Will ASX REITS be boosted by Australian workers returning to the office?

CBRE research shows the office occupancy rate across Australia's CBDs has increased to 76% of pre-pandemic levels.

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Several ASX real estate investment trusts (REITs) manage large portfolios of offices and are likely to benefit from the return to the workplace occurring across Australia's CBDs today.

Among them is the No. 7 ASX REIT by market capitalisation Dexus (ASX: DXS).

Dexus manages $24.3 billion worth of office blocks out of $48 billion in total real estate assets (as of FY23). It owns 62 office blocks.

Dexus shares are currently $6.78, up 0.44% at market close on Friday and down 17.42% over the past 12 months.

Another is the No. 8 ASX REIT by market cap Charter Hall Group (ASX: CHC).

Of Charter Hall's $71.9 billion property funds under management (FUM) as of FY23, $29.3 billion of it was office space. The ASX REIT owns 96 office towers and blocks.

Charter Hall shares finished Friday at $12.12, up 1%, and are up 8.21% over the past 12 months.

The largest pure-play office REIT is Centuria Office REIT (ASX: COF). It manages $2.2 billion in office space and owns 23 office blocks (as of FY23).

The Centuria Office REIT share price is $1.21, down 2.03% as of Friday's market close and 16.32% over the past year.

CBD office occupancy rises to 76% of pre-pandemic levels

The post-pandemic return to the office is continuing, although many workers are operating under hybrid arrangements where they work from home a few days per week.

In a recent report, CBRE, a global leader in commercial real estate services and investment, said Australia's average office occupancy rate rose to 76% of pre-pandemic levels in the first quarter of 2024.

This is up from 70% in the December 2023 quarter and 67% in the March 2023 quarter.

While occupancy rates rose in all capital cities during the quarter, Perth and Adelaide maintained the highest occupancy rates of 93% and 88%, respectively.

CBRE said a shorter average commute from home to work in these smaller capital cities may be contributing to higher occupancies.

Across the rest of the country, occupancy rates were 86% in Brisbane, 77% in Sydney, 66% in Canberra, and 62% in Melbourne.

Aussies are bowing to their employers' requests to return to the office much more than workers in the United States, where CBRE says occupancy rates have stalled at the 50% mark for more than a year.

Why do companies want employees back in the office?

Many companies are asking their employees to return to the office at least part of the time to leverage the benefits of teamwork, innovation, and collaboration.

They are concerned that working from home in the long term may reduce overall productivity.

One related issue is ensuring new employees have enough interaction with senior staff so they can learn faster and more easily integrate into the company's culture.

When the ASX REIT Centuria Office released its FY23 results, Grant Nichols, Centuria's Head of Office, commented:

With productivity falling in both Australia and overseas, we have seen an increase in mandated return to office policies that aim to address productivity, increased loneliness and diminished corporate culture.

While hybrid working arrangements and increased workplace flexibility are likely to become more prevalent, it is becoming increasingly apparent that the office will remain an important and focal point in many workplace operations.

In fact, Centuria's 2023 annual Australian office tenant customer survey reinforced this view, with approximately 75% of respondents stating they expect to retain or increase their office space requirements in the medium term.

But workers aren't being as cooperative as many companies would like.

So, some companies have begun to offer incentives, including linking salary and promotions to how much time an employee spends in the office.

Companies move into premium offices to lure workers back

Another trend is companies moving their corporate headquarters into more attractive office buildings. They appear happy to pay a higher rent in exchange for attracting workers back on-site.

CBRE reports that two-thirds of organisations that have relocated since COVID have upgraded to premium office blocks featuring retail, restaurants, and other amenities on the lower floors.

Charter Hall Office CEO Carmel Hourigan said Charter Hall was carefully curating its portfolio "to meet demand for premium offices that are rich with amenity".

Upon the release of the company's FY23 results, she said:

This is reflected in our strategic investments and development pipeline, including our recently submitted application for Chifley South in Sydney which will realise the development potential of the site.

Dexus Executive General Manager, Office, Andy Collins said more than half of new office leases in FY23 represented companies upgrading to better office suites:

The average terms of new leases and renewals was circa 6.2 years, and 57% of new leases were represented by customers upgrading to higher quality space.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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