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Morgan Stanley is out with a somewhat cautious call on Vornado (NYSE: VNO) that might work as a short in this environment.

The New York Times reported on Saturday that plans for the $14B redevelopment of Penn Station are close to failing due to the softening economy, government financing, and political inertia.

MSCO notes that were plans for the Penn Station redevelopment to fall through, as suggested in Saturday's New York Times, they might have cause to re-examine their Overweight rating on VNO’s stock. However, the firm believes it is premature to assume that this complex and highly political project will simply be abandoned, given its importance to NYC and the Hudson Yards redevelopment project, not to mention the number of well-connected developers involved.

In a worst case scenario, in which the project were not to happen at all and VNO is somehow unable to obtain approval for other large projects in the area, they estimate a maximum $11 adverse impact on their $94 price target, reflecting the elimination of previous discounted value of work on the site.

This project represents a significant growth opportunity for VNO, given its 50% development interest and the likely significant positive impact the project would have on its existing assets in the Penn Plaza area.

While the possible Penn failure may be mostly in the stock the prolonged political wrangling over this project, along with market skepticism about the New York office market could keep sentiment negative on this stock for some time.

Notablecalls: The article isn't yet circling the trading desks but I think it will. From what I've read on the Penn project (5-7 million square feet), it's one of the most important VNO has.

MSCO's call (while a defense) is cautious enough to create significant pressure in VNO in the near term.

Source: Vornado's in Trouble if Penn Station Deal Fails