Good morning, and welcome to the Vornado Realty Trust third quarter 2021 earnings call. My name is Vanessa, 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 that time, please press star then one on your touch-tone phone. I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead.
Thank you. Welcome to Vornado Realty Trust third quarter earnings call. Yesterday afternoon, we issued our third 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 annual report on Form 10-K for the year ended December 31, 2020, 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 Steve Roth, Chairman and Chief Executive Officer, and Michael Franco, President and Chief Financial Officer. Our senior team is also present and available for questions. I will now turn the call over to Steve Roth.
Thanks, Cathy, and good morning, everyone. I begin by saying that I am feeling quite optimistic about the economy, about New York City, and about our business. New York City is recovering rapidly. The apartment market is a case in point. It suffered a vicious decline to 70% occupancy. Nothing like that, nothing even close to that has ever happened before, as renters gave up their apartments in the work-from-anywhere period to now having recovered to pre-COVID occupancies at even higher than pre-COVID rents. This will go down as the most rapid V-shaped rebound in history. Public transit utilization rates are picking up, and public transportation is, of course, the lifeblood of the city. Restaurants and sporting venues are literally jam-packed, and Broadway and other cultural venues have reopened. With travel restrictions coming off this month, international tourists will be returning.
We can see increased automobile and pedestrian traffic everywhere. Vaccination rates among office workers are at high levels, I'm guessing around 90%. We're hearing unanimously that our tenants want their employees back in the office. Office occupancy has been climbing, and this week we are now at 43%. I must admit that our tenants and we are a little frustrated at how long the return to work process is taking, but there is no doubt that work in office will win over work alone at the kitchen table. Key themes we are hearing every day are health, wellness, culture, collaboration, purpose, productivity, socialization, all under the mantra of it's time to get back to work.
While the timing of complete return to the office and each company's hybrid plan are still unknowable, it is clear to me that the office is still and will be the center of work and of success. Importantly, our business is rebounding on a trajectory of recovery and return to growth. Michael will cover our operating results in a few moments. We had a very good quarter and feel good about the trend line for the future. Many companies throughout the economy are experiencing significant post-COVID pickup in activity, and we are as well. Glen Weiss and his team are as busy as they have ever been with deals on all of our assets. Citywide, third quarter leasing volume reached its highest level since 2019.
Our tenant tour activity and the volume of leasing proposals we are working on, particularly large proposal, is robust as companies are thriving and clearly looking to grow. This heightened activity demonstrates the importance of the office to their businesses. The dominance of New York, its infrastructure and scale, and its deep, talented, and diverse workforce continue to give New York a dramatic competitive advantage. In particular, the tech sector continues to be voracious in their appetite for space in our submarkets, and New York has clearly emerged as the second-largest and second-most important tech hub in the country. Our activities in the Penn district are full steam ahead. Here's the latest. At Farley, we are targeting opening the food hall and the Ninth Avenue entrance by year-end. Facebook's tenant work is proceeding, with first employee occupancy scheduled for second quarter 2022.
At the Moynihan Train Hall, we have completed 22 retail leases. We are gratified and validated that Starbucks reports that its new Moynihan store is trending number 1 out of its 190 Manhattan locations. In Penn Station, our Long Island Rail Road concourse construction is about one-third complete. We will now own both sides of this heavily trafficked concourse. It will be a big win for us. The 34th Street half of the Penn One lobby is open, and it is spectacular. Come take a look. Our unique three-level world-class amenity offering will open shortly, and the other half of the Penn One lobby, which fronts on 33rd Street, will be completed end of first quarter 2022. At Penn Two , our full building transformation is well underway. On schedule and on budget, the job is largely bought out.
The demolition of Hotel Penn will begin this month, creating the best development site in the city. Both office and retail tenant interest is high in the Penn District, with multiple large office users now focused on Penn Two. Let me review again our Penn District financing plan. Capital required to complete Farley, Penn One, and Penn Two is about $1 billion before TIs, and that will be paid for entirely from our cash on balance sheet. Further, Farley, Penn One, and Penn Two are free and clear, unencumbered by any mortgage debt whatsoever. Most importantly, as these great assets come online, they will produce, say, $200 million of incremental additional annual earnings. The Manhattan retail market has bottomed.
