I'm just going to give a brief comment or two, and then let's jump right into Q&A. Everybody generally knows Vornado. What I would just say is, I think if you look at where we as a company are now after the last few years, we're as optimistic and well-positioned as we've ever been. We own about 28 million sq ft . We have reshaped the portfolio to continue to add, upgrade the portfolio from a quality standpoint, adding assets like Park Avenue Plaza, 623 Fifth Avenue. We're about to do a 350 Park. We think we have the premier portfolio in New York City, both office and street retail. We'll talk about market fundamentals. They're arguably as good as they've ever been in my 37-year career. Certainly, they're better than they've been in 20 + years, and why it's going to stay that way.
We have de-levered our balance sheet over the last several years, continuing to make progress there. We bought stock back. We'll talk about that as well, if you want. I think we've taken a number of positive steps. The stock has performed a little bit. It's retrenched here recently. I think that it's sort of shocking given the fundamental backdrop, where certainly New York City office stocks are trading. Why don't we jump into Q&A? The only other thing I'd say is hopefully all of you have been over to the Penn District, seen what we've done there over the last six, seven years, transforming that area of the city. I think it's remarkable. The results, I think, speak to the transformation. We're still in the early innings there.
There's a lot more to come in terms of what those assets are going to produce and future opportunities coming out of Penn, and we couldn't be any more excited about owning that entire campus, which gives us the ability of unique things that you don't get by owning one or two buildings in a sub-market. Jana, with that, turn it over to you.
That's great, and we'd love to kind of dive into the best operating environment in 37 years. If you could help us kind of understand that a little bit more, characterize the state of the New York City economy, the job market, and then office market.
Let me start, and then Glen should jump in here. I think it all starts with where does talent want to be, right? Talent, particularly young talent, wants to be in New York City at a disproportionate level relative to every other city, and that gap has widened post-COVID. I do not know how many of you have college-aged kids or know people who have college-aged kids. I happen to have two that have graduated. I bet 80% of their friends that were not from New York now work in New York City, and that is generally the case with almost everybody. That does not mean they stay their entire lives, but they build their careers here. Many times do stay. Talent wants to be here. Companies recognize that, and you are seeing as a result of that strong, broad-based demand.
I would say as we sit here today, financial services, legal, accounting, tech, media, every sector is active and is growing, right? Driven by talent here, and therefore, the companies need to be here. You overlay that with, for those companies to attract talent, they have to be in higher quality space in the right locations. That is generally around the two main transit hubs in New York, Grand Central and Penn Station. They want to be in amenitized buildings. Out of that, I think we have said a couple times, 180 million sq ft. You are looking at a vacancy rate now that is tight, particularly in the Plaza District, mid-single digits. You have tight vacancy, you have strong demand. Rents are rising. There is limited new supply, and it is extremely hard to build in this city, both from a cost standpoint, from a time standpoint.
This is not Atlanta, this is not Charlotte, where you can slab up a building in two years, right? We know with certainty what is coming over the next seven years, and it is not much, right? If the demand stays reasonably strong, by definition, you have to see meaningful rental rate growth, right? That is why we are so bullish. Why do you tack on in terms of what else you are seeing?
No, look, I think Michael hit it all. I have also never experienced this market in my career, and I have been at this for three decades also. Just on the street, tenants are growing exponentially, and there is no space. We are seeing huge growth within our buildings. We are seeing tenants in our buildings growing into other buildings we own because they cannot grow where they are. CEOs want to be in New York, period. As Michael said, the talent is here. We track the better building segment, which is about 180 million sq ft, which is Class A trophy, Class A, and new trophy. That vacancy rate is only 6%. If you think about that vacancy rate in the upper half of the buildings, the towers, it is even less. I do not know the exact number, but it is probably 3% or 4%. There is really no space.
We're all of a sudden seeing tenants battling for space in all of our buildings. One thing we love about our portfolio specifically is our mix, where we have really done a great job expanding the Park Avenue sub-district with a real stranglehold now with 623 Fifth Avenue and 350 coming. The dominant Penn District portfolio, where rents are rising daily. The rents are just out of control up there now in a great way for us. 1290 has been an excellent performer, best building on Sixth Ave. We feel great about where we're sitting. We are working nonstop. It was the busiest August of my life. We'll go to the next one.
