FirstLook

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FirstLook

tentially skewing perceptions of market opportunities.

Office Steve Sakwa (212-446-9462)

Real Estate Steve.Sakwa@evercoreisi.com

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

The office REIT sector experienced a significant rebound in Q2, with stocks rallying 35% after a 17% decline in Q1, indicating that

fears regarding AI disruption are subsiding. Investors are now transitioning from concerns over demand risk to the critical

valuation debate, focusing on NAV versus free cash flow dynamics.

Demand Resilience and Rental Valuation: Employment data remains robust, and leasing in major markets continues to hold

steady. The previous AI-related fears discounting white-collar jobs are being adjusted, leading to increased confidence in

occupancy and rental growth. While many office REITs still appear inexpensive on a NAV basis, the outlook on free cash flow is

more constrained due to high leasing expenses and capex requirements.

CoStar Analysis on Leasing Volumes: An analysis comparing reported leasing volumes with CoStar data shows mixed results;

some companies demonstrate high correlation, while others do not. This emphasizes the necessity of cautious interpretation of

such data for lower-correlation names where significant leasing activity isn't captured.

Key Picks: We favor CDP and CUZ due to stable FFO growth and visible demand drivers. VNO stands out with potential from its

unique PENN 2 earnings ramp, while KRC showcases promise as a recovery story on the West Coast amid an improving SF

market. Conversely, ESRT is viewed cautiously due to guidance risks heading into earnings.

Additional Key Takes:

• SL Green (SLG) Downgrade: We are downgrading SLG from Outperform to In Line following a 40% gain in Q2,