Vornado Realty Trust's stock price hit a pandemic-era low last Tuesday.
CEO Steven Roth's real estate firm closed at $28.96 a share, down from $29.24 the day before, when it closed below the previous pandemic low of $29.66 on March 20, 2020.
The downward slide underscores growing concern on Wall Street that, 27 months after remote work became reality, workers won't return to New York offices in anything like their prepandemic numbers. Vornado's 23 million-square-foot portfolio is mostly Manhattan office buildings.
Industrywide, Manhattan office vacancy rates remain elevated at 15%, and headline gross rents for prime space are 10% below 2019 levels, Morgan Stanley said in a June 1 report. Costs are rising as interest rates increase, and it's expensive to renovate offices to make them more inviting to tenants.
"We expect lower pricing power," Morgan Stanley analyst Ronald Kamdem wrote, citing "continued weak fundamentals" at Vornado.
Changing the narrative hinges on Roth getting the green light to build several new office towers around Penn Station, Kamdem suggested. Gov. Kathy Hochul is banking on the project's tax revenue to pay for rebuilding the dismal transportation hub. Recently, she said she wants architects or builders to submit plans by the end of next month, but formal state approval awaits.
If the large development proceeds, Vornado President Michael Franco said at a March Citigroup conference that the new towers could command rents of $100 per square foot, or 40% more than now. He described Vornado's stock as "cheap by any measure."
"I think the phrase is 'stupid cheap,' " Roth chimed in, adding he is "fairly confident" Manhattan offices will fill up again.
A Citi analyst questioned if Vornado's new buildings can really command top dollar when the market is saturated with supply and prospects for refilling older buildings aren't promising.
"How do we get comfortable owning the best house in what seems like not the best neighborhood?" the analyst said.
Rising interest rates
Another headwind for Vornado is rising interest rates. Nearly two-thirds of its $6 billion in mortgages are floating rate, according to regulatory filings, compared with 20% at rival SL Green Realty and 5% at Empire State Realty Trust. As interest rates rise, so do Vornado's borrowing costs.
The company is selling properties to raise cash. The firm recently agreed to sell a 498,000-square-foot office building in Long Island City, Queens, and plans to sell an additional $750 million in assets described as non-core.
But fast-rising rates have driven private-equity bidders to the sidelines, and buyers in a position to pay cash seem inclined to wait.
"Buyer pools have thinned out," Evercore ISI analyst Steve Sakwa said in a recent report.