It was bad, right?
Yeah, exactly. Exactly.
Great. I guess about a year ago at this time, people were very concerned about the change in administration in the city. With the new mayor, just curious if there has been any notable changes on the day-to-day operations or business. Any new policies that you're watching that could potentially be positive or a little bit more challenging for the office market?
Actually, [inaudible] react.
We've seen no change in behavior at all. We haven't lost any leases based on what [Jana] is saying. Nothing so far. It's out there in the ether, so to speak. Everyone thinks about it, but so far, nothing at all that we're seeing on the ground.
I love Ken Griffin's quote. That when all this was happening, "My business is going to be here a lot longer than any administration." I think that's how come these things. They're here long term. Again, the talent wants to be here regardless of who the mayor is. Good, bad, whatever. Companies are growing here. Big tech is growing more here than on the West Coast. Obviously, financial services is the center of the world. Legal is the center of the world. Healthcare. If you want the best of the best, you come to New York City, right? We're not seeing any change in tenant behavior. If anything, as Glen's talked about, we've seen companies' growth accelerate over the last year. That's happening whether person X is mayor, person Y is the mayor. Their businesses are driven by what's going on in the marketplace.
Nothing that has impacted tenant demand, and I don't know that we're going to see it. Look, the Pied-à-Terre tax got a lot of noise. I don't think that's changed any tenant's behavior, and okay, you complain, and then you move on.
Great.
Citadel moved forward with their commitment. I think the interesting thing about Citadel was, if you look back to when we first announced the arrangement, which was in January of 2023. At the time, the way we structured it, you remember this deal was negotiated in 2022. The world was in a different place, right? They thought that they wanted to proceed on a new building, but they weren't 100% sure in growth plans, et cetera. We hadn't designed the building yet. So we said, "Look, let's not force. Let's come up with a structure where both sides have effectively eight years to decide to move forward. If we want to get out anytime, we can put. If you want to never build, you can call and pay a premium," et cetera.
Anyway, it was pretty clear in the ensuing few months that they wanted to proceed. They were refining their plans. So, we first signed up the deal in January 2023, was if the development went forward, they were committing to 850,000 sq ft. Now the official exercise by Ken occurred last year, and then we had until August to make our decision. So we exercised to participate in the venture. So at the time that we committed, Citadel had increased their lease square footage to 1,050,000. So they've grown 200,000 sq ft additionally in that three-year period. We'll see. I'm not saying it's going to grow any more or not, but it's a juggernaut of a business. These businesses, they don't sit around static every day. They're trying to conquer the world.
So, there's a chance it may grow larger, but I just think in that timeframe, not only did they commit, but they upsize their commitment over that timeframe, notwithstanding all the noise.
Maybe since we started with 350 Park, just kind of any updates on demolition progress and possible 25% sale of the JV?
On the demolition, it has commenced, and it will complete in April. We are coming down floor by floor. We are on, I think, the 30th floor now. By April, the building will be down, and then we will start construction of the new tower. All on schedule.
What are you hearing from tenants, brokers, and marketplace?
Everyone wants to see what we are doing. We are presenting actually tomorrow again. We are definitely exposing the project. But we feel great about it. He is taking the 1050 all in the bottom half, other than two floors at the top for the executive center. We have our speculative office block is perfect. It is floors 28 - 56, which includes some early option space where they could grow more over the next couple of years. But we are in the tower with views of heaven and the world and the park. Perfect floor plate to 26,000 sq ft with 16-foot ceilings, no columns, perfection. We are absolutely in no rush to lease that. It is only going to get better and better. But certainly, we are exposing it, we are presenting it, and we are talking to everyone who is out there.
But really, that space, my guess is we will wind up leasing to one, two, three-floor tenants. It will not be a big block user, but we will see. We are out there, and the response has been five-star, unbelievable response to what we are doing.
