Good morning, and welcome to the Vornado Realty Trust second quarter 2018 earnings call. My name is Christine, and I will be your operator for today's call. This call is being recorded for replay purposes. All lines are in a listen-only mode. Our speakers will address your questions at the end of the presentation during the question and answer session. At this time, please press star, then one on your touch-tone phone. I will now turn the call over to Ms. Catherine Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust second quarter earnings call. This afternoon, we issued our second quarter earnings release and filed our quarterly report on Form 10-Q with the Securities and Exchange Commission. These documents, as well as our supplemental financial information package, are available on our website, www.vno.com, under the investor relations section. In these documents and during today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-Q, and financial supplement. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from these statements due to a variety of risks, uncertainties, and other factors. Please refer to our filings with the Securities and Exchange Commission, including our Form 10-K, for more information regarding these risks and uncertainties.
The call may include time-sensitive information that may be accurate only as of today's date. The company does not undertake a duty to update any forward-looking statements. On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer, and David Greenbaum, President of the New York Division. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer, Joseph Macnow, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer, Mark Hudspeth, Executive Vice President and Head of Capital Markets, Matthew Iocco, Executive Vice President and Chief Accounting Officer, and Thomas Sanelli, Executive Vice President and Chief Financial Officer, New York Division. I will now turn the call over to Steven Roth.
Thank you, Kathy. Good morning, everyone. Yesterday, we posted second quarter numbers that I can say are, once again, the best in town. Here's the math. FFO as adjusted was $0.98 per share as compared to $0.95 per share for the prior year's second quarter, a 3.2% increase. On a cash basis, FFO as adjusted was $0.96 per share, as compared to $0.88 per share for the prior year's second quarter, up a very strong 9.1%. Cash basis NOI was $341.9 million, up 5.6% from the second quarter of 2017. This quarter's company-wide cash basis same-store NOI increase was 7.0%, comprised of New York Office up 11.0%, retail down 1.3%, with the total New York segment up 5.9%. theMART up 10.8%, 555 California Street up 23.8%. This quarter's leasing activity was robust.
We leased 611,000 sq ft of New York office space at a record average starting rent of $88.28 per sq ft. The mark-to-market increase on 502,000 sq ft of second generation space was 41.3% GAAP and 28.4% cash. We leased 49,000 sq ft of street retail space at an average starting rent of $165.98 per sq ft, call it $166. The mark-to-market increase on 38,000 sq ft of second generation space was 11.6% GAAP and 8.7% cash. At theMART, we leased 50,000 sq ft at an average starting rent of $51.66 per sq ft. The mark-to-market increase on second generation space was 9.4% GAAP and 1.6% cash. As David will tell you in a minute, across the board, we are full. All of these metrics are very strong and industry-leading.
These numbers validate why we believe theMART and 555 California Street have a lot of room to run. Our office business continues to perform very well. As I have said before, we are experiencing robust demand from all manner of industries in all of our sub-markets. Our tenants are optimistic, aggressive, growing, and upbeat about New York. As you can see from our New York office mark-to-market cash increases of 50.3% in the first quarter and 28.4% in the second quarter, great things happen when rents reprice. The best example of this to come in New York, and probably in the country, is our Penn Plaza assets. Here we are physically transforming One Penn Plaza and Two Penn Plaza, which aggregate 4.2 million sq ft.
Our efforts here will take in-place rents for these assets from the low $60s per sq ft to market rents approaching $90 per sq ft. These assets are in the heart of the new New York, adjacent to the Hudson Yards and Manhattan West developments, and sit literally on top of the busiest train hub in North America. I can't say it enough that we have actively positioned our portfolio so that a full 50% of our office assets are located in the fast-growing West Side sub-markets. Retail continues to be soft.
While I am certainly not calling a bottom, there is noticeably increased retailer activity and tours, albeit at rents in most sub-markets substantially below the top tick. We reaffirm our previous guidance that retail cash NOI will not go below $304 million, and we still expect GAAP FFO, as adjusted for the year, to be flat, albeit very nicely positive on a cash basis. The office investment sales market remains healthy but disciplined, with volume up 15% year-over-year. Demand and pricing is very strong for assets in the South and West of Manhattan and for deals under $400 million, a function of investor preference to keep check sizes smaller at this point in the cycle. Pricing for large assets is stable, though bidding pools are thin, and it's taking longer to execute.
