Manhattan Office Rent Assumptions Will Fail To Justify Overvaluation

Key Takeaways

• Market confidence centers on Vornado's premium Manhattan assets, redevelopment projects, and anticipated demand for high-end, sustainable office spaces driving sustained revenue and rent growth.
  
• Investors appear to discount risks from remote work, expecting tenant migration to quality and urban revitalization to provide durable pricing power and earnings visibility.
  
• Strong demand for premium Manhattan assets, successful redevelopment, solid leasing momentum, prudent financial management, and key market focus position Vornado for sustainable growth and resilience.

Catalysts

Vornado Realty Trust (“Vornado”) is a fully-integrated real estate investment trust (“REIT”) and conducts its business through, and substantially all of its interests in properties are held by, Vornado Realty L.P.

• The current valuation likely anticipates continued robust rent growth in Manhattan's premium office segment, as pent-up demand, low vacancy in Class A properties, and severely constrained new supply are forecasted to create a landlord's market; this is expected to drive a significant step-up in revenues and same-store NOI as new leases and lease roll-ups take effect in coming years.
  
• Investor optimism seems based on the expectation that the successful redevelopment of the Penn District-coupled with the ongoing migration of tenants towards modern, amenity-rich, mixed-use office spaces-will materially increase occupancy and allow Vornado to capture premium rental rates, substantially boosting both revenue and net income by 2027 and beyond.
  
• The market may be assuming sustained urban revitalization and population growth trends in core Vornado markets (especially Manhattan), underpinning strong tenant demand and positioning the company's trophy assets to deliver durable pricing power and above-average cash flow growth, enhancing long-term earnings visibility.
  
• Current valuations appear to reflect confidence that Vornado's focus on sustainability, energy efficiency upgrades, and LEED-certified buildings will not only meet evolving tenant and investor preferences but also support higher average occupancy and rental rates, with a positive impact on future net margins as green demand accelerates.
  
• The positive outlook may also discount risks from remote and hybrid work adoption, presuming the ongoing flight-to-quality dynamic will favor Vornado's premier assets in gateway cities, thereby driving improved leasing momentum and reducing revenue volatility compared to lower-tier or more diversified peers.

Vornado Realty Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vornado Realty Trust's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.0% today to 2.2% in 3 years time.
• Analysts expect earnings to reach $46.4 million (and earnings per share of $0.32) by about August 2028, down from $812.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $68.8 million in earnings, and the most bearish expecting $-58 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 224.4x on those 2028 earnings, up from 8.9x today. This future PE is greater than the current PE for the US Office REITs industry at 35.8x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Vornado Realty Trust Future Earnings Per Share Growth

Risks

• Sustained flight-to-quality trends and unprecedented tenant demand for top-tier, amenity-rich Class A space in prime Manhattan locations-combined with limited new office supply-create powerful pricing power for Vornado, positioning its trophy assets for strong rent growth and higher occupancy, which could drive notable increases in revenue and NOI.
  
• Strategic redevelopment of the Penn District and adjacent mixed-use, live-work-play enhancements (including new residential units and revitalized retail frontage) are already exceeding initial underwriting expectations, enabling value creation and long-term NOI expansion as rents rise from current $100/foot levels toward $150/foot, which could fuel substantial EPS growth over the next several years.
  
• Robust leasing momentum and a strengthening pipeline-demonstrated by significant multi-year leases with high-credit tenants (e.g., NYU, Verizon, Samsung)-suggest improving occupancy rates well over 90% by 2027, while upward mark-to-market rents and reduced concessions/free rent support higher margins and stable cash flow for shareholder returns.
  
• Prudent balance sheet management, including net debt reduction, improved fixed charge coverage, and disciplined capital recycling (selective asset sales and reinvestment), increases financial flexibility, reduces interest expense, and protects net margins-mitigating downside risk in volatile markets and making higher dividends more sustainable over time.
  
• Urbanization and economic revitalization trends in core markets such as Manhattan and the recovering San Francisco CBD, coupled with Vornado's focus on iconic, well-located assets, position the company to outperform weaker peers; this supports resilient long-term rental growth, elevated operating margins, and asset value appreciation, potentially enhancing overall earnings and share price.

Valuation

• The analysts have a consensus price target of $38.5 for Vornado Realty Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $46.4 million, and it would be trading on a PE ratio of 224.4x, assuming you use a discount rate of 8.3%.
• Given the current share price of $37.81, the analyst price target of $38.5 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.