Lord Rothschild’s advice to “buy when there is blood on the street” is perfectly apt in the bombed-out carnage of US office REITs, where stocks have fallen on a quantum scale more than the value of the underlying brick and mortar. Vacancy rates have spiked in the post-pandemic, remote/hybrid work zeitgeist of 2023, the Fed’s draconian monetary tightening has gutted valuations and the sector faces huge refinancing risk as 70% of all CRE loans are made by regional banks who can no longer underwrite the looming $2 trillion CRE debt maturity wall.
Money making opportunities have abounded in the carnage. Vornado (VNO), whose prime Manhattan office buildings traded at a 20% lower price per square foot than Dubai’s Business Bay in April was a no-brainer at 14 this spring after the panic that followed SVB’s failure/bailout. VNO surged to 25 before Powell’s FOMC tough love interest rate hiss last week whacked it to 22.40. You did not need the genius of a Soros/Buffett to have a 70% quicky profit in a mere 5 months on this office REIT fallen angel. All you had to do was to track the buy orders of the cognoscenti and follow the hoof beats of the herd.
True Midtown Manhattan was hit by remote work, mass Big Tech layoffs and downsizing of office space by banking colossi like J.P. Morgan and Morgan Stanley. Yet I would re-enter VNO in a heartbeat if it falls below 16 in another interest rate shock/credere loss, as it is all too possible in order to arbitrage the juicy spread between the private and public market valuations of its office and Fifth Avenue retail portfolio. With the classiest, greenest buildings in New York and a 91% occupancy rate, there is still real gold to be mined in Steve Roth’s Big Apple CRE Empire.
Is there a looming credit crunch that will hit the global property market in the next 12 months? Yes. Powell must raise the Fed funds rate to 6% as the Fed’s dual mandate target is 2% while inflation is above 4% even as Brent trades at $94. When Brookfield Corp. and Pimco’s default on office mortgages, I am certain that love is not in the air and it sure rains hard in Southern California. Office REITS had a psychotic volatility spike this spring since public market valuation had fallen by 65% from their pre-pandemic peak while the private market declines in office building values was a mere 10%.
I have seen this money making opportunity in every New York property cycle since the 1990’s, when home was a bad boy cave in the East Village and work was a glass walled trading room aerie on Wall Street.
High octane leverage amplifies the price swings in REITs, as do the wolf packs of short sellers. For instance, when the CEO of the Saudi National Bank made that fatal boo-boo about Credit Suisse to Bloomberg at Desert Davos, I knew it was time to go short SL Green, a Manhattan REIT whose top tenant just happened to be, hey presto, abracadabra, yalla habibi, none other than that angelic apostle of global finance and Boy Scout ethics – Credit Suisse.
