Investors scanning the horizon for new growth spaces may want to zoom in on those empty concrete boxes in the sky – a new ETF is betting big on the humble office.
On Friday, September 22, VanEck launched an ETF giving concentrated exposure to the U.S. office property segment – The VanEck Office and Commercial REIT ETF (DESK).
DESK will try to mirror the price and yield of The MarketVector US Listed Office and Commercial REITs Index (MVORT). This index tracks the 25 largest and most liquid U.S. exchange-listed REITs in office, industrial, and retail sectors. MVORT has taken a hammering in recent times. It has retreated more than 15% year-to-date and is down around 50% over the last five years.
The question for investors is – are office REITS down and out, or are they ready to get back on their feet again?
Buy the ‘Pandemic’ Dip?
The Covid-19 pandemic delivered a body blow to corporate real estate. Even in 2023, with the health crisis in the rearview mirror, valuations for U.S. office properties are significantly depressed. Vacancy rates were at 13.1% as of Q2 2023, per the National Association of Realtors, several percentage points higher than Q2 2019’s rate of 9.4%.
DESK’s investment thesis revolves around the struggle for the future of work, dubbed by financial media as “return-to-work wars,” which pits productivity-conscious companies against flexibility-minded workers. This “war” may not have a winner yet, but bosses may have just clinched a battle.
Many impatient employers drew a deadline at Labor Day for workers to get to their desks. The result was a surge in office occupancy across 10 major cities in the weeks following the public holiday.
Yet most workers have come to see remote or hybrid work as a given. Employees are after more than a decent salary and routinely negotiate remote options as part of their job package. These changes are also producing a happier workforce. According to The Conference Board survey, U.S. workers have never been more content – satisfaction levels last year reached their highest point since its annual surveys began back in 1987. What’s more, firms granting flexible and hybrid arrangements are growing their workforce at almost twice the rate as companies insisting on full in-office work – undoubtedly an edge in attracting the right talent.
Yet, could the remote work revolution be fading? Vaneck sees the pendulum could swing back the other way.
“More large employers are beginning to require employees to return to the office,” said VanEck product manager Coulter Regal. “Commercial real estate is undoubtedly continuing to face strong headwinds and negative sentiment.”
A bet on DESK is a bet the bosses will win, eventually. If U.S. work office culture will, eventually, return to pre-pandemic notions of ‘normal’, then DESK could prove a profitable play. If sentiment has potentially left the sector undervalued, with a longer time horizon, this could be an opportunity to tap into growth from its recovery.
“Investors may find this is an opportunity for tactical exposure or potential long-term capital appreciation while the relative high potential yield may offer income and a (volatility) cushion,” Regal added.
Investors will want to get a feel of which way the labor market winds are blowing as well as how DESK compares to REITs in other sectors, from residential to farmland.
DESK comes with an expense ratio of 0.50%.