I would note the just-announced $900 million sale of Terminal Warehouse, a 1.1-million-square-foot, 130-year-old warehouse-type building bounded by 27th and 28th Streets and 10th and 11th Avenues, which just so happens to be across the street from our 260 11th Avenue. 260 11th, which is currently fully leased, is on deck for our next generation of transformations. We are working here with the renowned architect, Richard Rogers, to reimagine this brilliantly located asset. By the way, the Terminal sale comes right on top of the blockbuster Chelsea Market sale to Google as another data point in the red-hot Chelsea market. There continues to be very little sales activity in the retail sector due to both a lack of quality product on offer and understandable investor skittishness. Pricing is clearly off for everything except prime, triple-A, well-leased assets.
I would note that we are beginning to see the first signs of distress, where retail assets that were bought at the top tick and loaded up with debt are starting to struggle. In many cases, the mezz debt, mostly made by non-bank lenders and debt funds, and in some cases, even the first mortgage, will be impaired. Debt markets for New York assets remain as liquid and strong as we have seen them, with all markets wide open. Although rates are up, spreads continue to remain tight, keeping all-in coupons at attractive levels. We have a highly liquid fortress balance sheet with $3.8 billion in liquidity, reasonable leverage, and well-staggered debt maturities. David?
Steve, thank you. Good morning, everyone. Both total private sector, as well as office-using employment in New York City, continues to grow to record levels, albeit at a bit slower pace than in recent quarters. For the first half of this year, TAMI sector growth has been particularly robust at 7,000 new jobs, offset by slight declines in financial services and professional business services. This dynamic is yet another indicator of a phenomenon I have spoken about in recent quarters, which is the health and durability of the New York economy that has multiple growth engines. In 2017, it was financial services and professional business services that powered the job growth. For the last six months, it's been the TAMI sector that's driven the growth. This diversity is a key underpinning of a very durable period of steady job growth.
No surprise then that Manhattan leasing activity remained robust, with 9.1 million square feet of new leases for the quarter. Absorption was a positive 2.8 million square feet, bringing the total year-to-date to positive 4.2 million square feet for the first half of the year and dropping the vacancy rate to 8.8%. Large deals continue to drive the market, with 13 new leases greater than 100,000 square feet in the second quarter, two of which were our deals. Average asking rents in Manhattan are now hovering at $75 a foot and significantly, for the first time, led by rents in Midtown South. The overall market remains strong.
Turning now to our own performance, as Steve noted, we turned in another very strong quarter in our New York office business with 611,000 square feet of leasing activity and 37 transactions at average starting rents of $88.28, a new high water mark for us with very strong mark-to-markets of 41.3% GAAP and 28.4% cash. Importantly, locking in these robust rents for term with an average lease term of 10.5 years. In the quarter, we completed two substantial growth deals for anchor tenants at 770 Broadway and at 1 Park Avenue. At 1 Park, NYU grew its healthcare-related tenancy by 110,000 square feet across three floors. When we first acquired 1 Park Avenue in 2011, NYU occupied 144,000 square feet. With this most recent lease, NYU now occupies 632,000 square feet, a quadrupling of its tenancy.
This expansion by NYU is reflective of continued growth in New York's healthcare sector, which over the last 12 months represented almost 37% of the city's new jobs, more than any other sector. At 770 Broadway, our anchor tenant expanded again by 240,000 square feet, taking its total space in the building to 755,000 square feet. At Penn One, we executed 10 leases representing 70,000 square feet at average starting rents of just under $70 a foot. Our office occupancy remains very strong at 96.6%. Our remaining 2018 expirations total 397,000 square feet, including only three blocks larger than 25,000 square feet. This includes Young & Rubicam's departure from 80,000 square feet at 825 Seventh Avenue, where we and our 50% joint venture partner are undertaking a significant redevelopment.
More than a third of our remaining 2018 expirations are at Penn One where, as Steve mentioned, we will embark on a major upgrade later this year. Our pipeline remains strong at over 1.1 million square feet, including 260,000 square feet of leases out in active negotiation. On the development front, we will deliver two top-quality boutique new builds in the third quarter, 512 West 22nd Street, directly on the High Line, and 606 Broadway at the gateway to SoHo. At the Farley building, Skanska's work on the dramatic new Moynihan train hall continues at a rapid pace. 75% of the new escalators down to track level have been installed, and the first glass will appear in the mid-block skylight in the next month, while framing of the acre-sized skylight over the train hall is well underway.
