The Real Deal New York

Credit Suisse gives REITs some good news

Vornado, AvalonBay shareholders have a reason to smile
By Rey Mashayekhi | August 24, 2015 04:05PM

Economic uncertainty has led several investment banks to downgrade their forecasts on real estate investment trusts. But not Credit Suisse, which last week upgraded Vornado Realty Trust and offered a decidedly sunny short-term outlook on the overall REIT sector.

The Swiss investment bank upgraded Vornado to a “neutral” rating from the previous designation of “underperform,” noting that “both [New York City] office and retail fundamentals are healthy (and improving), while there is a continued strong bid for NYC real estate by foreign buyers,” who represented 42 percent of the market share this year.

The upgrade was part of a bullish overall take on U.S. REITs from Credit Suisse, which cited how “historically, REITs tend to outperform” in a current macroeconomic setup characterized by solid job growth, “healthy” real estate fundamentals, and global economic uncertainly that makes the U.S. “a relatively safe harbor for global capital.”

Other companies that feel pretty good about Credit Suisse’s REIT optimism include AvalonBay Communities, which was upgraded to “outperform” from its previous “neutral” rating. The bank noted the “size/profitability of the company’s development pipeline,” valued at $6.5 billion.

On the retail side, General Growth Properties also had its outlook upped from “neutral” to “outperform,” with the bank pointing to GGP’s prime Manhattan retail properties and how “demand for irreplaceable, Fifth Avenue real estate remains very strong among retailers.”

Credit Suisse’s outlook on REITs runs counter to those delivered by other financial services firms in recent weeks. Goldman Sachs downgraded both Vornado and SL Green Realty last month while questioning the REIT market’s preparedness for a “coming increase” in interest rates, while St. Louis-based Stifel Nicolaus also downgraded SL Green last week.

Major New York-focused REITs experienced negative returns and price performance virtually across the board in the second quarter after a largely positive start to the year.