It will take some time for rents to start rising again, but leasing activity and tenant inquiries are certainly picking up as residents, office workers, and tourists return to the city. New York is still a most favored location for retailers who are on top of their game. Of particular note is our recently announced deal with Wegmans, the premier grocer in our region, at 770 Broadway, the Facebook building, replacing Kmart, and that's some big uptick. We also completed retail deals in this quarter with luxury, banks, and food tenants. We have now completed the retail retenanting of 595 Madison Avenue, the Fuller Building, with luxury tenants Fendi and Berluti, both LVMH brands, and Christofle and Stefano Ricci.
As you know, we sold 3 Madison Avenue street retail assets this quarter and are contracted to sell 2 Soho street retail assets in the first quarter of 2022. We still believe in high street retail and believe demand, rents, and activity have bottomed. I'm happy to go into detail and the whys and the wherefores of these sales in Q&A. We reaffirm the updated guidance of our retail business discussed in our last earnings call. For 2021, we still expect to do a little better than cash NOI of $135 million. For 2022, the guidance is cash NOI of $160 million. For 2023, we guided cash NOI of not less than $175 million. Pardon me. Last year, the topic du jour was rent collections.
You should know that rent collections are now, and have been for a while, at essentially 100%. Collections on the limited number of rent deferrals that we granted during the crisis are also running at essentially 100%. The topic du jour today is tenant employee occupancy rates. Company-wide, this week we are now at 43%, and that rate has been growing nicely since the summer. We are able to harvest lots of information about usage as employees badge in and many other operating statistics from our building level technology. Our buildings populated by financial types, market makers and traders enjoy occupancies in the 70s. Another factoid, the busiest day of each week is Wednesday. Another factoid, the number of unique individual employees who came to work in the month of October was 61%.
Finally, let me spend a minute on sustainability, where we continue to be the leader. Vornado was recently selected as a global sector leader for all office retail diversified respondents in the 2020 Global Real Estate Sustainability Benchmark, or GRESB, or the GRESB survey. Our GRESB score of 94 was our highest total score to date. We also placed second out of 94 publicly listed, real estate companies in the Americas who responded to GRESB, including most of our office peers. Kudos to Dan Egan and his team for their leadership. Thank you. Now to Michael.
Thank you, Steve, and good morning, everyone. I will start with our third quarter financial results and then end with a few comments on the leasing and capital markets. With the recovery in New York City occurring as Steve described in his opening remarks, so is our business and financial results. Third quarter comparable FFO, as adjusted, was $0.71 per share, compared to $0.61 for last year's third quarter, an increase of 10 cents or 16%. The increase would have been 26%, but for the once every three-year Mart real estate tax increase, which is largely reimbursed by tenants next year, sort of a timing issue, if you will. We have provided a quarter-over-quarter bridge in our earnings release on page 5 and in our financial supplement on page 7.
The increase was driven by the following items, $0.10 from tenant related activities, including $0.06 from the commencement of new leases and $0.04 from the non-recurrence of straight line rent and tenant receivable write-offs impacting the prior period. $0.04 from the continued improvement in our variable businesses, $0.02 from the acquisition of our partner's 45% interest in One Park Avenue in August, and $0.02 from lower G&A resulting from our overhead reduction program last December.
The total of these increases is partially offset by the following decreases: $0.06 from the already mentioned real estate tax expense accrual due to an increase in the triennial tax assessed value of the Mart, which as I said, will be largely billed back to tenants beginning in January 2022. $0.02 from an increase in other miscellaneous expenses, primarily related to our new preferred issuance, partially offset by interest expense savings. Our third quarter comparable results are ahead of the uncertain run rate we discussed at the beginning of the year and on our last earnings call, as is our expectation for this year's fourth quarter. We have several non-comparable items in the quarter as well, which total about $0.11 per share of income. With respect to our variable businesses, we are continuing to see a recovery as the city returns to normal.
