The Real Deal New York

After highs and lows, REITs experience mixed Q3

Fed inaction buoys performance but can't save office REITs from negative returns

October 09, 2015 02:45PM
By Rey Mashayekhi


From left: Marc Holliday, Owen Thomas and Steven Roth

It’s been an up-and-down year for the city’s major real estate investment trusts, as far as stock performance and shareholder returns are concerned: a wildly successful first quarter followed by a dramatic downturn across the board in the second quarter.

The third quarter gave more of a mixed bag, however. Housing market heavyweights AvalonBay Communities and Equity Residential experienced positive returns and price performance in the period, while commercial market giants SL Green Realty, Boston Properties and Vornado Realty Trust all saw negative shareholder returns and slipping stock prices.

Despite numbers indicating the city’s major office landlords had a tough time in the third quarter, all five major REITs have seen stock performance buoyed by the Federal Reserve’s decision last month to stand pat on interest rates.

“Prior to the Fed’s announcement, the companies that were in the growth sectors – apartments – did very well, while New York office REITs did take a bit of an underperformance hit,” analyst Alexander Goldfarb of Midtown investment banking firm Sandler O’Neill + Partners told The Real Deal.

“What’s important is since the Fed decided to punt on rates, REITs that had underperformed earlier in the quarter have performed well. Boston Properties, Vornado and SL Green have all done well,” Goldfarb said, noting stock prices that are up between 9 and 11 percent for those firms, as well as AvalonBay and Equity Residential, since the Fed’s announcement on Sept. 17.

REITs nationwide averaged modest yet positive results in the third quarter – the MSCI US REIT Index recorded a total return of just over 2 percent in the period, with the index increasing 1 percent. Those figures compare favorably with the S&P 500 Stock Index, which saw returns of -6.4 percent in the quarter and price performance of -6.9 percent.

The city’s major commercial REITs trended more toward the latter; SL Green shareholders experienced total returns around -1 percent, while price performance slipped nearly -1.6 percent in the third quarter. The Marc Holliday-led firm had a busy quarter, closing its $2.6 billion megadeal for 11 Madison Avenue while looking to raise over $1 billion through deals like the sale of Tower 45 for $365 million.

Boston Properties, meanwhile, recorded returns of -1.6 percent while shares dropped almost -2.2 percent. The Owen Thomas-led REIT announced in July that it might ramp up its investments in Brooklyn after partnering with Rudin Management to develop a 675,000-square-foot waterfront office building at the Brooklyn Navy Yard. The new building will be anchored by WeWork, which will take over 222,000 square feet at the property.

Vornado took the heaviest hit among the three, with returns of -4.1 percent and price performance sliding almost -4.8 percent in the period. The REIT, led by Steven Roth, upsized a development loan on its 220 Central Park South luxury condo tower to $950 million late in the quarter, while taking a bet on the West Chelsea office market with its acquisition of the Otis Elevator Building.

But as far as shareholder and price performance was concerned in the third quarter, the residential REITs were the clear winners; Tim Naughton’s AvalonBay recorded a positive total return of 10.2 percent and saw its stock price climb 9.4 percent, while Sam Zell’s Equity Residential booked total returns of 7.7 percent and positive price performance of 7.1 percent in the period.

Goldfarb noted that both residential firms are not “just driven by New York,” and pointed to “pretty healthy” rent growth in a multifamily housing market that is “doing better this year than last.”

“AvalonBay and Equity are some of the leading names in apartments, and they’re benefitting from those trends,” he added. “Apartments overall are benefitting from the strength of landlords’ abilities to push rents.”