Move over, Manhattan: San Francisco is now the most expensive city for office rents in the U.S. Tight real estate supply combined with the "Internet gold rush" has driven up the average asking price for rent in the heart of Silicon Valley. That poses a financial burden for office managers, but a long-term high-yield opportunity for investors eager for any silver linings in today's gloomy market outlook.
The best play on this trend: Alexandria Real Estate Equities (ARE) , a real estate investment trust that focuses on high-technology start-ups. Alexandria Real Estate Equities should benefit from the tech sector's insatiable need for increasingly rare office space, as the tech boom continues in 2016.
REITs are high-yield assets popular with income investors because they're required to pay out at least 90% of their taxable profits as dividends to shareholders. With a market cap of $6.21 billion and a fat dividend yield of 3.6%, Alexandria Real Estate Equities is a great way to profit from skyrocketing office rents that are a consequence of Silicon Valley's continuing prosperity.
According to a new report from CBRE Group, a commercial real estate services and investment firm, the average asking price for office space rent in San Francisco reached $72.26 per square foot in the fourth quarter of 2015, beating out $71.85 a square foot in Manhattan.
Prices in San Francisco increased 14% year over year, compared with 7% in Manhattan, traditionally the country's most expensive real estate market, according to CBRE. Roughly 29% of the occupied office space in San Francisco is filled with technology tenants, CBRE said, double the percentage seen during the dot.com boom of the late 1990s.
That's great long-term news for Alexandria Real Estate Equities, which is based in Pasadena, Calif. This unique REIT focuses on entrepreneurial companies, chiefly in the high-tech and biotech sectors, that need seed money or intermediate financing. ARE offers not just physical real estate but also technical infrastructure and campus development services.
Other major office REIT competitors such as SL Green Realty, Boston Properties , and Kilroy Realty chiefly emphasize conventional office properties.
ARE's backlog of projects now totals roughly $2 billion, which should generate sufficient cash flow throughout 2016 to sustain its high dividend. The stock has gained 32.46% over the last two years, compared with 5.86% for the S&P 500.
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