Office Preview: AI-Fears Dissipate In Q2 As Stocks Surge; Downgrade SLG On Valua

Research evidence excerpt

Office Preview: AI-Fears Dissipate In Q2 As Stocks Surge; Downgrade SLG On Valua

NAV vs. Free Cash Flow

Office REITs entered 1Q26 under significant pressure as the market increasingly discounted a structural demand

shock from generative AI, with investors questioning whether white-collar employment growth — and by extension

office utilization — could prove materially less durable over time. At the same time, higher rates amplified the sector’s

existing capital intensity and refinancing concerns, pushing the group to unusually wide discounts on both AFFO

multiples and implied cap rates. Since then, the narrative has shifted meaningfully. Employment data has remained

resilient, leasing activity in key gateway markets has stayed constructive, and the market has increasingly moved

away from a wholesale “AI replaces office workers” framework toward a more balanced view in which AI augments

productivity rather than eliminates the need for knowledge-based teams. Office stocks have rallied accordingly,

particularly those with visible leasing momentum, high-quality assets, and exposure to improving demand in New York

and San Francisco.

That rally now moves the debate to a different and more nuanced point: NAV versus free cash flow. On an NAV

basis, many office REITs still screen inexpensive, with public market valuations continuing to imply discounts to

private-market asset values even after the move in the stocks. However, on free cash flow valuation (DCF or AFFO

multiples) the sector looks far less compelling. In many cases, stocks now appear expensive or at least fully valued

versus near-term AFFO, given elevated leasing capital, higher interest expense, redevelopment spend, and the lag

between signed leases and cash rent commencements.