabled the real estate investment trust market to outperform the stock market by a factor of almost four in 2011, according to NAREIT.