Commercial real estate is in trouble. Skeptics need only look to Realty Income (NYSE:O), a perennial favorite “monthly dividend company” among income and REIT investors, for evidence. Shares of the top commercial real estate stock have fallen more than 11% since January 1, with limited upside potential. The reasons are as varied as you're likely to recognize: rising interest rates, permanent work-from-home arrangements, and weak consumer confidence.
But Realty Income isn't the only one struggling. As you might expect, office space, once priced at a premium, has fallen sharply, and the REITs that own the real estate are following suit. Clients in the office space sector are increasingly falling behind on their payments, with recent surveys reporting delinquency rates as high as 6%.
These commercial real estate stocks to sell are the riskiest parts of the sector, and now is the time to do it while you can.
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Vornado Realty (VNO)
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One only needs to look at its dividend outlook to see that commercial real estate stock Vornado Realty (NYSE:VNO) is in trouble. It suspended its dividend for most of 2023 due to declining revenues and rising interest rates, and its outlook for 2024 doesn't look much brighter either. In December 2023, the company told investors it plans to pay a single dividend in the fourth quarter of 2024, instead of the four dividends per year that most income investors expect. Realty Income's problems pale in comparison; at least the company has retained its “monthly dividend company” moniker.
As expected, Bornado's year-end report is enough to spook even the most staunch commercial real estate bulls. The company posted a net loss of $0.32 per share in the fourth quarter, but just barely made an overall profit for the year. To make matters worse, the company's full-year profit appears to be both a measure of business success and an accounting trick, with non-cash transactions such as credit losses, asset impairments, and deferred tax liabilities boosting the bottom line.
Boston Properties (BXP)
A close-up of a mobile phone screen showing Boston Properties logo letters and a stock market chart background. BXP stock.
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Boston Properties (NYSE:BXP) owns or manages about 200 properties in Boston, New York and San Francisco, making it especially vulnerable to the commercial real estate downturn as work-from-home arrangements become the norm and companies accelerate layoffs. Reflecting these challenges, the company's shares have fallen nearly 13% since Jan. 1, and its outlook remains bleak.
Office occupancy remains at 18%, well below pre-pandemic figures, driving a major push towards a remote-centric office culture. In New York, office real estate values plummeted 45% in 2020 and continue to fall to a staggering $453 billion loss. Commercial real estate in San Francisco is struggling as well, with a vacancy rate of 30%, exacerbated by ongoing crime concerns in the city.
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These issues are not limited to Boston Properties' two main markets. The company's operating income (a key indicator of REIT performance and similar to earnings per share) has been trending downward, coming in at $1.86 per share in its most recent report, a 2.2% decrease from a year ago. While the report slightly beat analyst expectations, it's not enough to allay analysts' overall concerns.
New York Community Bancorp (NYCB)
A person holds a mobile phone with the logo of the American company New York Community Bancorp Inc. (NYCB) in front of the company's webpage. The focus is on the phone's display. Unedited photo.
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New York Community Bancorp (NYSE:NYCB) isn't just a commercial real estate stock, but it's invested enough in the sector that any weakness poses a real risk to earnings. The bank's management recently surprised investors by raising the credit loss provision (in other words, expected loan defaults) on its balance sheet after closely reviewing its portfolio and the risks posed by borrowers in the multifamily sector facing sharp increases in interest rates. 60% of the bank's $100 billion in assets are closely tied to Manhattan commercial real estate, and as you might imagine, if the dominos start to fall, this puts the community bank at extreme risk.
In the residential sector, NYCB isn't faring much better. Raymond James analysts downgraded the bank's lending rating this week, setting a fair price per share of $3, about 16% below current levels. Raymond James' downgrade hinges on underwriting risks in residential, rather than commercial real estate, and “NYCB will likely have to sell troubled loans at a 30% to 50% haircut, resulting in a material deterioration in earnings.”
As of the publication date of this article, Jeremy Flint did not hold any positions in the securities mentioned. Opinions expressed in this article are those of the author and follow InvestorPlace.com's Publication Guidelines.
Jeremy Flint is an MBA and seasoned financial writer with an expertise in content strategy for asset managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed income investing, alternative investments, economic analysis, and the oil, gas, and utility sectors. Jeremy's work can also be found at www.jeremyflint.work.
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