Vornado Realty Trust expects its Manhattan office leasing this year to rise to the highest level since 2014 after the landlord said New York University is in the process of master leasing a high-profile building in the Greenwich Village neighborhood.
In another sign of Manhattan’s rebound from the fallout of the COVID-19 pandemic, Vornado also expects its average starting rent in New York City this year to hit all-time highs.
As New York and the U.S. office market still sit at what CoStar data shows as near-record or record-high office vacancy with declining rent growth, Vornado, with a portfolio that includes mainly top-tier office stock in New York, is benefiting from the so-called flight-to-quality trend of well-resourced tenants seeking top-tier new or renovated properties to attract talent or entice employees back to the office.
“The office leasing market in Manhattan is at the foothills of recovery,” Vornado Chief Executive Steven Roth said Tuesday on a third-quarter earnings conference call with Wall Street analysts.
While Manhattan’s office inventory totals over 400 million square feet, Vornado competes in 180 million square feet of Class A inventory, “where demand is strong and vacancy is rapidly evaporating,” Roth said. He pointed to a 7% vacancy rate and a 9% vacancy rate each among Class A office stock in the Park Avenue and Sixth Avenue office cluster that’s far short of the market average as an example.
“It’s very much the definition of a landlord’s market,” he said. “The icing on the cake is there’s no sign of additional office supply on the horizon. There hasn’t been a new major office start in five years. The cost of building and the cost of capital make it totally uneconomical to build. If history is a guide, no new supply always begets a landlord's market. Our rents are going up. I’m extremely optimistic.”
On Park Avenue, for instance, he said rents have gone up to $130 per square foot from $80 "almost overnight" as the supply shrinks.
Optimism aside, Vornado’s third-quarter funds from operations declined, thanks to higher interest expenses and move-outs at properties such as 770 Broadway, where NYU has agreed to take space. The real estate investment trust's Manhattan office occupancy dropped to 86.7% last quarter from 89.9% a year earlier.
Leasing boom
Vornado is expected to generate up to 3.8 million square feet in Manhattan office leasing this year, the second-highest annual mark in company history, Roth said. That volume would also rank as Vornado’s highest total since 2014, President and Chief Financial Officer Michael Franco said on the call.
“The tide has clearly shifted in New York’s Class A office space,” Franco said. “Leasing activity is strong and gaining momentum and availability is declining especially for large blocks of space."
In another encouraging sign for the largest U.S. office market, the city has more major transactions bigger than 700,000 square feet each signed this year than any year since 2019, he said, adding that "the headquarters deals are back."
That positions well for Vornado’s redeveloped properties such as Penn 2 in the Penn District above the Penn Station transit hub. Vornado signed more than 2 million square feet of Manhattan office space across 68 deals with an average $112 starting rent in the first nine months, he said. Meanwhile, the “tech sector demand is coming back strong” in the city, with Vornado having deals in the works, particularly in the Penn District, he said. Manhattan's largest office landlord, SL Green Realty, also has referenced growing signs of tech tenants returning.
The west side of Manhattan, including Hudson Yards, Manhattan West and Penn District, has “become a very established neighborhood” housing blue-chip tenants, Roth said, adding that in addition to the traditional midtown office market like that on Park Avenue, the new and renovated office stock on the west side is no longer a “new frontier” for office tenants.
A case in point, private equity firm TPG has signed one of Manhattan’s largest office leases this year at Tishman Speyer’s Spiral nearby as it plans to consolidate two existing New York offices.
Brokerage studies also have found the likes of Manhattan West, developed by Brookfield, and Hudson Yards, developed by Related Cos., regularly command top-dollar deals just like their Park Avenue counterparts.
Tight supply
As supply of top-tier office stock tightens, Franco said Manhattan’s office market has “broadened out” as Vornado sees “activity across all of its assets.”
Google, for instance, renewed its lease at 85 10th Ave. in the Meatpacking District. Vornado and Related Companies, which co-own the property, also modified a $625 million mortgage loan tied to the building. Roth said some smaller office tenants are signing deals in Vornado's Chelsea office space, paying $150 per-square-foot rent that he said is even higher than that on Park Avenue.
Roth revealed NYU as the tenant in talks to master lease 1.1 million square feet of the entire office space at 770 Broadway with future buyout options. NYU also is prepaying some rent, which Roth said would allow Vornado to pay off a loan on the property. The deal is expected to be signed “imminently,” Roth said, adding that supermarket chain Wegmans will continue as a retail tenant.
The NYU agreement means some 35% of Vornado’s vacant office space in New York is spoken for, Franco said.
Facebook parent Meta previously announced it was consolidating its real estate and moving out of about 275,000 square feet of Meta’s footprint at 770 Broadway that expired in June.
New York isn’t the only market that’s seeing the bifurcation in the office market trend. At 555 California St., Vornado’s trophy property in San Francisco, the property has a 98.7% occupancy with average starting rent of about $110 this year, in contrast to the citywide vacancy rate of 36% and declining rent, Roth said.
At Vornado’s Merchandise Mart trade show and office space in Chicago, medical supply firm Medline during the quarter expanded its footprint to about 160,000 square feet, Roth said.
The “Chicago market is soft, very soft,” he said, adding, however, Merchandise Mart is debt free. “As Chicago market improves, we’ll ramp up the leasing,” he said.