Tenants are looking that far out already because they are out of space. It is a balance of rent and committing. I would say in terms of 25%, I am not going to comment much on that. We will get into when we close the transaction. We will publish the economics. Confident you guys will be impressed. I think Steve talked about on the call, we are going to try to lay off a little bit, take a little bit of profit and risk off the table, but still own a meaningful piece of the investment. That is the game plan.
I think on the call, Steve said $350 per sq ft rent.
350 at 350 sq ft. That is our marketing slogan. Yes.
Maybe if you can kind of talk about your various sub-markets. What are you seeing with rent growth? Which are stronger than others?
Just on Citadel, what rights have they got in terms of- lots of veto design issues. What do you control? What are they?
The heads-up partnership between us and Ken Griffin. They agree on everything.
Ken Griffin personally is our partner. Citadel is the tenant. That's how the arrangement works.
And power of veto that? Mutual, right? It's a heads-up deal. There's things that relate just to Citadel, we control, and if it's things just relate to Vornado, they control, as you would expect, right?
So finishes. Is this a-
Building's designed. There's nothing to argue about at this point.
Okay. So it's not a vanity project where he's going to overspend.
No. Ken owns 60% of the build. He wants to make money. Trust me.
He cares a lot about the space and the rents and yes.
I think actually one of the more, not just interesting, but positive things is he has thought like a landlord the entire time, right? He constantly says, "Glen, what should we do here? How do we maximize the value of this space?" Right? Obviously, he wants the building to be great for Citadel, but he's thinking about how do I maximize my 60% ownership stake. And Glen, if you tell me we need to put in this amenity, let's do it. If you tell me that this is not good, let's not do it. So, he's listened to the real estate professionals, and he's very focused on that 60% being very valuable.
Is he in the Miami building?
He does, yeah.
Yes.
Yeah.
Great. Maybe chatting about the sub-markets.
Rents are rising everywhere. Particularly for us in Penn. Rents are going up, up. At Penn One particularly right now. We've leased more than 200,000, most recently, with rents running into the $120s. Similarly, at Penn Two, we have another 60,000-70,000 feet of leases out in that same zip code of rents. We're really churning. We're in fifth gear in Penn. Park Avenue, any space we could get back right now. With 280 Park, we're getting back, and those rents keep rolling up, and up. As you know, Park Avenue is just tight as a drum. 1290 similarly. We're seeing rents there in the bottom of the building now in the $90s, which is unheard of based on historical rents that we and others have gotten. We just did a deal of $97 a foot on the sixth floor at 1290, which is a huge rent.
It speaks, I think, to the market, but it also speaks to what we've done with these properties. The redevelopment of 1290 has been off the charts for us. Some of you have seen it recently. The town hall, the rooftop park. We've leased over 600,000 feet off that project now. Of course, you've all been at Penn now, and it's really, at this point in Penn, it's very natural state of affairs. People are coming, we're walking, we're touring, and they just feel and experience the environment we created and everyone's loving it. So, those sub-markets are humming. Sixth Ave, Park, Penn, but really the market overall is hitting on all cylinders. Rents are rising, free rents coming down, and even TIs are starting to tighten. It's certainly a landlord's market, period. It's just clear at this point.
Just pause on that for a second. Jeff, you were there early days. You came. We used to get rents at Penn of $60, $65 a foot, right? We are basically double that now. When we first published our yields, we thought we would get give or take $90 a foot, right? I think you are seeing a combination of obviously strong market and market acceptance of the sub-market and product of what we have done. Notwithstanding that success, we are still at a discount to Hudson Yards, Manhattan West, so forth. We are not new, right? But our amenities are better, and we are better located, and so that gap should narrow, we think, pretty dramatically over time. So, this is round one of sort of the redevelopment benefit, but we think there is a lot of room to run on the Penn assets as we roll those leases over time.
You touched on gaining a little bit more leverage in negotiations with lower TIs. Can you maybe just comment on kind of where those are? How it is free rent, what are tenants looking for? What is going on with term?
