The Real Deal New York

Vornado sees “no deterioration” in NYC office market: Roth

Facebook, AOL each take additional space at REIT's 770 Broadway

February 17, 2016 01:03PM
By Rey Mashayekhi

61 Ninth Avenue and 512 West 22nd Street in Chelsea, and Steven Roth

From left: 61 Ninth Avenue and 512 West 22nd Street in Chelsea, and Steven Roth

UPDATED, Feb. 17, at 1:26 p.m.: Vornado Realty Trust chair and CEO Steven Roth said the real estate investment trust sees “no deterioration in the New York office business” ahead despite concerns over slowing job growth in the city and rising economic uncertainty.

While acknowledging that “a huge deterioration in the economy” would mean “all bets are off,” the city’s office leasing economy “benefits from an enormously diverse business community” that insulates it from depending on any one industry, Roth said on Vornado’s year-end earnings call Wednesday.

In 2015, it was the financial services sector that “emerged as the top driver of leasing,” David Greenbaum, Vornado’s New York Division president, said. Financial services tenants grew to represent a third of all leasing in the city office market, he noted, with the shift toward cash-rich hedge funds and private equity firms having “a notable impact” on rents.

Greenbaum cited 138 leases valued at north of $100 per square foot signed citywide last year, and said Vornado was responsible for 28 such deals tallying 534,000 square feet of office space – 25 percent of the REIT’s total leasing activity in 2015 and 20 percent of all “triple-digit deals in the market.”

During the earnings call, Vornado confirmed that Facebook has signed on for an additional 80,000 square feet at 770 Broadway, taking the social media giant’s total footprint at the 15-story building to 355,000 square feet. Facebook had signed a previous, 80,000-square-foot expansion at the Astor Place office property in February 2015.

Mark Zuckerberg’s behemoth wasn’t the only famous tech name to increase its space at the landmarked building — Verizon subsidiary AOL is also taking an additional floor that gives it a total of 308,000 square feet at 770 Broadway.

Greenbaum said Vornado facilitated AOL’s expansion at the property by moving construction firm Structure Tone to 330 West 34th Street, where the company recently agreed a 15-year, 82,000-square-foot lease for its new headquarters.

Asking rents at 770 Broadway now touch $105 per square foot. The REIT announced last week that it had completed a $700 million refinancing of the office building that brought it net proceeds of $330 million.

As far as commercial investment sales, Roth said there are “fewer hysterical bidders” for high-priced office properties than seen in recent years. But he added that the current economic “swoon” and volatility in the capital markets could work in the real estate market’s favor – leading to “an extension of the low interest rate, easy money environment we have found ourselves in for years and years now.”

Despite concerns – shared by Vornado’s rival office REITs — over a slowdown in job growth in the city, Greenbaum was bullish on the city’s economic engine. He noted that while the city has projected lower job growth in 2016, New York is still on track for “a very healthy [job] growth rate of 1.7 percent” this year.

Vornado signed around 2.3 million square feet of New York City leases across 165 transactions in 2015, and achieved its “highest ever average starting rents of just under $79 per square foot,” Greenbaum said.

He also pointed to Vornado’s investment in ground-up, “boutique” office buildings in Chelsea – at 61 Ninth Avenue and 512 West 22nd Street – and cited the company’s belief that the Manhattan office market’s shift to the West Side means “these buildings will be the trophy assets of the future.”

Last year was also a lucrative one for Vornado’s retail business, with the REIT hammering out deals with Victoria’s Secret, at 640 Fifth Avenue, and the Swatch Group, at the St. Regis Hotel’s retail condo spaces – with the aggregate starting rents from those deals clocking in at $70 million.

Roth also offered more details on Vornado’s plans to combine its One and Two Penn Plaza office buildings into a massive, 4.2 million-square foot complex — noting how the properties’ location atop “the busiest train station in North America,” and in the center of what “the marketplace calls the new West Side,” presents a “tremendous opportunity” for the company.

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