Goldman Sachs Warns: Vornado REIT Nearing Debt Breach

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In today's issue, we discuss Vornado Realty Trust's potential default on $2.6 billion in loans. Plus, the "return to the office" remains complex, with office attendance on the rise but still far from pre-pandemic levels.

Today’s edition is sponsored by PMAT Companies, a developer of value-add shopping centers specializing in select open-air retail properties.

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Vornado Realty Trust Faces Potential Default on $2.6 Billion Loans

Vornado Realty Trust (VNO) risks defaulting on $2.6B loans due to rising costs and Penn Station project, warns Goldman Sachs analysts. Debt coverage ratio may also breach covenants, triggering default on loans and credit line.

Breach of covenants: Over the past year, Vornado's coverage ratios on debt covenants have declined by more than 70 basis points, primarily due to increasing interest rates. With a slim buffer of only 79 basis points remaining, the coverage ratios could further narrow to 10 and 20 basis points, respectively, if the current trends persist. Additionally, the expiration of interest rate swaps and rate caps on $2.4B of mortgage debt could add $73M in interest rate expenses.

Financial pressures mount: Vornado is facing further financial pressures, including the loss of two major office tenants resulting in a $68 million revenue decrease. The company must also allocate $500 million to complete its ongoing Penn Station area projects, primarily redeveloping Penn 1 and Penn 2 buildings.

Vornado's response: Vornado plans to sell assets to repay debts and address capital needs, including funding a stock buyback program. The company's decision to suspend its dividend for the rest of the year and its removal from the S&P 500 index reflect the challenges it is currently facing. Vornado's stock has experienced a significant decline, falling from nearly $68 per share to below $14 as of Thursday.

➥ THE TAKEAWAY

Zoom out: Vornado Realty Trust is navigating a precarious financial situation, with rising interest rates, tenant departures, and significant expenses impacting its debt coverage ratios. The company's actions to sell assets, suspend dividends, and address capital needs indicate the severity of the challenges it faces.

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The "Return to the Office" Won't Save the Office

The "return to the office" is a messy situation—more people are showing up, but we're still light-years away from the pre-pandemic era. Office buildings continue to face challenges beyond remote work, and one thing is clear: the old normal won't be making a comeback anytime soon.

Illusion of return: The push for a complete return to the office may not be as robust as it seems. While some companies are keen on bringing employees back, others are embracing flexible work arrangements. Even the mayor of New York City, who initially mandated a full return, is rethinking the decision due to job vacancy challenges. The lack of consistency surrounding the office return creates confusion for both employees and employers alike.

Office buildings in trouble: Office buildings have it rough these days. It's not just about remote work. Leasing space and getting financing is a tough gig, causing high delinquency rates for office loans. Add rising interest rates and problems at regional banks into the mix, and things get even worse. Converting office spaces to something else is expensive and difficult due to limited credit availability. And guess what? It's not just office owners feeling the pain – public budgets and livelihoods tied to office-related activities are taking a hit too.

The evolution of space: With fewer people attending the office less frequently, the demand for office space is decreasing. Companies hold the reins, selecting top-notch office spaces that align with their requirements. Recent data reveals that remote-capable workers continue to work from home part-time. Hybrid work arrangements, combining remote and office-based work, are on the rise, impacting former full-time office-goers. Even companies once adamant about on-site work are embracing hybrid models to stay current.

➥ THE TAKEAWAY

Big picture: The office market faces diverse challenges beyond remote work, including tech cutbacks, rising interest rates, and economic uncertainties. Transitioning to a service-based economy complicates real estate needs, while short-term leases disrupt income stability. Densification persists despite social distancing concerns. Adaptability and flexibility are crucial for success, as the demand for appealing workspaces endures.

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• Inflating appraisals: A North Carolina real estate appraiser pleaded guilty for facilitating a tax shelter that enabled $1.3 billion in fraudulent deductions.

• Fronting the money: Madison Realty Capital is lending $585M to complete a luxury resort near Phoenix, capitalizing on nearly finished projects amid a slowdown in commercial real estate funding.

• Market chill: The allure of purchasing a rental property to accumulate wealth has traditionally appealed to many individuals. However, for landlords in two distant countries, the math doesn’t pencil anymore.

• Drop in CRE volume: Commercial and multifamily mortgage borrowing and lending are set to decline by 20% this year to $654 billion, per the Mortgage Bankers Association (MBA).

• Jobless claims rise: Last week, US jobless claims soared to a 1.5-year high of 264,000, indicating labor market weakness and potentially delaying future interest rate hikes by the Fed.

• Unloading cargo: Macquarie Asset Management plans to sell Ceres Terminals, a North American port operator, despite challenges from rising interest rates and sluggish trade activity.

• Cost breakdown: Newmark spent $114.8 million (£90.92 million) to acquire UK real estate adviser Gerald Eve. This disclosure unveils the transaction's market impact details for the first time.

• Texas Triangle: Scarborough Lane Development and Partners Real Estate are developing AXIS Logistics Park, a massive 2,000-acre industrial project in San Marcos, Texas, slated to be one of the largest in the U.S.

• Unfinished business: Amazon is currently engaged in a legal dispute in Montgomery County, Pennsylvania, regarding its decision to halt new openings for its grocery store chain.

• The road ahead: San Francisco officials and developers are considering converting vacant office space into housing to solve the city's high office vacancy rate, which is less than half of pre-pandemic levels.

• Spectacular collapse: Nir Meir, the former luxury condo developer of HFZ Capital Group, claims to be financially depleted with only $5,000 in his bank account and relying on a friend's accommodation.

• Free the fee: The FHFA has scrapped its proposal to modify a mortgage fee targeted at individuals with specific debt-to-income ratios, bringing relief to many.

• Office to multifamily: Dallas-based REIT Creative Media & Community Trust (CMCT) has acquired a majority stake in two multifamily campuses and two development sites in Oakland from parent company CIM for $282M.

• Affordable housing crisis: A report by Moody's Analytics reveals that the US has lost over 500,000 affordable housing units since 2020, accounting for approximately 8% of the nation's total.

According to data from Goldman Sachs, CMBS issuance in the first quarter reached its lowest level since 2010, and this downward trend has continued into the month of April.