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Stock Strategist Industry Reports

A Fresh Look at Office Real Estate

We think fears of overbuilding in Manhattan are unwarranted.

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We have updated our opinion of the five office real estate investment trusts we cover after taking a fresh look at the industry. Despite tweaking our fair value estimates, we are maintaining our no-moat and stable trend ratings for each of the companies. Although we agree that the central business districts where these companies operate face supply constraints, we think new construction can eventually come on line to correct any supply/demand imbalances over the long run. We would highlight SL Green Realty (SLG) as undervalued, as we think pessimism regarding a recent influx of supply in Manhattan is unwarranted. We consider Boston Properties (BXP) and Kilroy Realty (KRC) to be fairly valued.

We think Vornado Realty Trust (VNO) and Empire State Realty Trust (ESRT), the two other New York City-focused REITs we cover, are also undervalued. Investors are spooked by concerns that the Manhattan market will become overwhelmed by supply additions coming from the Hudson Yards megaproject, Midtown Manhattan, and Lower Manhattan. Indeed, Hudson Yards represents one of the largest development projects in the United States and is scheduled to add more than 10 million square feet of mostly Class A office space to the Manhattan market once completed. Although we think these supply additions may cause a temporary overhang, we ultimately think New York City will endure as the premier hub for global talent, with new demand eventually emerging to absorb supply.

Yousuf Hafuda does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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