We've commenced the demolition of the old post office installations to begin the preparation of the future office floors, which will be available for tenant fit-out in a little over two years, and are busy with tours and RFPs, both for the 730,000 square feet of office space, as well as the 120,000 square feet of ancillary retail train hall space. The bottom line for our office business in New York is our industry-leading same-store growth of 8.3% GAAP and 11% cash. Let me now turn to our best-in-class street retail business. For the quarter, we signed eight retail leases totaling 49,000 square feet at mark-to-markets of positive 11.6% GAAP and 8.7% cash. The retailer flight to quality continues, and activity has increased this year as brands begin to take advantage of lower asking rents and prime available corners.
After a solid holiday season, the luxury sector has begun to reenter the market, but only for the very best locations. We signed a lease with Celine, an LVMH brand, at 650 Madison Avenue, moving them from 71st Street to one of Madison Avenue's most heavily trafficked corners at 59th Street. Our retail occupancy stands at 96.3%. For the second quarter, our retail business was basically flat, with a small same-store decline of 1.5% GAAP and 1.3% cash. Turning to theMART in Chicago, it was a quiet quarter with no new office leases. No surprise when you consider that the office space is 99.5% leased. Same-store growth was strong at 5.2% GAAP and 10.8% cash. As we've mentioned over the last couple of calls, we have a large lease with Publicis that expires in Q3 that is well below market and will continue to drive our same-store growth.
While the office leasing was quiet, we signed 19 showroom leases totaling 50,000 sq ft at average starting rents of just over $52 a foot. TheMART, which is the commercial hub of River North sub-district, soon will also be the cultural heart of the district with the launch of our Art on theMART project. It's a nightly video projection on the 115,000 sq ft masonry facade of the building, equivalent to a 2.6-acre canvas facing the Chicago River. In announcing the installation, Mayor Rahm Emanuel described the projection as the largest permanent art installation in the U.S. We hope you can join us in Chicago on Saturday evening, September 29, as we launch the inaugural exhibition. Finally, at our 555 California Street complex in San Francisco, we've also been very busy.
In our last call, I told you that we had completed the lease-up of the redeveloped historic 315 Montgomery Street building. Today, I'm pleased to tell you that in the early days of the third quarter, we signed a lease for the entirety of the iconic Cube, the former Bank of America banking hall. We are presently well underway on a $45 million redevelopment of this grand building that was purpose-built as a retail bank, but which will now become a flagship 77,000 sq ft coworking environment for the recently launched Spaces division of Regus IWG, the publicly held coworking giant. We're very proud that IWG selected this highly visible site to showcase its latest offering.
We've also been active in the tower. Within the last week, we executed a lease with Bank of America to expand by 30,000 sq ft, bringing B of A's total occupancy in the building to 316,000 sq ft. With the lease with IWG as well as Bank of America, we effectively have now brought the entire 1.8 million sq ft 555 California Street complex to 100% occupancy. Same-store growth for this asset in the second quarter continued very strong at 13.5% GAAP and 23.8% cash. For the business as a whole, our same-store growth was 4.7% GAAP and 7% cash. With the best office and retail properties in the best sub-markets, we remain very confident in our position and our prospects.
Thank you, David. We'll be happy to take questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Each caller will be allowed to ask a question and a follow-up question before we move on to the next caller. Our first question is from Steve Sakwa of Evercore ISI. Please go ahead.
Thanks. Good morning, everyone. Steve, I was just wondering if you could maybe talk about sort of the portfolio repositioning that Vornado's been going through over the last couple of years. Where would you describe it in terms of its evolution, meaning, how much do you think you have left to sell, including some of the stock positions? What do you think the timing is behind those?
Good morning, Steve. Pardon me. First off, our office business, in N.Y. and in Chicago and San Francisco, we think has a perfect mix of assets. As I said in the call, as I've said over the last number of quarters, we think we own the best asset in San Francisco. The rents are rising. It's 100% leased now, and the growth rate of the mark-to-market in the building is pretty extraordinary. We think we've created an enormous amount of value in San Francisco. That asset is a keeper. Ditto in the theMART in Chicago. I'm still in the old days. Ditto the theMART in Chicago, where we think we have created the most amenity-centric, 3.7 million sq ft asset. That asset has lots of room to run. That's a keeper.
