Brad Schwer: We recently relaunched coverage of office REITs Boston Properties and Vornado with no-moat ratings. Both companies own and operate Class A office and retail space in key markets such as Washington, D.C., San Francisco, and Manhattan. I think its important to highlight three key takeaways.
First, we don't see any structural competitive advantages in either company to support a moat. Substitutes for Class A office space are everywhere, and Boston Properties and Vornado typically have a low- to midsingle-digit market share depending on the location.
Second, our outlook for office and retail space remains healthy, but some locations are more promising than others. We think Vornado is best positioned to capitalize on future growth stemming from the upcoming Hudson Yards project. It owns about 6.5 million square feet of office space and half a million square feet of retail space a couple blocks east of the upcoming project. Management is hoping to increase rent in those areas 40%-50% as the project should increase daily foot traffic by about 65,000 people.
Third, Vornado announced that it will shed its Washington, D.C. portfolio this year, and it will be laser-focused on Manhattan. We believe this will be a net positive for the company given that the D.C. portfolio has been an area of concern for Vornado in the past. Vornado's future should involve lucrative redevelopments within its existing portfolio of assets. These opportunities can often yield 8%-10% and further attract tenants to its Manhattan properties.
We view Boston Properties as fairly valued, but see about 10% upside in Vornado. Both firms have solid financial positions and offer dividends in the mid 2% range.