Orion Properties Inc. (ONL): Navigating Strategic Shifts and Market Dynamics in a Post-Pandemic Net Lease Sector

The post-pandemic real estate landscape has forced REITs to rethink their strategies, with Orion Properties Inc. (ONL) emerging as a case study in adaptation. As traditional office properties grapple with structural challenges—high vacancy rates, hybrid work trends, and declining absorption—Orion has pivoted toward dedicated-use assets (DUAs), a move that aligns with broader market dynamics favoring specialized, mission-critical real estate. This article evaluates Orion's strategic shift, its implications for risk mitigation, and its potential to drive capital appreciation in a maturing REIT market.

Strategic Realignment: From Traditional Offices to Defensive DUAs

Orion's portfolio has historically been anchored in single-tenant net lease office properties. However, the company's 2025 strategic pivot toward DUAs—governmental, medical office, R&D, and flex/industrial assets—reflects a deliberate effort to enhance portfolio resilience. As of June 30, 2025, DUAs accounted for 32.2% of Orion's Annualized Base Rent, up from negligible levels in 2021. This shift is not merely tactical but foundational, as DUAs offer inherent advantages:
- Tenant Quality: 68.5% of Orion's base rent now comes from investment-grade tenants, including healthcare providers and research institutions.
- Lease Durability: Long-term leases, such as a 15.7-year agreement in Parsippany, New Jersey, and a 7.6-year lease in Plano, Texas, provide stable cash flows.
- Defensive Characteristics: DUAs are less susceptible to remote work disruptions and cater to essential services, such as healthcare and government operations.

Orion's CEO, Paul McDowell, has emphasized that this transformation is a “multi-year journey,” but early results are promising. The company has monetized 23 properties totaling 2.4 million square feet since its 2021 spin-off, generating $26.9 million in Q2 2025 alone. These proceeds are being reinvested into DUAs or used to reduce leverage, which has improved Orion's Net Debt to Adjusted EBITDA ratio to 7.3x–8.3x (from 8.0x–8.8x previously).

Market Dynamics: Why DUAs Outperform Traditional Offices

The post-pandemic net lease sector has seen a stark divergence between DUAs and traditional office properties. Medical office buildings (MOBs), a subset of DUAs, have become a cornerstone of Orion's strategy. Key trends include:
- Vacancy Rates: Traditional office vacancy rates hit 19.6% in late 2023, while MOBs maintained a 8% vacancy rate in Q2 2024.
- Rental Growth: Triple-net asking rents for MOBs rose 1.4% year-over-year to $24.86 per square foot in Q2 2024, compared to stagnant growth in traditional offices.
- Cap Rate Spreads: MOBs traded at 6.9% cap rates in Q2 2024, versus 7.4% for traditional offices, reflecting stronger investor confidence.

These trends underscore a structural shift in demand. Healthcare systems are decentralizing care delivery, favoring outpatient facilities and urgent care centers located near residential areas. Orion's DUAs—many of which are repurposed former retail or office spaces—align with this demand. For example, the company's Arch Street Joint Venture, a 100%-occupied portfolio of DUAs, has a weighted average lease term of 6.8 years, far exceeding the 5.5-year average for Orion's broader portfolio.

Risk Mitigation and Capital Appreciation: A Balanced Approach

Orion's strategic shift reduces exposure to cyclical risks inherent in traditional offices. By focusing on DUAs, the company is positioning itself to benefit from secular trends in healthcare and life sciences. However, the transition is not without challenges:
- Execution Risk: The shift requires disciplined capital allocation. Orion's liquidity of $257.7 million as of June 2025 provides flexibility, but further asset sales could dilute long-term value if overdone.
- Market Volatility: While DUAs are defensive, rising interest rates could pressure cap rates and valuation multiples. Orion's debt maturity profile, with $355 million in CMBS loans maturing in 2027, necessitates proactive refinancing.

Despite these risks, Orion's improved financial metrics suggest a path to capital appreciation. The company's Core FFO guidance for 2025 has been raised to $0.67–$0.71 per share, and its occupancy rate of 77.4% indicates a stable base. Investors should monitor Orion's ability to secure long-term leases and its progress in reducing leverage.

Investment Implications

Orion's pivot to DUAs positions it to capitalize on a $2.5 billion Q2 2024 MOB investment volume surge, driven by aging demographics and healthcare spending growth. For investors, the key question is whether Orion can maintain its disciplined approach while scaling its DUA portfolio.

Recommendation: Orion's strategic realignment aligns with favorable market dynamics, making it an attractive long-term holding for investors seeking defensive REIT exposure. However, near-term volatility in interest rates and execution risks warrant a cautious approach. A buy rating is justified for investors with a 3–5 year horizon, provided Orion continues to execute its DUA strategy and maintains its liquidity buffer.

In a maturing REIT market, Orion's ability to adapt to post-pandemic realities will determine its success. By prioritizing DUAs, the company is not just mitigating risk—it is positioning itself to outperform in a sector where specialization and resilience are paramount.