Signage is picking up nicely, with healthy bookings continuing in the fourth quarter. BMS is now performing near pre-pandemic levels. Our garages should be fully back in 2022. Finally, a number of trade shows have successfully taken place, albeit with lower attendance, primarily due to travel restrictions. Other than Hotel Penn's income, we still expect to recover most of the income from our variable businesses next year, with the full return in 2023. Company-wide same-store cash NOI for the third quarter increased by 2.8% over the prior year's third quarter and would have been 8.1%, but for the aforementioned additional real estate tax expense at the Mart during the quarter. Our core New York office business was up 7.6%.
Our retail same-store cash NOI was up 14.2%, primarily due to the rent commencement on new leases at 595 Madison Avenue and 4 Union Square South and lower real estate taxes. Our office occupancy ended the quarter at 91.6%, up 50 basis points from the second quarter, which we believe represented the bottom for our office occupancy. We expect this figure to keep moving up from here based on the leases we have out for signature and in negotiation. Retail occupancy was consistent with the second quarter at 77.2%. Now turning to the leasing markets. New York leasing volume reached its highest volume since the onset of the pandemic, with more than 7 million sq ft leased during the quarter. Employment growth continues its upward trajectory.
Asking rents and concessions have stabilized for high-quality buildings, even improving in some submarkets, and subleased space has begun to be absorbed or removed. The theme of flight to quality has continued. Quality of the asset, strength of the landlord, and access to transportation all continue to be the main focus for tenants coming out of the pandemic, and we are a major beneficiary, given the quality of our portfolio and the capital we invested over the past 10 years to redevelop our assets. Notably, 65% of the deal volume in the city was new in expansion leases, led by 15 deals in excess of 50,000 sq ft. The majority of leasing action is being driven by the tech and financial service industries, which accounted for 60% of all activity.
We enjoyed a solid third quarter, signing 27 office leases totaling 757,000 sq ft, with average starting rents of $77 per sq ft and positive GAAP and cash mark to market of 4.2% and 1.4% respectively. The highlight for the quarter, which also happened to be the largest lease done in the market, was an early lease renewal for IPG with Interpublic Group for 514,000 sq ft at 100 West 33rd Street. This important transaction reaffirms IPG's commitment to the Penn district and resolves what was our largest 2023 expiration. Importantly, we also executed on a full floor expansion with Google at 85 Tenth Avenue, increasing their total footprint in the building to just under 300,000 sq ft. Our buildings which cater to financial service users continue to thrive.
During the quarter, deals we completed include 52,000 sq ft at 280 Park Avenue, 37,000 sq ft at 888 Eighth Avenue, and 19,000 sq ft at 650 Madison Avenue. We are busy across our portfolio with more to come. Our leasing pipeline is very strong. We have 1 million sq ft of leases in negotiation with an additional 1.5 million sq ft trading paper or in advanced discussions. Our office expirations are very modest for the remainder of 2021 and 2022, with only 936,000 sq ft expiring in total, representing only 5% of the portfolio, and 189,000 sq ft is in Penn one and Penn two.
2023 office expirations total 1.5 million sq ft, of which 350,000 is in Penn One and Penn Two. This total is down significantly since last quarter due to the Interpublic Group lease renewal. Retail leasing activity in the third quarter included 10 leases totaling 111,000 sq ft, with average starting rents of $110 per sq ft and positive GAAP and cash mark to market of 45.3% and 19.6% respectively. The largest transaction for the quarter was the previously announced 82,500 sq ft lease signed with Wegmans at 770 Broadway.
In addition, we completed the lease up of the retail at the Fuller Building with a lease to Stefano Ricci, giving us four luxury retailers there with new long-term deals and reflecting the recovering market for the best locations. We also completed deals with Citibank at One Park and Capital One at 731 Lexington, reflecting the return of the banks to the marketplace. Finally, a word on the capital markets. The investment sales market is picking up again with a couple recent strong office sales in addition to several other assets now in the market. Investor interest in New York is clearly rebounding as they see the city has bottomed and find the relative value compelling. On the debt side, pricing in the financing markets is as tight as we've ever seen, and we continue to be active in refinancing our debt to take advantage of the low rates.
In September, we also took advantage of the tighter preferred market to refinance our $300 million, 5.7% perpetual preferred shares with a 4.45% issuance of the same size, a very attractive rate for forever money. Finally, our current liquidity is a strong $4.443 billion, including $2.268 billion of cash and restricted cash and $2.175 billion undrawn under our $2.75 billion revolving credit facilities. With that, I'll turn it over to the operator for Q&A.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're 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 touchtone phone. Each caller will be allowed to ask a question and a follow-up question before we move to the next caller. We have our first question from Michael Bilerman with Citi.
