2020 was a really rough year for hotels, and that extends to New York City properties. In December, the occupancy rate among New York City hotels was just 36%, a significant drop from the 88% occupancy rate city hotels enjoyed during the previous holiday season. In fact, a number of New York hotels have shuttered in the course of the pandemic, and now, Vornado Realty Trust (NYSE: VNO) is making plans to permanently close and raze its Hotel Pennsylvania, a Midtown Manhattan staple.
A new strategy
Vornado shut down the Hotel Pennsylvania in response to the coronavirus outbreak. And now, it's making plans to create new developments around New York's Penn Station in its place. Vornado is also planning to create a trading stock that focuses specifically on its new development projects. That way, real estate investors will get the option to choose where to put their money -- Vornado's traditional portfolio or this new development.
Like many real estate investment trusts (REITs) with large concentrations of New York City properties, Vornado had a brutal 2020, with shares falling 44% last year. But the REIT has since rebounded nicely, and shares have gained 22% during the first part of 2021.
Still, Vornado's portfolio leaves it vulnerable in the face of changing workplace setups. As of the end of 2020, 85% of Vornado's net operating income was derived from New York City properties. And 68% of its net operating income came from office building locations.
But office buildings have largely sat empty since the pandemic first reared its ugly head. And even though things are improving with regard to the outbreak, especially with the rollout of vaccines, a lot of companies are rethinking their office space needs after managing for over a year with remote-work setups. Some employers have already made a point of downsizing their space. Others may look to dump it entirely. Leasing activity has been sluggish for office buildings, and concessions will likely come into play in an effort to lure tenants in.
The result? REITs like Vornado with heavy office building concentrations could be in for a volatile couple of years. As such, the fact that real estate investors will get the option to put money into a different Vornado venture is a positive thing.
Vornado also, as of the end of 2020, got 16% of its net operating income from retail locations. That sector, too, has been hammered in the course of the pandemic.
Of course, the fact that Vornado's assets are so centered on New York City properties may work to its disadvantage in the near term, especially given the mass exodus of city dwellers over the past year and the city's astoundingly high residential and office building vacancy rates of late. But New York City has a long history of emerging victorious and overcoming adversity. It did so after 9/11, and there's a good chance it will recover successfully once the pandemic is behind us. That's something current and future investors in Vornado should keep in mind.