Douglas Emmett Inc. (NYSE: NYSE:DEI), a real estate investment trust, has an office-heavy portfolio that will likely constrain revenue growth in the coming quarters. The shift towards a work-from-home culture will likely hurt the office segment, which currently makes up 86% of DEI’s total annual rent. However, strong growth in the multi-family residential segment will likely compensate for weak growth in the office segment. DEI is in the process of converting an office building in Honolulu, Hawaii, into a multi-family project that will likely drive revenues in the coming years. Further, the REIT has a multi-family project under development in Brentwood, California, which will likely get completed in 2022. I’m expecting revenues to increase by 2% year-over-year in 2021, leading to funds from operations of $1.79 per share. The REIT is currently offering a limited total expected return; therefore, I’m adopting a neutral rating on DEI.
Outlook for Office Portfolio Remains Gloomy
As mentioned in the third quarter’s investor presentation, almost all of DEI’s office leases contain contractual annual rent increases of 3% to 5%. Nevertheless, DEI’s rental income from office properties is likely to face pressure in the coming years because of the ongoing shift towards a work-from-home (“WFH”) culture. More than half of U.S. employees currently working from home say they’d like to keep their remote arrangements beyond the pandemic, according to a recent Pew Research Center survey quoted in a Bloomberg news report. I’m expecting rental rates to come under further pressure in the coming quarters because the shift towards WFH culture will free up some office space in DEI’s major market of Los Angeles, leading to lower pricing power for REITs. I’m expecting tenants in the Financial Services and Accounting and Consulting Industries to vacate the most space because teleworking does not hurt the productivity of most
