Far be it from me to weigh in on a debate between two noted investors, but when it comes to New York City, like most residents, I have an opinion.
So, the weird, sort-of debate between James Altucher and Jerry Seinfeld over the future of New York City touched a nerve for me. I live in NYC and have done so for the better part of the last 30 years.
Living in New York in the 1990s showed me the wonderful insights Seinfeld, though filmed in Los Angeles, had about our great city. So, I have a natural affinity for Seinfeld (both TV Jerry and the real person,) but I have to say, in this case he is dead wrong. New York City -- and those companies that exist to own its property, especially commercial -- is in really bad shape right now. I would not go to the length of Altucher and refer to the Big Apple as "dead," but, as always, I found an investing angle to play the Big Apple's problems.
New York has a few very large landowners, and excepting the City itself and Columbia and NYU, there are seven private entities on Real Deal's list of the largest landowners in New York. Of those seven entities, four are public companies -- SL Green Realty (SLG) , Vornado Realty Trust (VNO) , Blackstone group (BLK) and Brookfield Property Partners (BPY) -- and I would advise squeamish Investors not to punch up a stock price chart for any of them.
As often happens with high-yielding companies, the decline in stock prices has made the mathematics of the yields look attractive for these companies, but please do not be drawn in. I noted SL Green and Empire State Realty (ESRT) as short ideas in this article I wrote in February 2019, and I still believe that every one of these names could be profitably shorted today.
Why?
Because this city's role as a hub of office work is being disrupted. Jerry, like many in disrupted industries, refused to accept this by responding to Altucher's initial column with the notion of remote working: "Everybody. Hates. This." But in Seinfeld Season 7; Episode 20, "The Calzone," TV Jerry admits that he "never had a job." So, I believe real-life Jerry is just as out of touch with the working world as his character was 25 years ago.
Remote work is here to stay. Covid-19 has been the accelerator for this trend, but it had started many years ago. I know many people who do it, and, unlike Jerry, I don't know anyone who hates it. It is becoming the rule rather than the exception, and that is the most difficult thing for traditionalists to accept.
So, who loses from this nascent Pajama Movement? The companies that built these glass-and-steel monuments to commerce that line the streets of Manhattan. Until recently, my firm, Excelsior Capital Partners, held office space in one of those beautiful buildings. Upon being presented with the offer of a flat renewal rate -- I had expected an opening offer of a 30% decline in monthly rent and would not have gone higher than half -- I simply smiled, shook the office manager's hand and collected my things to go home and join the Pajama Brigade.
It seems, and certainly was the case for me, that office landlords just don't get it. Commercial real estate rents in New York City are going to have to come down dramatically. In the case of SL Green, Empire State and Vornado that means that the returns on their invested capital will do the same.
Don't get me wrong. I am not going anywhere. As another famous New Yorker, LL Cool J, once rapped, "I represent Queens." I will stay here, and New York will remain a center of the arts and culture, nightlife and just a generally cool place to live.
But it's hard sometimes. Between high taxes, Covid-19 and the skyrocketing rates of violent crime that highlight, in my view, the breathtaking incompetence of the current mayor, the quality of life in the City is under threat. The biggest threat to New York's commercial real estate, though, is technology. It's so darn easy to work from home now. The inherent demand for office space and, by association, office buildings is under a type of threat the terrorist attacks and economic collapses could never before level at New York.
So, whether or not you have joined the Pajama Brigade, please do not underestimate its growing legion of members. And don't underestimate how those non-commuters have decisively lowered the core demand for office space everywhere, but especially here in The City.
Short a few NYC commercial office plays and add some protection to your portfolio.
