Report: Activist REIT investor is now short NYC real estate stocks

Land & Buildings Investment Management is among the most notable activist investor firms in the real estate space. The fund, mostly known for establishing long positions and pushing for change, is now taking a different approach by shorting multiple New York City office owners, The Wall Street Journal reported.

Potential short targets

Land & Buildings is reportedly short three names, including Empire State Realty Trust Inc (NYSE: ESRT), SL Green Realty Corp (NYSE: SLG), and Vornado Realty Trust (NYSE: VNO), according to WSJ’s sources.

The fund’s founder and CIO Jonathan Litt commented in a press release the New York office market faces “an existential hurricane” although he fell short of confirming reports his fund is positioned to profit if his outlook is realized.

He singled out Empire State Realty Trust in particular as “poised to bear the full brunt of this storm.”

Why now?

Litt further wrote in the press release the New York real estate market first faced a “hurricane” in 2018 for tax reasons. Specifically, the $10,000 cap on the state and local tax (SALT) income deduction damaged New York’s ability to compete against other states. The market “continued to worsen” in 2019, in part due to WeWork’s “implosion.”

In fact, many tend to overlook the scale of WeWork’s business and importance to the New York real estate market. The office-sharing company along with its competitors combine for 4% of the entire office market in New York City and WeWork alone occupies nine million square feet of space.

It wasn’t until 2020 the “hurricane” picked up momentum to become an “existential hurricane.” Many companies are now taking a look at their physical office space and wondering if it is necessary for a post-COVID-19 recovery. The work from home phenomena could transform from its current state as a necessity to a permanent and defining characteristic of the future of the workspace.

What’s next for NYC real estate?

Litt believes the New York City vacancy rate could hit 20% or more in the future. By comparison, the current Manhattan office vacancy rate stands at 11.3% so a nine percentage point increase might even be on the low-end.

Litt’s assessment is backed by Moody’s Analytics who sees national office vacancy rates hitting 20% by 2021 while New York City rent will plummet by as much as 25%, according to the press release.

Those who manage to survive the upcoming “existential hurricane” will need to invest significant dollars to upgrade their assets to stand out in an ultra-competitive environment.