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Vornado’s Roth Sees Lack of Supply Boosting Property Prices

Higher U.S. real estate prices are inevitable because of a shortage of buildings after the financial crisis stalled construction, Vornado Realty Trust Chairman Steven Roth said in his annual letter to investors.

“By and large, building (i.e. new supply) stopped nationwide in 2008,” he wrote in the letter, filed today with the U.S. Securities and Exchange Commission. “Lack of supply begets, over time, higher real estate prices. Always. This is a prediction of the future.”

In the letter, Roth, 69, gives his observations on the state of his company, the real estate market and the economy. In New York, where Vornado is based and where its office buildings produce 31 percent of the company’s earnings before taxes and other items, values of offices are “within hailing distance of peak pricing,” he said.

“This cycle has surely been confusing,” Roth wrote. “Everyone expected the chaos and distress of the residential real estate markets (the eye of the storm) to carry over and infect the commercial markets. This did not happen -- sellers have held on, financing has come back (albeit at lower amounts) and prices have rebounded. As prices rise, a fire hose of assets will come to market.”

Roth said New York office rents declined by 23 percent and 25 percent in the 1990 and 2001 recessions, respectively, citing data from CB Richard Ellis Group Inc., the biggest commercial property brokerage. Those were followed by rent gains of 118 percent over seven years in the 1990s, and 76 percent over three years in the 2000s, he said.

Wayne Gretzky

Citing hockey legend Wayne Gretzky’s observation that good players skate to the puck, and great players skate to where the puck will be, Roth said that “office building prices in New York and Washington are skating to where rents will be.”

He also said Vornado is “working hard to put the pieces in place” to build a 1.5 million-square-foot (139,000-square meter) tower over the Port Authority Bus Terminal at Eighth Avenue and West 42nd Street. Vornado’s plan for a 2.8 million square-foot tower on the site of the Hotel Pennsylvania, across from Pennsylvania Station, won’t proceed “without a major tenant in place,” Roth said.

He also said that Fannie Mae and Freddie Mac, the government-sponsored lenders that House Republicans want to shrink, underwrote homeownership “swimmingly well for decade after decade. In fact, the financing available to the American homebuyer supported our economy and differentiated our country from the rest of the world.”

The two companies “fell victim to human error” by too closely emulating private lenders that took too many risks, Roth said. “Properly managed, Fannie Mae and Freddie Mac have an important role in our economy.”

The letter was released after the close of regular U.S. trading. Vornado shares rose $1.16, or 1.3 percent, to $90.77 today in New York Stock Exchange composite trading. They have gained 8.9 percent this year.

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