Barclays prefers U.S. office sector over Europe on valuations

Investing.com -- Barclays revealed in a note Thursday that it is more constructive on the U.S. office property sector than its European counterpart, pointing to weaker demand trends in Europe and more attractive valuations across American office real estate investment trusts.

Analyst Eleanor Frew told investors that the bank remains cautious on European office landlords because tenant demand has softened following the pandemic.

“In Europe we have, since pandemic-era lock-downs were lifted, been broadly cautious on Offices due to reduced tenant demand,” she wrote, citing the growing adoption of hybrid working and higher capital expenditure requirements as tenants demand better-quality space.

While demand has become increasingly polarised between top-tier and lower-quality buildings, Frew noted that “demand for the best space… [is] actually increasing, whereas the worst space is effectively obsolete.”

Even so, the sector has struggled to regain investor support due to “low EPS growth or in some cases declining EPS outlooks” and broader concerns about the structural future of office work.

Barclays sees a more compelling case in the U.S. market. The bank is “more constructive on US Office, due in large part to the 10–22% YTD sell-off of our US coverage”.

Leasing conditions have gradually improved, though tenant incentives remain elevated. Barclays expects those incentives to fade through 2026 and 2027, which should lead to “higher economic occupancy, higher cash rents, and waning TIs.”

The key risk, Frew added, is that upcoming lease expirations could trigger downsizing or higher vacancy if leasing momentum weakens.

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