These real estate stocks could be the next short squeeze

Vulnerable firms could get piñata treatment from short sellers, day traders

From left: 1290 Avenue of the Americas, 731 Lexington Avenue and Empire State Building (VNO, iStock, Reddit)
From left: 1290 Avenue of the Americas, 731 Lexington Avenue and Empire State Building (VNO, iStock, Reddit/Illustration by Alexis Manrodt for The Real Deal)

The short-squeeze frenzy on Wall Street could soon rock more real estate firms.

The share prices of some struggling brick-and-mortar retailers, including GameStop and AMC Entertainment, swung wildly this week as retail investors clashed with hedge funds over speculative trading known as short selling. And at least one major real estate company caught the eye of those same mom-and-pop traders.

The unprecedented trading activity saw GameStop briefly become nearly as valuable as Delta Airlines before plummeting 44 percent Thursday. (Melvin Capital, founded by Gabe Plotkin, reportedly needed an infusion of $2.75 billion after taking losses on its short positions.)

And AMC’s share price shot up 500 percent this week before falling by half Thursday, but has still tripled since Friday.

Wondering what the heck is going on?

Some institutional investors bet against pandemic-wracked firms by shorting their stocks. This involves selling shares to a third party and buying them back later, pocketing the difference if the price dropped.

But if the share price goes up, short sellers face unlimited losses. When this happens and they are forced to close out their positions while they can still afford to, the repurchasing drives share prices up, especially if there are not many shares available to buy. This is a short squeeze, and investors who anticipate it and buy the stock ahead of time can make a fortune.

But when stocks become wildly overpriced in a short squeeze, they can come crashing down just as fast.

In this week’s confounding case, day traders communicating on platforms such as Reddit’s WallStreetBets drove up the share price of those shorted stocks, causing hedge funds substantial losses and leading trading platform Robinhood to pause the exchange of volatile shares.

Here’s where real estate comes in.

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Investors have taken short positions against mall landlords, such as Simon Property Group and Macerich, who rely on tenants like GameStop and Bed Bath and Beyond.

Macerich, in particular, has been pressured by short sellers. More than 85 percent of the firm’s tradable shares were held by short sellers as of Jan. 15, Morningstar reported. (That figure was 88 percent for GameStop.)

Whether it becomes the next target on Reddit is anyone’s guess. Last month the company was identified by WallStreetBets as an undervalued stock. Its share price rose 94 percent early this week before falling 25 percent from the week’s high.

Short sellers have targeted other real estate firms, though not to the same extent as Macerich. Almost 11 percent of outstanding shares in Zillow, once eyed by subprime mortgage short-seller Steve Eisman, were owned by short sellers on Jan. 15.

In Manhattan, where real estate prices fell more than anywhere else last year, office landlords are also under pressure. The number of tradable SL Green Realty shares owned by short sellers fell to 7 percent on Jan. 15 from nearly 20 percent on Dec. 31. Tradeable Vornado Realty Trust shares owned by short sellers rose 1 percent over the same period.

“Urban office[s] will likely experience substantial rent declines, lose occupancy, and assets values may fall as much as 40% over the next several years,” wrote real estate hedge fund Land & Buildings in a December report.

The company, led by Jonathan Litt, reportedly took short positions in May on Empire State Realty Trust, SL Green and Vornado.

While traders with big short positions remain vulnerable to coordinated buying sprees, companies and their lenders have so far benefited from surging share prices.

AMC took the opportunity to drum up cash, issuing $304 million of new equity, it announced Wednesday. Silver Lake, which financed debt to save the theater chain from bankruptcy, converted $600 million of that debt into 44.4 million shares at a price of $13.51. AMC shares closed at $8.63 Thursday.