In New York, as you know, following us for a long time, we are wildly enthusiastic about the prospects for Penn Plaza, the validation of the neighborhood, at the bullseye in what I call the new New York. We think that the rent growth that we can achieve there is quite extraordinary, will be industry leading, and is certainly the best in New York and maybe even in the country. We have curtailed our acquisition activity in the face of rising prices. I think that I can say right now that I don't think I have any remorse on any asset that we haven't bought in the last two or three years, and we've looked at every single one of them, and chose to be extremely disciplined.
With respect to the mix of our portfolio, where we have been adding assets in the West Side market, in the Chelsea market and what have you, we think we've been exactly correct in that. We think that's where the rapid growth will be. I would point to the 61 9th Avenue building that we built as a new build, where we achieved $140 rents, which are, I might say, handsomely higher than even Park Avenue. We announced some quarters ago that we have identified over $1 billion of non-core assets that we have on the for sale list. Okay? They are legacy real estate fund assets. They are some securities positions. They are some other assets that don't give into our core. We are actively involved in marketing all of those assets, but it's slow going.
Some of them are illiquid, some of them are complicated, some of them have a little bit of hair. We will accomplish that program, but it will take us a little bit more time. What else do I need to answer your question, Steve?
That's it for now. Just as a follow-up, you mentioned the distress in the retail area. It sounds like you might find some acquisition opportunities there. What is your sense as to kind of the timing and when some of those may fall in your lap? Is that a second half of 2018 event, or do you think that's more of a 2019 and beyond event?
Certainly not 2018. This game plays out very slowly. What I referenced was, we're beginning to see struggling cracks. We're beginning to see lenders who are out of the money. We're beginning to see mezz lenders and debt funds and private lenders beginning to become aware of the fact that they are impaired. The process will take time. If we can buy an asset at 10% discount to what it sold for three or four years ago at a top tick, we wouldn't touch it with a 10-foot pole. What I'm saying basically is that we will get into that market, and we will become an aggressive acquirer, but we will do it at the right time in the cycle and at the right prices.
Thank you.
Next question, please.
Our next question is from Jamie Feldman of Bank of America. Please go ahead.
Great. Thank you. Starting with the chairman's letter and in recent conversations, there was a lot of talk about methods to close the NAV gap. Steve, I was just hoping to get your latest thoughts on any activities that might be in process or just where your head is in terms of, I know you guys are doing a great job operating, but any other thoughts out there?
I fluctuate between being frustrated and pissed off. You can probably quote me on that, which I'm sure you will. We're not alone in the fact that our stock sells at a discount. If you go down the roster, everybody does. Some a little greater, some a little less. There is, in New York, all the New York-centric operators sell for approximately the same discount with the exception of Boston Properties, which sells at a discount, but a little bit better discount, a little bit less of a discount.
I wrote in my letter that these discounts seem to be chronic, and they seem to be, I think I said in my letter that private LP investors, which represent 90% of the property ownership in the country, 90% are willing to pay 100%-105% for assets that they are going to hold for a very long time on behalf of their pension peers or their employees or whatever the fund is. Public company investors seem to be willing to pay not more than 80% of the value of an asset. This is a chronic thing. Now we have done, I think, way more than anybody else has done to begin to handle the difference between public and private market values. We've spun off $10 billion of assets in two companies, by the way, which are fairing and performing very well.
We think that was a great transaction. We've sold $5 billion or $7 billion of additional assets. We got ahead of the curve and sold our mall assets before the market break, et cetera. I've said this and it's been speculated, but we're not done yet. We will continue to strive to restructure, so as to get the maximum value we can, the optimum shareholder value that we can. There's been speculation we may spin this, we may spin that, we may do other things. I can only tell you that we are actively thinking about every possibility, and we're not done yet. It's premature for me to speculate or to say anything about what our plans might be in the future.
Okay. That's helpful.
Thanks, Jamie.
Sure. Then can you just walk us through, just as we think about street retail for the back half of the year or even into maybe first half of next year, just what the major moves are in terms of large NOI moves in and out of the portfolio?
