REITs: A crystal ball for NYC’s commercial real estate

Four real-estate investment trusts signal what direction the i-sales and office leasing market could take

New York /
Jul.July 06, 2020 01:30 PM
From left: Empire State Building, One Vanderbilt and 220 Central Park South

From left: Empire State Building, One Vanderbilt and 220 Central Park South

How quickly will New York City recover from the pandemic’s jiu jitsu move that uses the city’s greatest strengths against it? The answer may lie in real estate investment trusts.

The fate of four major REITs whose assets are concentrated in New York City — Empire State Realty Trust, SL Green Realty, Vornado and Paramount — suggests that Covid-19 has hastened the cyclical decline of office-anchored investment properties, according to the Wall Street Journal.

The REITs collectively own stakes in some of Manhattan’s best real estate – the Empire State Building, the Bloomberg Tower, the former New York Daily News building, 220 Central Park South, and One Vanderbilt.

Heavy reliance on public transportation and a higher population density once buttressed the high-end commercial real estate market, but those qualities now make the virus more communicable. Each of the four companies lost more than 54 percent of share value during a month-long market slump this spring, compared with 35 percent in the broader market.

The observatory deck of the Empire State Building accounted for 25 percent of Empire State Realty’s operating income last year; SL Green’s co-CIO left the company after its $815 million sale of the former Daily News building to Jacob Chetrit fell apart; Vornado may cut its dividend by 20 percent in Q3; and Paramount is expected to lose 10 percent of its operating funds over the next 12 months.

Densification, the process of putting more people into a limited space brought about by innovations like open office planning, already posed obstacles for commercial developers, even before a glut of new office space became available at Hudson Yards.

The pandemic is expected to unwind densification, and cause companies to rethink how they use office space — creating larger open spaces for fewer people — hedging against the space lost to those who will continue working from home post Covid-19.

In the second quarter of 2020, Manhattan office leasing activity totaled just 3.18 million square feet, according to Colliers International. It was down about 100 percent from the prior quarter, and about 72 percent year-over-year.

Analysts and investors predict Manhattan office rents will decline between 5 and 20 percent over the next year or two.

Tony Malkin, president of Empire State, which rarely buys or sells property, said recently he felt the coronavirus has created opportunities for purchases.

“We view this as really a 12-month to 36-month opportunity set,” Malkin said. “And I’ve always said — we’ve always said — we’d come to a fork and then we’ll take it. We think this is a fork in the road.” [WSJ] — Orion Jones


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