Stocks to sell

Dump These 3 Commercial Real Estate Stocks Before They Crumble

Commercial real estate is in dire straits. Skeptics don’t have to look further than “The Monthly Dividend Company,” Realty Income (NYSE:O), a perennial favorite among income and REIT investors for proof. Shares in the top commercial real estate stock are down more than 11% since Jan. 1st with limited upside in sight. The reasons run the gamut you’re no doubt familiar with — higher rates, work-from-home permanency, sluggish consumer sentiment and more.

But Realty Income isn’t the only commercial real estate sector struggling. As you can imagine, office space, once valued at a premium, is on a rapid downswing, taking REITs holding the properties along with it. The office space sector’s customers are increasingly late to pay, with 6% delinquency rates reported in a recent survey.

These commercial real estate stocks to sell represent the riskiest slice of the sector and now is the time to run while you still can.

Vornado Realty (VNO)

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You don’t need to look further than its dividend outlook to see that commercial real estate stock Vornado Realty (NYSE:VNO) is in trouble. After suspending its dividend for most of 2023 amid falling income and higher rates, 2024’s outlook doesn’t seem much brighter. In December 2023, the company told investors that it expects to pay a single, solitary dividend in 2024’s fourth quarter rather than the four per year that most income investors have come to expect. That makes Realty Income’s problems pale in comparison. At least it hasn’t lost its “Monthly Dividend Company” moniker.

Vornado’s end-of-year report, as expected, is enough to spook even the most steadfast commercial real estate bulls. The company posted a fourth-quarter net loss of $0.32 per share while barely breaking into overall profitability for the year. Worse yet, its annual profit seems as much an accounting trick as it does a measure of business success, with non-cash transactions like credit losses, property impairments, and deferred tax liabilities giving its bottom line a boost.

Boston Properties (BXP)

Source: Ralf Liebhold / Shutterstock

Boston Properties (NYSE:BXP) owns or manages nearly 200 properties across Boston, New York and San Francisco, making it particularly vulnerable to the downturn in commercial real estate as work-from-home trends become the norm and corporations accelerate job cuts. Reflecting these challenges, its share price has fallen nearly 13% since Jan. 1st, and the outlook remains grim.

Office occupancy rates remain at 18% and well below their pre-pandemic figures, with a significant push towards a remote-centric office culture. In New York, office real estate values plummeted by 45% in 2020, continuing to decline to a staggering $453 billion loss. San Francisco’s commercial real estate is similarly struggling, with a 30% vacancy rate, further exacerbated by the city’s ongoing crime concerns.

These issues extend beyond just two of Boston Properties’ main markets. The company’s funds from operations — a key measure of REIT performance akin to earnings per share –are on a downward trajectory, registering at $1.86 per share in its latest report. That’s down 2.2% on a year-over-year basis. Although this report outperformed analyst expectations by a hair, it does little to alleviate their broader concerns.

New York Community Bancorp (NYCB)

Source: T. Schneider / Shutterstock.com

Though it isn’t exclusively commercial real estate stock, New York Community Bancorp (NYSE:NYCB) is sufficiently invested in the sector that weakness presents a real risk to its bottom line. Bank managers spooked investors recently after hiking their provision for credit losses on the balance sheet (projected loan defaults, in other words) after looking closely at “the portfolio and risk posed by borrowers in the multifamily sector who face sharp increases in interest rates.” As much as 60% of the bank’s $100 billion worth of assets is closely linked to commercial properties in Manhattan, which, as you can imagine, puts the community bank at extreme risk if the dominoes begin falling.

On the residential front, NYCB isn’t faring much better. Analysts at Raymond James cut the bank’s lender rating this week and pinned its fair value per-share pricing at $3, or about 16% below current levels. Raymond James’ downgrade hinges not on commercial real estate but on risky residential underwriting and that “NYCB is more likely to sell problem loans at 30%-50% haircuts, hence substantial earnings difficulties.”

On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth 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 utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.

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