Goldman On REITs: Buy SL Green, Sell Paramount Group

Despite employment numbers at more than a 10-year high, investors should think twice about investing in office REITs. Cooling in demand coupled with cyclical highs in supply means investors will need to be extremely selective in the office REIT space, according to Goldman Sachs analyst Andrew Rosivach.

However, despite hitting peak supply, office REIT bulls still have reason for optimism.

“Office supply nationally is below most other CRE property types and at levels lower than the end of the prior cycle (which cannot be said for apartments, senior housing or hotels) and is seeing less expansion than multifamily or hotels in gateway markets,” Rosivach wrote.

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In addition, the office sector is currently trading at a 3-percent FFO premium to the rest of the REIT space, slightly below its historical 7-percent premium.

Overall, Goldman is neutral on office REITs at the moment, but the firm is more constructive on some names than others.

Goldman has a Buy rating and $121 price target for SL Green Realty Corp SLG, noting that “signed leases provide visibility into 2018 earnings.”

At the same time, Goldman has a Sell rating and $15 price target on Paramount Group Inc PGRE. Rosivach notes growth challenges in markets facing an uptick in supply (check out Rosivach's track record).

In addition, Goldman maintains Neutral ratings on Boston Properties, Inc. BXP, Empire State Realty Trust Inc ESRT and Columbia Property Trust Inc CXP.

So far in 2017, U.S. real estate investments have lagged the returns of the S&P 500. The iShares US Real Estate ETF IYR is up just 4.7 percent year to date.