Credit Suisse On REIT Stocks: NYC/East Coast Will Outperform West Coast

Office sector stocks have gained 18 percent in the last seven weeks, after declining 15 percent from the beginning of the year till mid-February. Credit Suisse’s Ian Weissman maintained a cautious stance on the sector, given an anticipated weakening of tech office demand in the second half of the year.

“New supply in NYC (over 5% of the Class A market is currently under construction) will be an overhang as private office using job growth is estimated to be cut in half in '16 versus '15 (80% correlation between private office using job growth and net absorption),” analyst Ian Weissman wrote.

East Coast Companies To Outperform West Coast Players

Asset pricing is likely to shortly begin to rollover for the entire office sector, and the performance of West Coast companies may be lower than that of East Coast players due to several headwinds.

“NYC certainly isn't immune to any fallout in tech (accounting for 30-35% of net absorption over the last two years), not to mention new supply concerns, but it does benefit from a much more diverse tenant base and remains the only global city in the US,” Weissman commented.

Vornado Realty Trust

The analyst upgraded the rating for Vornado Realty Trust VNO from Neutral to Outperform, with a price target of $108.

Vornado Realty’s shares trade at a 19 percent discount to its NAV, while exhibiting excellent liquidity and leverage. “We believe the company should outperform as West Coast (WC) tech dominated markets face increased headwinds, balance sheet continues to simplify (DC spin + Skyline property give-back), and NYC portfolio posts strong SS NOI growth (7+%),” the Credit Suisse report noted.

SL Green Realty Corp

Weissman upgraded the rating for SL Green Realty Corp SLG from Underperform to Neutral, while reducing the price target from $119 to $105. SL Green Realty’s shares trade at a discount of 21 percent to its NAV, despite the company having one of the most dynamic REIT teams.

The analyst expects SL Green Realty’s shares to benefit given their massive underperformance over the last one year and their relative valuation. He added, however, that leverage continues to be an issue that warrants a discount to the NAV.

Corporate Office Properties Trust

Credit Suisse upgraded the rating for Corporate Office Properties Trust OFC from Neutral to Outperform, while raising the price target from $23.50 to $29.

The company’s Gov [cyber & intelligence] focused portfolio and deleveraging should help it weather increased market volatility. Corporate Office Properties Trust’s shares has outperformed the office sector by 22 percent so far in 2016.

“Despite upgrades, we remain cautious on the office sector as major leasing fundamentals (tech demand on WC, supply in NYC) and asset pricing (CMBS & loan spreads) headwinds persist and will likely worsen,” Weissman stated.