We have guided to a, that the portfolio will not go lower than $304 million of cash. Okay? I shouldn't say this, and Joe's probably going to slap me, but I will. As we go through the math, we think that we will better that number. Maybe even better that number by a fair amount. Basically what's going on is that on some of the known move-outs, we have chosen to give very short-term leases to tenants at low prices. That nicks our numbers. We have one or two properties which will go vacant over the next year or so, which we do not yet currently have a replacement tenant for. If we got a replacement tenant, it would be for lower rents than we are losing. It's that which makes up the retail.
On Fifth Avenue and Times Square, which represents a full 50% or more of our retail values, we are 100% leased for term, and that income is rock solid and will rise as the contractual increases in rent come about. The only vacancy that we have coming up, which we have reported multiple times, is 689 Fifth Avenue, where we have a lease expiry sometime in the middle of next year. I forget the exact date. The lease income on that is below market, so we expect to achieve an increase there. I think there you have it.
Thank you. Our next question is from Manny Korchman of Citi. Please go ahead.
Hey, good morning. It's Michael Bilerman here with Manny. Steve, I wanted to come back to sort of the strategic alternative, strategic options, everything being on the table. Just in the sense of time, at what point do you start to eliminate certain things and tell the market, "XYZ is not going to work. We're going to go with ABC instead"? When should the market be prepared to get sort of an update, in terms of everything being on the table versus things being removed, and certain paths that you want to go down?
Michael, hi. How are you? What you're asking is something that we can't do and we shouldn't do. We have to run the company. It's really not appropriate for us to communicate what happens in our boardroom and what happens with our bankers as we deliberate and as we go forward. We just can't do that, okay? We have a history of activity. We have a history of doing smart things, and we're going to try very hard to continue that, but we just can't get into speculation or premature announcements of things.
Right. It's just the sense of how critical it is at this juncture, whether we should be expecting things to come about this year versus time that just goes by and the stock trades up, trades down, trades sideways, wherever it may go.
The answer to that is the same answer as I just gave you 30 seconds ago.
All right. On 260 11th Avenue, I know you bought 537 West 26th as well last quarter, in the first quarter. Can you talk a little bit about maybe the entirety scope in terms of what you have as of right build with the assemblage that you have, the timing upon which you would commence something, and something in terms of total additional capital that may be required for it?
Wow. 260 11th Avenue is a great asset. We bought it, how many years ago, David?
Three.
Three, four years.
2015.
Three years ago, which I think was exactly the right time to invest there. It's directly across the street from Starrett-Lehigh. It's catty-corner across the street from this terminal warehouse that just sold for $900 million. It's three blocks south of Hudson Yards. It's a pretty terrific asset. It's the old Otis Elevator headquarters. It's exactly the kind of asset that our creative class tenants want. By the way, we also have had look-sees from some more traditional businesses who want to transform their business by attracting and recruiting a different kind of team. There's that. Now, we own the building. We also own a lot, which is vacant, so we will expand the building with a new build that will, what's the word, David? That will-
Integrate?
Integrate. Good. Thank you. That will integrate into the Otis Elevator building. We have brought in Richard Rogers, who has an incredibly interesting skill set, to reimagine this building and meld the old and the new into the modern age. We think we're going to create something that's pretty extraordinary. We bought something that's called Cedar Lake, which is a one-story landmark district event space. How big are the floors there, David? 10,000 feet?
Yes.
Which has 10,000 square feet. We bought it as an adjunct. It's contiguous to, we bought it as an adjunct to 260 11th because if you think about it for a second, a company that goes in and takes that whole building can use that adjacent space for presentations, for sales, for events, for whatever. We thought it was interesting. By the way, that's the only building in town that has that kind of an adjacency. The building is fully leased now to one tenant. What we're doing is we're going through landmarks. We're preparing for a reimagination of that building. We will not start that until maybe three years from now, two years from now. That will involve canceling the lease, getting all our approvals, getting ready to go, et cetera.
What might accelerate that is if a tenant comes in, by the way, we're not really actively marketing the building. If a tenant comes in, the community knows about the asset. If a tenant came in and had to have the building, maybe we would accelerate. We're not going to start this thing for, I guess, three years. We are not ready to release budgets or statistics on this. I think that's my answer.
