Invesco Bets on Office Revival, Targets 9.5%-10.5% Returns Amid Distress

Key Takeaway

• Invesco is betting on a revival in high-quality US office properties, seeing opportunities in the sector's current distress.
• The firm targets double-digit returns from office REITs, leveraging their solid land value and cash flow despite refinancing challenges.
• Invesco believes that as more people return to offices, these investments will yield lucrative returns over the next 12-24 months.

Invesco's Strategic Bet on US Offices

Invesco, managing $1.6 trillion in assets, is positioning itself to capitalize on high-quality US office properties amid widespread concerns about commercial real estate (CRE) debt. Matt Brill, head of North America investment-grade credit at Invesco, highlighted the firm's strategy on Bloomberg Intelligence's Credit Edge podcast. Brill noted, "Most investors just think there’s only going to be losers. These are opportunities that you’ll look back at in three years and say ‘I cannot believe we were getting 9.5%-10.5% for credits like that.’"

The CRE sector faces significant challenges, with over $900 billion in loans maturing this year and rising delinquencies. Many borrowers are struggling to refinance due to falling asset values, leading banks to offload debt at steep discounts. Despite these hurdles, Invesco believes many real estate companies and banks are well-prepared, with sufficient reserves to manage potential losses. Brill emphasized the importance of navigating this period, stating, "If you can get through this period and prove that the office market isn’t dead... then I think that they will be in much better shape."

Invesco is particularly interested in office real estate investment trusts (REITs), which often hold high-quality properties with solid land value and cash flow. However, many REITs face refinancing challenges, lacking the necessary cash for the next few years. This situation allows Invesco to negotiate favorable terms, including double-digit coupons and strong covenants on high-yield debt. Brill explained, "This is an opportunity for us to work with the banks, to work with the company and try to figure out how much can we extract out of these companies — yet still allow them to live."

Trammell Crow's Bold Office Development

In a bold move, Trammell Crow Company is set to develop 2.8 million square feet of office space in Frisco, Texas, as part of the Fields West mixed-use hub. This development, spanning 47 acres, is part of the larger 2,500-acre Fields master-planned community. Despite the high vacancy rates and distress in the Dallas-Fort Worth office sector, Trammell Crow's project signals confidence in high-growth areas like Frisco.

The Dallas-Fort Worth office market has been grappling with a 22% vacancy rate and negative net absorption of 2.1 million square feet in the first quarter, according to Cushman & Wakefield. However, the Legacy/Frisco submarket saw nearly 387,000 square feet of new supply added last quarter, with another 1.2 million square feet under construction. The Fields West development will include 365,000 square feet of retail, dining, and entertainment space, 1,200 residences, 375 hotel rooms, and 325,000 square feet of office space. The $10 billion Fields development is also home to the PGA of America’s headquarters and the $520 million Omni PGA Resort.

HSBC's Flexible Office Policy

HSBC Holdings Plc has taken a flexible approach to office attendance, with CEO Michael Roberts stating that the bank will not force US staff to return to the office five days a week unless required by new regulations from the Financial Industry Regulatory Authority (Finra). Roberts emphasized, "I want them to come back because they want to come back and they feel productive and they feel good about it."

Finra is preparing to end pandemic-era accommodations for monitoring brokers, traders, and other staff, prompting banks to reconsider their office attendance policies. Despite this, HSBC's New York office attendance has doubled to 80% since opening its new building in Hudson Yards. Roberts noted, "Today, our overall attendance levels are 80%. Before we moved? Less than 40%."

HSBC is expanding its presence in the US, where many of its wealthiest clients are based. The bank recently opened a new flagship wealth hub and is looking to establish a stronger footprint in the region. Additionally, HSBC is in the process of selecting a new CEO following Noel Quinn's announcement of his departure. Roberts mentioned that the board is considering both internal and external candidates, stating, "There clearly is an advantage for someone who knows the institution."

Street Views

• Matt Brill, Invesco (Cautiously Optimistic on US office real estate investment trusts):

  "Most investors just think there’s only going to be losers. These are opportunities that you’ll look back at in three years and say ‘I cannot believe we were getting 9.5%-10.5% for credits like that.’"
  "We’re not saying that the office market isn’t going to have problems... If you can get through this period and prove that the office market isn’t dead — that people are still going back to the office, that people still need to work in office properties — then I think that they will be in much better shape."
  "This is an opportunity for us to work with the banks, to work with the company and try to figure out how much can we extract out of these companies — yet still allow them to live."
  "If you can kick the can down the road long enough, eventually you’re going to have these major cities and these major buildings do well... I’m a believer that longer term, people like to be around each other and want to be in offices."