Yeah. Term is no issue. We are still in the 10-15 year range. No change at all on that. If anything, people want flexibility for expansion more than I have ever seen because people are growing a lot. Net effective rents are up, certainly in the high single digits, if not at 10% at this point. But net effective rents are up and keep going up every month. So, everything is looking up. The arrows are up on everything. Especially as supply keeps coming down, and then the quality of that supply is really, really coming down quickly. The market is running very fast right now. So we are trying to look ahead every day. We have been increasing rents over the past three months, basically once every week or two in our hallways.
We keep sitting down looking at our rent charts and increasing rents, as we see things and just trying to stay ahead of the market as we are supposed to do.
How much interest in how much of your activity is on the early renewal side as the markets continue to move up?
More and more now. More and more. We're in a couple of those discussions with large tenants right now, which gives us very good leverage on those negotiations. That's a good point, yes. Very much so.
Historically, has there been a spread to where if New York got pricing so far above some other market that people would start to shift to that other, almost like a substitution effect. Has there been a spread? Does it get wide enough?
No.
There's never been that point historically where they've moved for price.
Never for price. No. You see some companies taking space in Florida, Texas. That is different, and those are not big spaces, as you see from the reports, but it has never been about price. It used to be, "Oh, we are going to move to Long Island City or Brooklyn." That never happened either. That was more the price talk and that theory, but that never took off at all.
Maybe downtown. Does downtown sometimes compete on price? No.
The tenants we have talked to are never looking at downtown. It is a totally separate market in every respect. By the way, downtown is performing better also now.
Yeah.
We do not see ourselves interacting with downtown activity at all. If anything, the downtown tenants, we have landed a bunch of them in Penn. They have come up to Penn, many of them. Some of the healthcare companies, insurance companies. So that has been good for us in Penn, but generally, we do not interact with that.
Most big downtown companies were already downtown. They've maybe moved to higher quality buildings. Some move uptown. I can't think of a major tenant that's moved from Midtown to downtown. That's just not where they want to be.
Can you take us through what you think the profile of Park Avenue Plaza acquisition? I think it's got a nine or 11-year term. Is it a future land bank? How do you unlock value with that term? Or is it something you're just happy to sit on and base?
Look, we love the acquisition. If there were five more of them, we'd buy five more. When you have an opportunity to buy a high-quality asset in that kind of location at that kind of price, in our view, no-brainer, right? We basically bought it for, if you think about the value, we're contributing the land at 350. We basically bought Park Avenue Plaza for the land. Okay. Now, there's a building on top of it with good income. So we didn't buy it as a teardown play. Is that a play? Sure. We looked at it, and we evaluated it. That's like in the drawer for 15 years from now. But that's likely not the path it's going on. You have an attractive yield with rents that are 40%, 50% below market, at least. Maybe more than that. Certainly, when the leases roll.
It's kind of a one-way option, right? We have 11-year Walt with built-in bumps, good income, very strong cash on cash yields, given the debt. If any tenants want to do anything before that, they're going to have to come to us and say, "We want to do something." That's already happening. That creates opportunity. So we have a baseline of, okay, we know we're getting this for the next number of years. Assets are not static, right? Companies grow, they get bought, they shrink, whatever the case may be. It results in opportunities to restack that space. I don't even think we closed, and we already had a phone call on this one. We didn't underwrite that. Just literally out of the blue, we're involved, and we have an interest in doing something. So stuff's going to happen there.
If it doesn't, we're fine with that, too. But stuff's going to happen there, and that's going to be positive in our view.
Would you joint venture it? Given the market's getting better, would you sell down an interest?
No. We bought a 49% interest.
Okay.
I think that's part of what created the opportunity is it was not a wholly owned opportunity. It was an opportunity to buy a joint venture interest. We happened to know the other 51% owner well, or 50% owner well. Maybe some institutions didn't and said, "It's not for us." So we're happy at our 50% and very bullish on it.
The credit roster is excellent, top-tier financial service building, and we are already working on recapture opportunities in the tower, which we knew about before we went after this building. As Michael said, there is huge opportunity in this thing with the rents being so below market. Do not forget, it is right next door to 350 Park, which we love.
One follow-up on the early renewals. What, I guess, year are some of these leases expiring that you are working on these?
2029, 2030, 2031 mainly. So three to five years ahead of time already. And big tenants.