Okay. Thank you.
Thank you, Michael.
Thank you. Our next question is from Vikram Malhotra of Morgan Stanley. Please go ahead.
Thanks for taking the questions. Maybe just some specific questions about street retail. Within the portfolio, I believe you had expirations coming up on Madison, three stores in particular, which I think were likely to move out 830 Madison. Can you give us any update on those three tenants?
We expect those tenants will likely vacate. We do not have replacement tenants for them yet.
Okay. Just on that street retail, if I look at next year, and I'm not looking for guidance or any specific number, but just for the leases signed, essentially, Sephora, Levi's, and Forever 21, can you give us a sense of the cash NOI contribution from those three in 2019?
Who's got that number?
Levi's, Sephora, Forever 21.
Faster.
It's going to be roughly 20-23.
Tom says it's going to be roughly 20-23. I'd like to have the accurate number.
Okay.
If I had it.
Yeah, I can follow up with you guys.
We'll take your next question, and then when we find the number, we'll tell it.
Okay, just last thing. Some of your peers, especially in New York City, have called for a rebound in Midtown rents maybe during the next six to nine months. Maybe, can you give us your sense? Do you agree, disagree? What are you seeing in terms of rent trends in your markets?
What we're seeing is the West Side is on fire. What we're seeing is Penn Plaza is doing wonderfully well. What we're seeing is that space is getting tight. The economy is very strong. People want to expand. There is activity in the traditional Midtown market, but it is nowhere near as vibrant as the West Side market. What's more, we are looking over our shoulder at the new supply that is coming as a result of the West Side Hudson Yards, Manhattan West development sucking millions of feet out of the traditional Midtown market. It's difficult to understand what that will do. There are some folks who think that job growth will absorb that space. That may be a little bit aggressive, but over time, certainly it will be.
What we're saying is that we're 100% leased at our Midtown assets, but the growth that we are realizing, the extraordinary growth comes from the West Side.
What's that?
We can get back, Vikram, to the.
Okay. What's the number?
20 You want to say it?
In 2019, the cash coming out of those three leases is approximately $20 million. By the time they fully stabilize in 2020, it's about $28, $29 million.
Got it. Okay. Thank you very much.
Forever 21, Levi's, Sephora. Forever 21, don't forget that. Okay. That's the number.
Great. Thank you very much. Thank you.
Yes, sir.
Thank you. Our next question is from John Kim of BMO Capital Markets. Please go ahead.
Thanks. Good morning. A question on theMART. The office conversion has been a success. Steve, you mentioned there's still room to run. In this market, you have the owners of Willis Tower and the main post office, basically trying to emulate what you've achieved on large scale, iconic buildings. I'm wondering how this impacts your ability to achieve the kind of rents or growth that you've had so far, going forward.
The answer is that the room to grow and the room to run is that we have, for example, the Publicis How do you pronounce it? Publicis?
Publicis.
The Publicis lease that expires, is in the low $30s, and the market rent for that space is in the mid to high $40s. There you have a 25%-35% increase right there. Almost every piece of space that we will get back and roll over is under market and what have you. Okay? That's step one. Step two is that we have the dominant building in the marketplace. We have the dominant building in the marketplace by far. We have a franchise, and we get a premium to our competitors, which I believe will hold. If it doesn't hold, we're still doing great. Okay? We own this building. We have the lowest bases in town, and the most attractive space in town.
We do not shy from competition, because the competition makes the district that our building in, makes it even better and more in demand. For example, if there were one building on Park Avenue, Park Avenue wouldn't be Park Avenue. What makes Park Avenue is the 50 million sq ft of tenants that are there doing business with each other, et cetera. We can't stop the competition, and we'll all be fine.
I might just add that over the next three years in the building, there's a total of about 425,000 sq ft, all of which, as Steve referred to, are rents well below market office space. That represents 10% or 11% of the building. It's not a significant number.
Got it. Okay. Then a question on retail.
By the way, if you haven't seen the building lately, give us a call, and we'd love to show it to you. That invitation, of course, is open to everybody on the call.
We'll take you up on that.
What's that?
We'll take you up on that.
Okay, good. We want you to. By the way, similarly, I think Nareit, this November, is in San Francisco, and we intend to do tours and an event of 555 California on that occasion. You're all invited to that, too.
