A forced surge in Americans who were able to work from home (WFH) during the COVID-19 pandemic ended up being mostly a success for those people lucky enough to be able to do it. At the same time, WFH has raised the issue of what companies are going to do with all that unused office space.

Recent research suggests that they’ll be able to use it. According to survey data from staffing agency Randstad, 78% of people globally want to go back to their pre-pandemic workplaces either part time or full time. Fully 75% of the more than 27,000 people surveyed said they would be willing to be vaccinated if that were a requirement for returning to the job.

Goldman Sachs analyst Caitlin Burrows on Tuesday published a report on U.S. office real estate investment trusts (REITs), resuming coverage of five firms ranging in valuation from around $17.7 billion to $4.4 billion.

Overall, Burrows writes, Goldman Sachs “believe[s] corporate America’s return to the office over the coming six months, coupled with strong office employment growth, will support gradual occupancy recovery and ultimately market rent growth.” For the near term, occupancy rates are expected to remain under pressure “given lower retention and recent leasing activity, plus sublease availability.”

Over the next 12 months, multiples for the sector remain lower than they were in January of 2020, notwithstanding that since November multiple expansion of 64% is the second-highest among all sectors (retail leads). In the same period, all REITs have experienced multiple expansion of 28% and the S&P 500 has improved by 12%. Office REITs have been trading at a discount of 26% to the REITs in general, a wider discount than the historical average of 7%. Burrows is cautious, however, because Goldman Sachs thinks the “discount versus REITs overall may persist over the medium-term given uncertainties related to office demand.”

Hudson Pacific

The smallest (by market cap) of the five office REITs rated by Goldman Sach’s analyst, Hudson Pacific Properties Inc. (NYSE: HPP) was one of just two to get a Buy rating. Burrows assigned the stock a price target of $35, implying a total return of 28.1% to the current price including a 3.6% dividend yield.

All of Hudson Pacific’s properties are located on the west coast, with 66% in San Francisco and 18% in Los Angeles. A new 3.8 million-square-foot development in Los Angeles is expected to be ready for occupancy in the first quarter of next year and is 100% pre-leased to Google.

Goldman Sachs projects funds from operations will rise by just 1.6% in 2021, but jump by 11.9% in 2022 and rise by 4.7% in 2023 (average annual growth of 6.1%).

Hudson Pacific’s stock traded down less than 1% in the late morning Wednesday, at $28.94 in a 52-week range of $18.62 to $30.97. The consensus price target is $31.21, and the average daily trading volume is about 1.2 million shares.

SL Green

With a market cap of $5.41 billion, SL Green Realty Corp. (NYSE: SLG) is the second-smallest of the REITs included in the firm’s coverage resumption, and it is the only other to earn a Buy rating. Burrows assigned it a price target of $91, implying a total return of 23.9% to the current price including a 4.8% dividend yield.

Unlike Hudson Pacific, 100% of SL Green’s properties are located on the east coast and all are located in New York. A new building in Manhattan is expected to be 90% leased by the end of this year (by SL Green) and fully leased by the end of next year (by Burrows). Another New York City property is expected to be finished by midyear.

SL Green stock traded down nearly 2% Wednesday, at $77.10 in a 52-week range of $40.35 to $79.59. The consensus price target is $74.73, and the average daily trading volume is about 1.2 million shares.

Another all-west-coast REIT is Kilroy Realty Corp. (NYSE: KRC), which has a market cap of around $8.2 billion and received a Neutral rating from Burrows. Goldman Sachs has a price target on the stock of $75, implying a total return of 11.6% including Kilroy’s 2.9% dividend yield.

Burrows does not expect new development to be an earnings growth driver for Kilroy, although she expects longer-term revenue growth from two future developments in San Francisco, where 58% of the company’s properties are located. In the first quarter of this year, Kilroy sold a San Francisco building for $1.08 billion, funds Burrows says will be used to develop new projects or make acquisitions in the fourth quarter of this year.

Kilroy’s shares traded down by less than 1% Wednesday to $70.60, in a 52-week range of $45.28 to $71.78, and the high was posted earlier in the morning. The consensus price target on the stock is $74.54, and the average daily trading volume is about 1.1 million shares.

Boston Properties

With a market cap of around $17.7 billion, Boston Properties Inc. (NYSE: BXP) is the largest office REIT in this group, and it is one of two to get a Sell rating from Burrows. She also assigned the stock a price target of $106. Including a dividend yield of 3.6%, the Goldman Sachs price target implies downside of 5.4%.

Boston Properties operates on both coasts, with 35% of its exposure in Boston, 27% in New York, 21% in San Francisco and 13% in Washington, D.C. Burrows expects future operations revenue per share growth “to be challenged by a muted and gradual recovery in occupancy, and a relatively small development pipeline relative to the company’s size.”

Shares traded down about 1.4% on Wednesday, at $113.44 in a 52-week range of $69.69 to $115.29. The consensus price target is $112.18. The average daily trading volume is about 1.1 million shares.

Vornado

The second-largest company on Goldman Sach’s list, Vornado Realty Trust (NYSE: VNO), has a market cap of around $8.7 billion. The company also got stuck with a Sell rating from Burrows, as well as a price target of $39.00. That 12-month target implies a downside of 13.4% and included Vornado’s 4.7% dividend yield.

Burrows expects Vornado’s property types, including a retail mall in Manhattan and the recently closed Hotel Pennsylvania, also in Manhattan, to face more earnings pressure than the company’s peers. Vornado also has the dubious distinction of being the only office REIT in the Goldman Sachs coverage that analysts don’t expect to regain 2019 earnings levels by 2023.

Shares traded down about 2.5% to $45.74, in a 52-week range of $29.79 to $49.50. The consensus price target is $45.00, and the average daily trading volume is about 1.8 million shares.

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