For a window into how America’s return to the office is going in the first quarter of 2023, not to mention the effect of surging interest rates on commercial real estate in general, look no further than the shares of Vornado Realty Trust ( VNO ). At one point on Thursday, shares in the real estate investment trust headed by CEO Steven Roth had fallen 59.5% from their 52-week high a year ago — and almost 80% from their all-time reached in early 2015. In fact, Vornado shares on Thursday briefly touched their lowest level since 1998. VNO 5Y mountain Vornado over past five years The vast majority of Vornado’s portfolio is concentrated in what it calls “the nation’s key market — New York City,” along with far smaller holdings in Chicago and San Francisco. Vornado says it owns 20 million square feet of office space plus 2.6 million square feet of street retail space in Manhattan alone, 3.7 million square feet at The Mart in Chicago and a controlling stake in almost 2 million square feet of office in San Francisco. One problem for Vornado is that the national office occupancy rate last week — as measured by the number of employees coming into the office rather than working from home — topped 50% “for only the second time since the start of the pandemic,” according to Kastle Systems, which monitors the number of employees swiping in each day. But in the New York metropolitan area last week, the rate fell to 46.7% from 47.8% the week before, Kastle said. In San Francisco, the rate was even lower last week, at 43.9%, while in Chicago it was 49.4%. Maybe that’s why Vornado took a $600 million non-cash impairment charge in a retail joint venture in New York City in late January. All REITs face a second problem: the higher cost of capital. With the Federal Reserve raising benchmark interest rates for the past year to almost 5% from almost nothing, that also raises capitalization rates in real estate, increasing the level of risk. Vornado owed $8.39 billion in proforma long-term debt as of March 1, according to FactSet. Deutsche Bank analyst Derek Johnston ranked office REITs last out of eight REIT subindustry groups in a monthly review released on Tuesday. In January, subsector year-over-year cap rates climbed the most for office owners, he said, up 80 basis points, or 8/10ths of a percentage point. Vornado’s fourth-quarter results and earnings call were “directionally … positive,” JPMorgan analyst Anthony Paolone wrote last week, but “VNO still has a lot of wood to chop with respect to managing its capital structure (higher leverage and rate exposure than peers) in the years to come amidst a challenging office environment.” He has an underweight rating on Vornado and a price target of $20. That said, Vornado’s woes are far from unique. Boston Properties ( BXP ) touched its lowest since 2010 on Thursday, while Hudson Pacific Properties ( HPP ) on an intraday basis Thursday fell to a record low, going back to its 2010 initial public offering. Elsewhere, JBG Smith Properties ( JBGS ) intraday dropped to the lowest since its 2017 IPO, and Kilroy Realty ( KRC )’s 52-week low was its weakest price since 2011. — CNBC’s Michael Bloom contributed to this report.