Hey, good morning. It's Michael Bilerman here with Manny. Maybe if I can just start on putting capital to work. What's your current appetite to go out and, you know, buy assets? You obviously did the Park Avenue buyout of your joint venture partner. Is that something, Michael, you talked about the market, you know, with increased activity that you wanna participate in? Or are you just hoarding your capital at this point to pursue all the development and redevelopment types of activities? Maybe just, you know, talk a little bit about if you are gonna go external, whether you look at other property types rather than just office.
Sure. Good morning, Michael. Look, in terms of the capital deployment, you know, we look at everything in the marketplace. You know, as you know, there's been very little that's transacted, you know, for probably the first 12 months of the pandemic. Frankly, you know, with short-term rates at basically zero and long-term rates quite low as well, there's been very little pressure on sellers. You know, you've seen very little transaction activity. You're starting to see that pick up now with assets being brought out. You know, to date, you know, the buyer universe, I would say, has generally been driven by players that use higher leverage, although we're still in the early days. To the extent we see compelling opportunities, you know, we would act on those.
You know, so far, the pricing has frankly not been compelling. As we compare both to what we're doing in Penn and prospectively what we can do in Penn, you know, those continue to be more attractive than, you know, just buying another asset that we're gonna, you know, stabilize at a 5% yield after spending a lot of money and, you know, capital to lease it up or just to buy it. We look. We're gonna continue to look. If we find something interesting, we would certainly act on it. We have the capital to do that. To date, capital continues to price assets, you know, quite aggressively, notwithstanding, you know, the volume of activity is still down.
Can you just,
Michael, hang on.
Yes, Steven.
Good morning. Let me just add a little bit to what Michael said, Michael Franco said. I mean, look, there has to be accretion in anything that we would buy. Right now, the math is topsy-turvy. Our stock sells in the marketplace, I don't know what it is, you know, probably close to an 8% cap rate. Assets in Manhattan office buildings that we would even consider all sell at sub-5%. You can't, you know, that math is topsy-turvy. It makes no sense to buy an asset for 5%. By the way, when you take the capital that's required for these assets, certainly that's at 0% per year, maybe the cash-on-cash is 4%, when our stock is selling for 7%.
Anything that we would do there would be dilutive to shareholder wealth. Obviously, we're not going to do that. If we saw an empty building, by the way, that we could buy, where we thought we could create a great deal of value, we might do that. Generally speaking, it's very difficult for us to transact and grow right now. What we do have on the other side of that is we do have liquidity. We do have a very dry powder balance sheet. We do have great opportunities to accretively spend that capital that's on our balance sheet in the Penn District. That's our main focus right now is in the Penn District. I'm just sort of doubling down with what Michael said.
Well, that's helpful. Maybe just as a follow-up, Steve, just on the Penn District, where do things currently stand in terms of pursuing the tracker? I know it's probably a little bit longer than you would like to have everything prepared and ready to go. Maybe just give us a little bit of an update where you are internally in terms of preparing all the financials and getting all of that done and also externally with, you know, a lot of new governmental partners coming in to new seats. You know, how is that all playing into sort of the timing of getting this tracker out to the marketplace?
Michael, thanks for that question. I remain committed to the tracker. Let's understand what I remain committed to. I remain committed to allowing our investors to choose between our stable core business on the one hand, and then the Penn District, which is our high-growth development segment of our business, and to be able to invest in either of those individually or both of those. We are very strong believers that we will create enormous values in the Penn District. We will create a district that will command premium pricing, and we couldn't be more excited about it. I remain committed to it, number one.
Number two is we are well along with the paperwork and what have you that would be required to do it to launch. We recognize what you said, and that is we are seeing a complete turnover in government in senior government officials, and we have pending matters with them. You know, obviously we're going to maybe slide a little bit as that all plays out. We are very optimistic that the new government leaders at the city and state will be. Let me see. How do I say this? Will be constructive, will be business friendly, and recognize that the Penn District is something that requires and demands their attention, and we believe we will get that, their positive attention.
