The activist investor Land & Buildings Investment Management shortens the report to three property names.
The founder of the fund, Jonathan Litt, wrote that the market is facing an “existential hurricane”.
The segment’s problems date back to 2018.
Land & Buildings Investment Management is one of the most remarkable activist investor companies in the real estate sector. The fund, which is best known for building long positions and pushing for change, is now taking a different approach by short selling several New York office owners, the Wall Street Journal reported.
Potential Price Targets
Land & Buildings is reportedly three names short, including Empire State Realty Trust Inc (NYSE: ESRT), SL Green Realty Corp (NYSE: SLG), and Vornado Realty Trust (NYSE: VNO), according to WSJ sources.
The fund’s founder and CIO, Jonathan Litt, commented in a press release that the New York office market is facing “an existential hurricane,” although he has been unable to confirm reports that his fund is in a profit position if its prospects materialize.
In particular, he highlighted the Empire State Realty Trust as “ready to bear the full brunt of this storm.
Litt went on to say in the press release that the New York real estate market was exposed to a “hurricane” for tax reasons for the first time in 2018. In particular, the $10,000 cap on income deductions from state and local taxes (SALT) impacted New York’s ability to compete with other states. The market “continued to deteriorate in 2019”, in part due to the “implosion” of WeWork.
Indeed, many tend to overlook the scale of WeWork’s business and its importance to the New York real estate market. Together with its competitors, the office sharing company accounts for 4% of the total office market in New York City, and WeWork alone occupies nine million square feet of space.
It was not until 2020 that the “hurricane” regained momentum and became an “existential hurricane”. Many companies are now taking a look at their physical office space and wondering if it is necessary for recovery after COVID-19. The phenomenon of working from home could change from its current state as a necessity to a permanent and defining feature for the future of the workplace.
What is the future of real estate in NYC?
Litt believes that the vacancy rate in New York City could reach 20% or more in the future. By comparison, in Manhattan, the current vacancy rate for office space is 11.3%, so an increase of nine percentage points could even be at the lower end of the scale.
Litt’s assessment is supported by Moody’s Analytics, which sees the national office vacancy rate rising to 20% by 2021, while rents in New York City will fall by up to 25% according to the press release.
Those who manage to survive the impending “existential hurricane” will have to invest significant sums to upgrade their assets and stand out in a highly competitive environment.