Jonathan Litt Maintains Views on New York Market

Hedge fund activist Jonathan Litt said in a report in May that he is betting against Empire State Building Realty Trust, Vornado Realty Trust, and SL Green Realty. After the article came out, shares of these companies have either gotten flat or grown higher. Have his views against these big names now changed?

In an interview yesterday, Jonathan Litt of Land & Buildings Investment Management was asked if he is still shorting these big names and the others that he is betting against.

"We don't comment on shorts specifically," he said, "I think the Journal made it an assumption based on what we wrote, but I think that New York is going to be very challenged on the office market and likely on the property market as well."

"What's happening is, the population in New York has been in decline for about three years. So, you're seeing the population declining, and that's really a function of the megatrend, of Millenials having families and moving to the suburbs."

Litt said that the migration was accelerated with tax cuts, causing places like New York to be expensive and that the rate of migration will even accelerate due to the COVID-19 pandemic.

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In his statement, he stated that there were numerous headwinds weighed on NY office landlords in the past years, causing the rent growth to stall and value plateau. He added that a "hurricane" began in 2018 with the $10,000 cap that was implemented on the state and local tax or SALT income deduction that hurt New York's competitiveness.

Litt likened the COVID-19 impact on the New York office market as a Category 5 existential hurricane with ESRT poised to bear the storm's brunt. That prediction comes as many companies are now beginning to question the need for physical office space now that the home could potentially be the place where most employees would be working.

Many companies who adopted the work-from-home- approach have shown success and impressive productivity. In fact, CEOs of Blackrock and Morgan Stanley are already suggesting that they may need significantly less office space in the future.

Even the Bank of Montreal has indicated that 80 percent of its employees may also switch to the blended home-office work approach.

He added that the Empire State Building observation deck might likely see weak demand until a COVID-19 vaccine is found. Even then, international travel and tourism will likely be among the slowest sectors to rebound from the pandemic-induced recession.

Even if ESRT's retail tenants survive and reopen, their sales volume will likely be far from the pre-pandemic levels, and that condition may exist for an extended period. That, along with WeWork's financial troubles adds to the challenges facing the New York office market.

"I think you're going to see value come down materially. You're going to see the rents come down materially over the next two to three years."