11/02/21 01:47 PM EDT

REITS DAILY BRIEF | 11.2.21 | (PSA, U.S. OFFICE UTILIZATION)

Rob Simone, CFA

Takeaway: Office utilization rates still grinding, stalled last week

Public Storage PSA: Two quick key call outs from the PSA earnings call this afternoon: (1) longer-term the third-party management business is expected to scale from ~100 properties currently to ~500 properties by FY25 with a targeted long-term ~20-30% stabilized NOI margin, and (2) year-end FY21 occupancy is expected to be down about ~150bps q/q and end the year near 2020 levels similar to EXR. On the former point, there is a long lead time as many of the third-party assets are non-stabilized developments when they enter the system and it takes 24-36 months for property-level revenue to ramp and stabilize. For now the business will grow but likely remain around break-even. Management did not rule out also using JV structures and handling the management which would expand the pie and be additive to the fee line. On the latter point, broadly occupancy trends are trending better than first feared and we are baking in -100bp of average occupancy decline for FY22.

Office Utilization: Kastle Systems released its weekly office utilization tracker for the 7-day period ending 11/1, which showed a -10bp decline in the 10-city average utilization rate that has been tracked since the pandemic began (Figure 1 below). Seven out of 10 cities showed declines last week, but utilization rates broadly remain on an upward trend. As a reminder this tracks "bodies through turnstiles," and is different than "occupancy" which represents tenant leased/occupied space as a percentage of total square feet. The New York Metro showed the biggest drop at -170bp to 30.1%, while Austin showed the largest increase of +150bp to 50.4% and San Francisco remains at the bottom of the list at 25.1%.

Figure 1: Kastle Back-to-Work Barometer