Like yesterday, we did a New York City tour. We had a lot of folks who was there. We did a double-decker open-air bus. For a lot of people, it was the first time doing something like that. One of the big takeaways was some of the development. How does it all work? I guess, is there an easy way to explain to folks over the coming years, the confusion is the dynamics. You are starting to see these early renewals. There is not much space. You were saying supply for the next couple of years, limited. I guess, high level, how does it all work over the coming years? Because I think there was some confusion on does the new supply take away from some of this demand or not? That it sounds like it is kickstarting some renewals.
Here's the beauty of it. The new supply needs rents of, call it, $250 a foot or more, all of it. Whether it's 625 Madison, 343 Madison, 175 Park, whatever it is. That's great for us on the renewal theme because our rents aren't $250 a foot. So you have tenants who are in a tweener situation where their leases are coming up three, four, five, six years from now. They don't want to move to new supply because it's too expensive. They generally like our building otherwise, and they want to renew because either they want to redo their space or expand, or something's happening. So they come to us early in a market that's robust for us, and we're trying to take advantage of that. At the same time, we want to service our customers and keep our tenants.
But at the end of the day, that's the umbrella of what's going on. They don't want to move to these new buildings because the rents are too high, and also these projects take a long time to deliver. That's the general overview of what's happening.
Jeff, if you look at the supply, and there's probably, including 350, maybe five buildings that are, let's call it, started or about to start. You'll probably have one of those deliver a year starting in 2029. Maybe it jumps one year and you miss one. So that's not a lot of supply. And by the way, every single one of those buildings is at least 50% pre-leased. And most of that constitutes expansion space for those tenants that are pre-leasing that. So A, that's not much supply to add over the next-- that's probably from 2029 - 2032, 2033. So you're talking about seven years. And as Glen said, in terms of the rent dynamic, that's a big umbrella for all the other Class A buildings to operate under. I think we've gotten to the point now, as good as all this is, the city needs some new supply.
If you can't service these tenants, they will look at other places. Maybe they'll back off that, but eventually to attract that talent, you have to be in high quality space. So we need some new supply. We don't want oversupply, but we need some amount of new supply. And so that's what you're seeing. And that generally is catered toward the financial service tenants, because when you're talking about $250, $350 a foot rents, those are financial service tenants. Shockingly, I guess there's actually a couple law firms that are now leasing space, which tells you how much money lawyers are making these days. They're making more than you guys now, [Saruan]. They're making more than bankers. I know it's shocking.
That's awful.
I'm sure Horwitz is bothered by that. You have to service those companies. And those companies, you think about the investment managers, and their businesses continue to grow. So they're going to grow in terms of space needs. You have to service that with some amount of new supply. So for New York to be successful, we have to have some new supply. We don't want a massive bulge, and you're not going to see that. It's just too the quantum of capital that you're having to move on these deals now, and we've got all the data going back to when Hudson Yards deals were It's 2X what it used to be. So damn expensive. The amount of, not just debt, but equity. There's just not many people that can pull it off.
I think the other takeaway was the sticker shock on what we were hearing rents. You mentioned $250 for new. I think we heard over $400 and maybe some top floors at least over $350, I guess. Again, I think I see some faces in the room that were on the tour. I think there was some surprise there. What are your thoughts around that?
People are paying it who could afford it, and it's the financial companies. They want the best of the best, so they've increased their budget on rent. It used to be rent was X percent of our overall operating expense, and that's no longer, because people realize just how important it is to be in the best buildings, more than ever. Recruiting, the brand, the company, the culture. So I will spend more on my real estate to get the talent. Part of that is all the industries are competing for the same people. So the financial companies are competing with the technology and the AI companies, and it's all very mixed, and that's part of it also. But it's changed. The game has changed. That's why the rents have been able to increase and become much more elastic upwards in these new properties.
Jeff, the key thing is that it is happening already. We have a chart we put together that we look at. Glen talks about where our spec space is on $350, so there is a number of comps. We sort of, where in the building is that comp? What are they paying? Et cetera. There are several deals that have been done in the $300s, in some cases upper $300s for space. So that is today. When these buildings get finished and the market is further ahead, we think that number is going to be higher. But we are not prognosticating something that is not happening. It is happening today. It is going to keep happening. So when a 9 West says, "We are going to try to get $400 for a foot," God bless. We are rooting for you.
