Manhattan office owners have spent millions on new lobbies and other improvements in the last few years to make their towers more appealing. The cost is starting to hurt.
Steven Roth said that to induce companies to take space at his firm’s buildings, Vornado Realty Trust must first commit as much as $300 per square foot divided equally between tenant improvements and free rent.
“This is a killer,” wrote Roth, Manhattan’s second-largest commercial landlord, in his annual letter to shareholders released Wednesday.
The costs of securing new tenants amount to more than $40 per square foot over a 10-year lease, Roth said. That’s a painful sum considering Vornado says the weighted average rent in its Manhattan office buildings, including the impact of free rent, is $100 a square foot.
Piper Sandler analyst Alexander Goldfarb said the costs “jumped out” because they erode profit margins at Vornado, which owns 20 million square feet of office space around the city, including at 1290 Sixth Ave. and the Farley Office Building, among other locations.
“Office ain’t for the faint of heart, for sure,” Goldfarb said in a client note.
Roth, who has more than 50 years of experience in real estate, said that his firm is “clear-eyed and realistic” about near-term challenges. In the coming months mortgages will have to be refinanced at higher rates for such properties as 280 Park Ave. and 731 Lexington Ave. He advised Vornado will “certainly have a few workouts to deal with over the next couple of years.”
“That goes with the territory,” he said.
Roth said he’s optimistic Vornado will weather the storm thanks to its attractive properties; plus, there won’t be much new office space to compete with thanks to hostile financial markets. He described 245 million of New York’s 422 million square feet of office space as “old, tired, obsolete, and well past their sell-by date.”
“Notwithstanding all the noise, it’s important to note…that our business units have by and large, and in the aggregate, held up very well,” he added. “Interest rate increases and other below-the-line items have, of course, taken their toll.”
Roth also explained in his letter why he withdrew from bidding for a casino license.
He said tenants leasing space at Penn2, his recently renovated tower next to Penn Station, would not want to work across the street from a casino on the site of the demolished Hotel Pennsylvania. Penn2, he said, will generate $100 million in incremental income and more than $2 billion in incremental value. He put the odds of any bidder winning a casino license at no better than 10%.
“Two billion dollars of value creation vs. a 10% chance in a long-tailed governmental process – this was an easy call,” he wrote.
Aaron Elstein , 2024-04-11 20:44:32
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