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## Morgan Stanley's Outlook on the Global Office Space Sector
Morgan Stanley has expressed caution regarding the global office space sector and has named three stocks to buy and three stocks to short. The Wall Street bank predicts an oversupply of office space that could last for more than a decade. Factors contributing to this oversupply include the rise in working from home, increasing capitalization rates, and the challenges of expensive refinancing. However, Morgan Stanley acknowledges that not all office real estate is facing the same predicament, with variations in debt levels, density, and occupation rates across different regions.
### The Widening Gap between Class-A Prime Assets and the Rest of the Property Market
According to Morgan Stanley, there is a growing disparity between class-A prime assets and the rest of the property market. Class-A prime assets refer to modern buildings with green credentials located in prime office locations. The bank believes that these prime assets have the potential to recover in half the time as the rest of the market, as they have an outsize share of demand. Based on historical demand levels, Morgan Stanley analysts estimate that it could take 5 to 13 years for the global office market to return to pre-pandemic occupancy levels.
### Stocks to Short: Challenges in the U.S. Office Real Estate Market
Morgan Stanley specifically highlights challenges in the U.S. office real estate market due to higher vacancies related to work-from-home trends, sharp interest rate hikes, and weaknesses in regional banks. As a result, the bank recommends shorting shares of Office Properties Income Trust and Vornado Realty Trust, expecting both stocks to decline by more than 35% over the next 12 months. The analysts caution that fundamentals in this cycle are worse than those during the global financial crisis, citing occupancy rates, subleasing activity, and challenges from office utilization stalling at 20-55%.
### Stocks to Buy: Promising Regions and Undervalued Stocks
On the other hand, Morgan Stanley also identifies stocks that it believes are undervalued and likely to perform well. The bank's analysts prefer Hong Kong and the U.K. over Singapore and continental Europe. They expect shares of Hongkong Land, Derwent London, and Keppel REIT to rise by more than 30% over the next 12 months. These three property companies are also traded in the U.S. According to the analysts, Hong Kong offers one of the highest implied cap rates in the global office markets. However, they believe that the limited further rental and occupancy downside, coupled with lower leverage compared to other regions, justifies the potential for growth.
Morgan Stanley's cautious stance on the global office space sector highlights the uncertainties and challenges faced by the industry. It advises investors to carefully consider their investment choices based on the specific market conditions and regional variations.
## Conclusion: Impact on New Businesses in the Office Space Sector
Morgan Stanley's cautious outlook on the global office space sector raises important considerations for new businesses entering this market. With an anticipated oversupply of office space that could last for over a decade, entrepreneurs and startups need to carefully assess the potential risks and opportunities.
One key takeaway is the growing disparity between class-A prime assets and the rest of the property market. New businesses should evaluate their options and assess whether investing in prime office locations with modern and green buildings could provide a competitive advantage. These prime assets are expected to recover faster than the rest of the market due to their outsized share of demand.
However, caution is advised in the U.S. office real estate market. Higher vacancies resulting from work-from-home trends, interest rate hikes, and weaknesses in regional banks present challenges. For new businesses, it might be prudent to consider alternative strategies such as shared office spaces or flexible leases that align with the evolving work environment.
Additionally, examining promising regions like Hong Kong and the U.K. could offer potential growth opportunities. These regions have lower leverage, limited downside in terms of rental and occupancy, and higher implied cap rates compared to other markets, making them attractive for new businesses looking to establish a presence internationally.
Overall, new businesses in the office space sector must carefully navigate the uncertainties and challenges outlined by Morgan Stanley. Conducting thorough market research, analyzing regional variations, and considering innovative approaches can help mitigate risks and identify growth potential in an evolving market landscape.
Article First Published at: https://www.cnbc.com/2023/07/28/morgan-stanley-reveals-the-top-property-stocks-to-buy-and-short-right.html