We hope you do it because if we tell you $350, that may look like a bargain. That is today's number. It may go up. So we are not guessing and say, "Oh, it may get there." There are actual comps that they are there today.
Maybe just in the interest of time, I want to quickly jump into capital allocation and balance sheet. Curious if-
Maybe retail. It just does not get much of a mention.
Yeah.
What's going on in the retail space.
Yeah. Look, retail's come back strong. New York is the premier market for retailers. If you want to have This is where the tourism is. This is where you maximize sales when you have a location. I would say that leasing velocity's picked up significantly the last two, three years. We've seen a number of, I would say particular international retailers that want to come to New York, first time locations. We're in active discussion with today Rents and retail, it's not office. It's a little more bespoke. You can be two blocks different on Fifth Avenue, one versus another, and the rents are totally different given the quality of the space and who you're next to and so on. But I would say for the best assets, you're pretty close back to peak rents, both Times Square and Fifth Avenue.
If you look at what we've done in Times Square, we've executed several leases and have a couple others in the works that are basically back at peak levels. I think we'll announce a deal in the third quarter that's quite strong.
Yes. Market rents would be?
What's that?
Market rents in retail, what would they be?
I'd say Times Square, and again, Times Square, the bullseye is the bow tie. Vornado own both sides of that. When you get one block on either side, it falls off a little bit. But I would say rents in the bullseye are $1,500 to maybe $2,000 for a corner. Right?
And what sort of growth rate is that?
On an annual basis, or 2.5%-3% a year?
Yeah, 3% a year.
On Fifth Avenue, let's call it rents generally back to, depending on, it could be anywhere from $2,500-$3,500 is the sweet spot, and some spaces command a lot higher. We have achieved that recent space. A lot of it is the quality of the asset. There is a stretch of Fifth that is probably four blocks. It really is, with the luxury, it is a lot higher. The beauty of both those is that is beachfront real estate. They are not making any more of it. You know exactly how much there is, and with users buying some of that space over the last few years, there is just less and less of that available. We got, in fact, two calls in the last week on Fifth Avenue out of the blue. It is not an office where there is a rhythm because those are big commitments.
There is another deal that will get announced shortly, not ours, but these things take a little time. But market is healthy.
Could we touch on the investment sales market, just given the upward pressure on rates? I know you're looking to sell a couple of sizable assets. You got the 350 Park interest you're looking to sell as well. Just what you're seeing, any tenants, what's going on there?
Yeah, I think if you trace what's happened in the market. At first, I'll call it some B assets traded, right? That tended to be private capital. Then some higher quality assets came to the market, and you start to see more institutional capital. The REITs like us and SL Green Realty Corp. got more active. We clearly see this as the most interesting investment environment probably in 15 years. If you look at our track record, other than filling in assemblies, I don't think we made a single investment on a new buy for a decade, right? So if it's not the right thing, we're happy just to keep sitting out. In our view, the last 18 months has been prime time, and you've seen what we've announced. We missed out on a couple other things we were pretty close on. So we've been pretty bullish and remain so.
But it's a tight window where we're willing to buy. But I would say in terms of what the capital that's out there today, it's private capital is active, high net worth capital, very active. And I'd say that's globally. South America, Asia, Europe.
Michael, I'm so sorry. I don't want to cut you off, but unfortunately, we're out of time.
It's done.
I have three rapid-fire questions, if I could sneak in.
Sure.
Number one, if long-term rates stay higher for longer, which has the biggest impact on earnings for your sector? Higher refinancing costs, lower transaction activity, or less new supply?
Probably higher refinancing activity.
Will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no.
I only care about us. Probably not.
For your sector, will 2027 same-store NOI growth be higher, the same, or lower than 2026?
I think higher, Tom, right?
Yep.
Thank you very much.
Up for the second?
Yeah.
I only care about us.
Thank you very much.
Thank you. Thanks, guys.
Appreciate the time.