Investor Jonathan Litt on NYC real estate post-pandemic, what's booming and the future of retail

Published Thu, Oct 1 202012:44 PM EDTUpdated Fri, Oct 2 20204:28 PM EDT

A View from the Top is a Q & A series exclusively available on CNBC Pro . CNBC reporters will regularly speak with a business leader about decision-making, investing and industry news. Land & Buildings Investment Management founder and CIO Jonathan Litt has been closely tracking the ups and downs in the real estate industry, including office, industrial, retail, residential and hotel space, during the coronavirus pandemic . Litt has grown L & B, founded in 2008, into a prominent activist hedge fund in the real estate world. In more recent years, he has waged battles with the high-end shopping mall owner Taubman Centers , Forest City Realty Trust (now owned by Brookfield Properties ) and office and multifamily property owner Mack-Cali Realty Corp. In 2017, he targeted Saks Fifth Avenue owner Hudson's Bay, arguing the best use of Hudson's Bay's real estate was not as department stores. During the pandemic, his firm has reportedly taken short positions in some of New York City's biggest office owners — Empire State Realty Trust, SL Green Realty and Vornado Realty Trust. And in late September, Litt came out against the real estate company Apartment Investment & Management Co. 's plans to split into two public entities, saying he would call a special meeting if AIMCO did not let shareholders vote on the move. In this interview with CNBC in late September, Litt said: "Real estate touches every part of the economy. There are sectors where dividends are up, stocks are up, and you're making a lot of money in them. Then there are the sectors which are struggling, like regional malls and shopping centers which reduced their dividends. So I think that it's a misnomer to think that [the real estate industry] is a homogeneous group. The point is, there are a lot of different sectors within it." Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Lauren Thomas: As you think about all the asset classes within real estate, which ones are you honed in on more during this pandemic, and are there a few different sectors that you're watching more closely day-to-day? Jonathan Litt, Land & Buildings founder and CIO: The mega-trends in real estate that were in place pre-Covid were turbocharged due to Covid-19, and those are the places where I think you're going to look back in five years, and you're going to have made a lot of money in real estate. When people look at the [real estate] index, it's not that exciting. That might be the case, but real estate covers everything, from a mall which is struggling to a data center which is booming so you have to find what the real estate trends are and where you want to be. And what we identified here in our mega-trends piece was: You want to be in single-family housing, whether it's a home builder or is a single family for rent company because we already saw the suburban population is already [booming]. The population has been declining for several years in the major cities and now that millennials are in their prime childbearing years, they are making the leap from urban to suburban. Covid has accelerated this move to suburbia because people are saying, 'We don't need to wait. Let's get going.' And we saw that in the single-family home numbers. This trend that was already in place, and for at least the next five years we believe people are going to continue to buy homes and rent homes. How much of that do you think there are trends that are just cyclical in nature? And you could argue Covid comes along and accelerates it, obviously, but it is cyclical. I just wonder, with what's happening in housing, for example, do you see that as more of a cyclical thing, or is it becoming more permanent? Yeah, it feels more like the tip of the iceberg. But it's not the hangover we had back in the financial crisis when you had cab drivers and shoe-shiners owning homes, flipping homes and making money. This is true demand. We've been under-building the housing space for 10 years. People have been staying in apartments longer than staying with their families and now they want to be in homes. Now, we have to watch it, monitor it, and see what happens. And, ultimately, it's the interest rates, right? If interest rates go up, you're going to see people hesitate. Now you can buy a lot more home and you can pay a lot more for a home than you could pre-Covid because rates are down 100 to 150 basis points. So I think this is going to continue and it's not going to be a flash in the pan. To pivot a bit, I did want to ask you about office space. We've discussed that in the past, and I think you're seeing a similar exodus there. Maybe one trend being companies are opening more satellite offices and avoiding kind of the flagship model. But what are your thoughts on the future of office space, especially in a city like New York? I think that Covid is very disruptive. The office market was facing headwinds going into the crisis. And this just compounded work from home, so the genie is out of the bottle. It's not going to change. We're going to have a lower number of people in office buildings than we have pre-Covid, because the work from home is going to be here to stay at a bigger scale than it was before. And look, I love New York. I love the energy in New York. It's always going to attract the best and the brightest. It's just that right now we've got to go through a resetting, like lower vacancy rates. You're going to see values probably fall 40% for office buildings, but we're going to get to the other side of it, and then it's going to be a phenomenal investment opportunity. What are your thoughts on these comments from some of the big office landlords, like Related Cos. being one of them, coming out and pushing everyone to get back to the office? It's really fascinating. We've been out at a lot of conferences and talking with a lot of management teams, and public companies, and the office CEOs say, 'You know, companies want to come back.' But then when you listen to other companies and other [sectors] where their workforces are working from home, they're saying