New York-centric real estate investment trusts took a hit in the third quarter thanks to “taper talk” from the Federal Reserve, according to the investment banking firm Sandler O’Neill + Partners.
In May, Federal Reserve Chairman Ben Bernanke announced that the Fed was considering scaling back its $85 billion per month bond-buying stimulus program, which has kept interest rates at record lows. Since then, REITs have underperformed in comparison to the Standard & Poor 500 Stock Index, according to Alexander Goldfarb, an analyst at Midtown-based Sandler O’Neill.
“Since Bernanke gave his May speech, anything interest rate-related has been hit hard,” Goldfarb said, adding that REITS and other yield-bearing instruments have “definitely felt the brunt.”
Even the Manhattan-based REIT SL Green Realty, which consistently bested its competitors and the S&P 500 in the second quarter, fared poorly this quarter, according to data compiled by Sandler O’Neill for The Real Deal. SL Green saw total returns of only 1.11 percent this quarter, down significantly from 17.66 percent in the second quarter, the data show. In comparison, the S&P 500 saw total returns of 5.24 percent this quarter.
Vornado Realty Trust saw a total return of 2.33 percent in the third quarter, the highest among the REITs tracked by Sandler O’Neill which do a significant chunk of their business in New York. Meanwhile, shareholders of Sam Zell’s Equity Residential took a loss in the third quarter, with the REIT seeing total returns of negative 7.08 percent, after second quarter returns of 2.59 percent. Boston Properties, which sold its 45-percent stake in the 48-story, 1.2 million-square-foot tower at 7 Times Square for $684 million in September, saw total returns of 1.97 percent in the third quarter.
Sandler O’Neill does not follow Brookfield Office Properties, but the REIT’s share price reportedly jumped 15 percent to just under $19 in the wake of Brookfield Property Partners’ $5 billion offer to acquire its remaining shares. That event was the “story of the quarter,” said John Bejjani, an analyst at California-based Green Street Advisors. Brookfield Office has set up a special committee to review the proposal, the company told Bloomberg News.
In total returns so far this year, however, SL Green is still leading the pack by a fair margin, with total returns of 16.62 percent. In second place came Vornado with 6.52 percent, the data show. The S&P 500 saw total year-to-date returns of 19.62 percent.
Still, New York-focused REITs outperformed their national counterparts in the third quarter, thanks to healthy local fundamentals and strong demand for top-notch Manhattan office buildings, analysts said. Despite the taper talk’s detrimental effects, the New York office market is in good shape overall, Goldfarb said, with strong leasing activity in the third quarter and “very healthy” asset values.
As an example, he cited Boston Properties’ lucrative deal at 7 Times Square, which came about despite the fact the building’s tax abatement is set to expire.
“Look at the value that Boston Properties got for a building that has a tax reset,” he said.