An Undervalued Play on Shifting NYC Office Market
Vornado Realty is set to benefit from the Hudson Yards project with 6.5 million square feet of office space and half a million square feet of retail property just east of the incoming development.
We believe that investors can gain exposure to a monumental shift in the Manhattan office market through a company poised to reap benefits through its existing positions as opposed to risky development spend with undervalued, no-moat Vornado (VNO). As builders pour concrete and cash into the upcoming Hudson Yards project and surrounding submarkets, Vornado remains set to benefit from the improving neighborhood with 6.5 million square feet of office space and half a million square feet of retail property just east of the incoming development. We were pleased with rental rates surrounding Penn Plaza which climbed into the upper-$60s per square foot in 2016. We see this positive trend continuing, as half of lease expirations for 2018 are concentrated in One Penn and Two Penn Plaza, so next year serves as a real opportunity to renew leases at higher rates given the greater appeal for that submarket. We believe Vornado being been hit twice as hard as some of its peers in the past few months was unwarranted. Given our outlook stemming from its existing property position near the Hudson Yards project and a dividend that should hover around 3%, we see Vornado trading at a discount to our $92 fair value estimate as attractive.
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Brad Schwer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.