I had a question on retail and the impact of discount retailers like Five Below entering Fifth Avenue. I realize that's a few blocks south of where most of your assets are, I'm wondering, how do you think this impacts the perception of Fifth Avenue retail and potentially rents and values going forward?
I don't know. The Five Below thing has sort of a desperation look to it. The difference between Upper Fifth Avenue and Lower Fifth Avenue is enormous. The demographic and profile of the customer, of the street traffic, of the occupants, of the tenants, et cetera, it's like night and day. There's that. By the way, the rents are multiples. Upper Fifth Avenue's rents are multiples of what Lower Fifth Avenue is. I don't think it'll have any effect. It's not something that I worry about, actually. While Five Below may be going 20 blocks south or something like that, Nike is opening their world flagship, and you have to come see it, adjacent to our Victoria's Secret store. We share the same block. We're on the 51st Street side, they're on the 52nd Street side. It's a seven-story behemoth. It's going to be extraordinary.
I'd rather focus on what Nike will do to traffic and values rather than what Five Below will do.
Thanks. If I could just squeeze one more in. This morning, we had the announcement of Brookfield buying Forest City, and you talked about a number of office companies trading at significant discounts to NAV. I'm wondering if you think we'll see more consolidation or privatizations in this sector.
Possibly.
Can you argue that there's an advantage to being private rather than public?
Say that again.
Is there an advantage to being private and privately run versus public company?
That's too loaded a question for me. I will tell you that the business format, the asset-light business format of the real estate funds is, one might think, a better format than the public companies, which basically are asset heavy. There's that. I can tell you that the comp for the private real estate companies and funds is better than the public companies by a wide margin. I can tell you, in easy money times, such as this, which may be coming to an end, but may not be, the advantage that the public companies have access to capital does not exist. The private companies have as much access to capital, if not more. It's fun to be the head of a public company. It's fun to be the head of a private company. It's all fun.
Great. Thank you.
Thank you. Our next question is from Daniel Santos of Sandler O'Neill. Please go ahead.
Hey, good morning. Thanks for taking my questions. I was wondering if you could comment specifically on what the tax implications would be if you were to sell some of those non-core assets you've identified.
Joe?
Daniel, we said that originally there was about $1.25 billion of assets, we would be able to retain $1 billion of that, meaning that there was tax gains of about $250 million, which would be distributed to shareholders, barring some other event negating that need. That really hasn't changed very much. Look, some assets have been added, like 666 Fifth Avenue, some assets have been sold. Over $100 million has been realized to date. That's roughly the numbers. About $1 billion of the $1.25 billion would be retained by us.
Got it. That's helpful.
That's pretty good and pretty attractive, we think.
Agreed. My next question is on Crowne Plaza.
By the way, Dan, Daniel, let me just say one last thing about that.
Sure.
You know that it's not a free lunch. These assets have, on average, a return to them, this $1 billion that we're talking about, of in the 4%-5% range. Selling them is dilutive until we replace those earnings. We're very cognizant of that. The second thing is that we spend a lot of time understanding what the clearing price and the clearing strategy of knocking those assets out more quickly is. It is not impossible that the clearing price to get speed on that might be $100 million less than we've projected. Which, in the scheme of things, is a great deal of money, but in the scheme of things, it's not. Thanks.
Got it. That's helpful. My next question is on Crowne Plaza. I was wondering if you could give us an update there and your ability to rebrand it.
We have a franchisee, and we have a relationship. There is litigation pending about that relationship, other than that, I have no comment.
Got it. Thank you.
Thank you. Our next question is from Jed Reagan of Green Street Advisors. Please go ahead.
Hey, good morning, guys. Just to follow up to an earlier question in terms of rent growth, can you quantify how much net effective rent growth you're seeing on the West Side, the Penn Plaza, Chelsea area? Then maybe related to that, just curious how you'd characterize concession trends across Manhattan at this point.
David?
Jed, I'll first talk about concessions, which I think have been flat. As we look at our numbers, we went back over the last 3 years, and on average, what we look at is the metric that I think most of you guys consider, TIs per square foot per annum as a percentage of the starting rent. Obviously, as the starting rents have significantly increased, that in this quarter, the number of $88.28. Our average TIs as a percentage of starting rent were 7.8%, which to us is really well contained, and it's been very level in the 7%-8% range over the last 36 months. We're seeing really no further pressure in terms of concessions and seeing those numbers stabilized.
