When the coronavirus outbreak first erupted, it immediately changed the way the workforce operated. Employers were quick to shift employees over to remote work in an effort to keep them safe and also to limit their own liability in the face of a developing pandemic.
But many company executives did not expect to have staff still working remotely 15 months later, and at this point, many are just plain used to that setup. In fact, there's concern among office real estate investment trust (REIT) investors that remote work will evolve to become less of a trend and more so a long-term fixture. If that happens, leasing activity will continue to drop and office REIT values will continue to follow suit.
Such may be a fear among investors in Vornado Realty Trust (NYSE: VNO), a REIT that, as of the end of 2020, derived 85% of its net operating income from New York City properties, 68% of which consist of office buildings. In fact, Vornado has, in recent years, been going all in on New York City by exiting other markets to free up capital to invest in the Big Apple.
But for Vornado to be successful, New York City needs a serious revival. The city was hit hard by the pandemic, due in part to the fact that it served as the pandemic's early epicenter and, thus, office buildings have been astoundingly vacant since the crisis began.
Thankfully, though, Vornado thinks office space demand will pick up across New York City. And once that happens, it'll be in a very strong position to capitalize.
A positive outlook
Like many REITs with office buildings in their portfolio, Vornado took a beating during the pandemic. In February of 2020, its share price sat at $66.34. By March of last year, it had sunk to $29.66. And while it's risen since then, shares of Vornado are still worth a lot less than they were two years ago.
But despite concerns about remote work becoming a permanent fixture, Vornado is hopeful that office leasing activity will pick up soon. In a recent shareholder letter, chairman and CEO Steven Roth said that while remote work will likely stay in effect for quite some time, businesses will ultimately require in-person collaboration in order to thrive. In other words, Vornado expects that in time, people will return to offices, if not on a full-time basis then at the very least on a hybrid one. And that could be enough to put it and other office-heavy REITs in a much better spot.
In fact, Vornado has made it pretty clear that it expects New York City to rebound following the events of the past 15 months. It's already involved in a large-scale project to develop the area around Penn Station -- an initiative that will really only prove profitable if office building demand picks up.
As more and more Americans get vaccinated against COVID-19, employers will have an easier time calling workers back to the office. Many, in fact, are already planning to have staff return this summer or fall. Office REIT investors may need to sit tight and wait for those numbers to improve, but those with investments in the New York City market should take comfort in the fact that Vornado is feeling very confident about an office-building recovery.