Obviously, that's having a positive impact on net effectives, as we have seen continuing rent growth in the markets that Steve talked about, the West Chelsea market and also in our Penn Plaza district, where, as I said on the call, rents for this quarter, average rents for all of our leases at One Penn were at $70 a foot.
Okay. That's up and on a year-over-year basis recently. Is that low single digits, mid-single digits, or sort of hard to put your finger on it?
Listen, it's all dependent, obviously, on which pieces of space are coming up in the buildings. As you look at that whole West Side district, that's where we have really seen what I'll refer to as a fairly explosive growth in rents over the last number of years. Over, I'd say, the last 12 months or so, those numbers on the West Side basically have been stable to, as you're fairly commenting, probably low single-digit growth.
Okay, thanks. I guess sticking on the West Side, any update on how you guys are thinking about plans at Two Penn Plaza? Do you have any more clarity on whether you'd go the redevelopment route or potentially a full tear down and rebuild?
I think we said on the last call or the call before that we have abandoned the tear down. We are full steam ahead on the redevelopment and reimagining Two Penn, which will go into a complex with Two Penn and One Penn connected into a 4.2-million-square-foot complex. The advantage of having a campus like that, which is on top of the train station, you can get from both buildings to the train station without going outside into the rain and snow. You can get from one building to the other building with also without going outside, is that we can service our tenants with greater amenities because it's 4 million feet, about 500,000 square feet. The second is as our tenants grow, which is really the lifeline of our business.
As our tenants grow, we can always find space for them for growth in the 4 million feet.
Great. Are you in any position to sort of size the cost of that project and the economics around the Two Penn project?
Not yet. I did say in my remarks that we expect to take the rents from the low 60s to approaching 90s. That'll give you a feel for what we think about the income side of that. Remember, and I know you know this, that we only realize that uptick as leases roll. What we're talking about is the in-place rents are in the low 60s, and we believe the market, when we get done in, I don't know, however long it takes, will be approaching 90. With respect to the cost of the project, we're still involved in bidding and plans and estimating, and we're not ready to release that number.
Okay, great. Thank you.
Thanks, Jed.
Thank you. Our next question is from John Guinee of Stifel. Please go ahead.
Great. Thank you. Hey, David. Looks like you have had stunningly good lease spreads in the first half of this year. Looks to me with an average in-place rent of mid-$80s, that should slow down in the second half. 2019, with an in-place rent of $63, you have a potential to replicate the first half of this year. Is that accurate, or are there not the same magnitude of spreads available for the next 18 months?
I'll first talk for a minute about the second half of this year. There are a number of leases that are coming back to us toward the end of this year, that are at very high rents, which is the reason that you're seeing some average rents of, I think it's about $82 a foot for the space coming up through year-end. On those, most of the math will be flat, and in a couple of cases, there'll be some roll-downs of what have been some very, very high rents. As we look out into 2019 and the future, we remain very optimistic in terms of the spreads that we can achieve on the portfolio.
Okay, great. Steve 2005 to 2015 was the golden age of REITs. Declining cap rates, declining interest rates, rising NAV, positive fundamental, a lot of positive fund flows to the REIT dedicated crowd, a real NAV bias in the way people looked at things. If your crystal ball said to you that's just not going to happen again. There's not going to be an NAV bias in how people underwrite REITs, and if multiples going forward with interest rates going up are more in the 15 to 16 range, which is on a $4 FFO, sub $60 a share for a company like Vornado. If your crystal ball said that to you, would you step up any thought process strategically, or how would you think about things?
Well, first of all, I like you a lot, I don't like your comments. Obviously, we think about that all the time. The answer is yes. I don't know that we see the same level of ugliness in the marketplace that you do, we're prepared for everything. The answer is yes.
Great. Okay. Thank you.
Thanks, John.
Thanks.
Thank you. We have no further questions at this time.
Thank you all very much. We appreciate it. By the way, I think it was my friend Anthony Malkin who made a comment on his earnings call that he was a hero and won the race for the shortest prepared remarks. I'm happy to let him win that. We've completed this call in 58 minutes, which is a record for us. We thank you all very much, and we'll see you on the next quarter.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.