The next thing is, I've read in among the analysts some skepticism about the idea of separating the Penn District. I'm very surprised at that. There's sort of a, you know, I'm as enthusiastic about this as I've ever been about any project in my career, so I'm having trouble understanding it. Also, we have had conversations with multiple real estate investors as opposed to stock investors who share our judgment and my judgment about the potential of the Penn District. But from the point of view of the analyst community, I am almost starting to believe that we are in a show-me mode. What that means is that we have to knock off some more leasing to be able to surface the values.
That's basically what's going on. We have no counterparty in the tracker. We have no timetable. It's gonna slide a little bit, not too much, and we think it's going to be smashingly successful.
Yeah. I appreciate those comments. Look, Steven, I think part of the skepticism out of the investment community. I think everyone recognizes what the Penn District represents. You know, I've been following your company for, I don't know, almost 25 years, and we've watched that area transform. It's always been that opportunity. I wouldn't go through the list of things you've called it, the Big Kahuna, the, a lot of other things. I think it is a similar. It's in the same business that you are in, even though I would concur with your phrasing that you have core assets in this big development opportunity.
I think trackers have typically been used where it's a business that is different than the parent company and has other comps or other things in there in terms to highlight that value. Your comments about the private market are much more akin to where I think investors sort of wanna be able to highlight that value. You know, to your point, you don't wanna give up a part of that project to a private that's gonna make all the money versus something that you believe should endure to Vornado shareholders. Is that a fair comment?
I guess so. I mean, the comment was so lengthy, I didn't really follow all of it. The answer is that I understand the skepticism. I said, in fact, I'm looking at it as a show-me project, and believe me, we will show you.
Great. All right. Thanks for the time, Steve.
Thank you. Our next question is from Steve Sakwa [Senior Managing Director] (Evercore ISI) Evercore ISI.
Thanks. Good morning. I guess first, Michael, I wanted to just follow up on your comments about the robust leasing pipeline. If you could just maybe provide a little more color on, you know, how much of that activity is for, you know, either Penn two or some of the other developments, and, you know, and how much is for current vacancy or how much of that is, you know, for renewals. I guess a kind of a split on new versus renewals would be helpful. Thanks.
I'm gonna let Glenn take it, Steve, but the answer is yes. Glenn, why don't you give some color on all that?
Hi, Steve. It's a very strong mix of everything. New deals both in Penn, new deals in the core portfolio, strong renewal activity throughout all of it, and expansions everywhere. We're seeing strength throughout the portfolio, both in Penn and the core portfolio, in all different shapes and sizes with all different industry types. Things have picked up really well since we last spoke.
Maybe just as a quick follow-up, when you're sort of talking to the tenants about space needs and space planning. You know, what does the densities look like, particularly on sort of the new deals and, you know, how do they compare from a, you know, space per employee perspective to, you know, maybe deals from two years ago?
I've said this the last couple of calls, we've seen no change at all in density. You're seeing maybe a different mix of, you know, collaborative space, communal space versus cubicle office, but generally no change. People are planning for the future. They're back at it. A lot of them are acting as if it's pre-pandemic times, growth, new, fresh start, all about talent recruitment and moving forward.
You know, Steve, in your question and in a lot of the questions or comments in the reports from different analysts, you know, there remains a skepticism as to whether, you know, New York is going to recover, whether people want to be in the office, you know, et cetera. You know, a little bit picking up on Steve's comment, you know, I think we're sort of in a show me mode in terms of when we put the points up on the board, people see it. As we look at the pipeline, I mean, there is activity literally at every building, all types of users. I mean, Steve commented on the voracious appetite of tech is stronger now than it was pre-COVID. You know, the financial types are booming.
You know, we're seeing heavy activity there. You know, you have an economy where companies are doing very well. They're in growth mode, and that's reflected in our pipeline. I think the leasing market is sending a very strong signal that New York's gonna be fine. New York's gonna be one of the winners. Companies wanna locate here. I think you're gonna see those stats continue to get posted over the next several quarters. Obviously, this quarter was a good start, but there's much more in the queue, you know, across our portfolio.
Great. I guess-
Steve.
Oh.
Steve, good morning. Look, the stock market, if you look at the price of our stock and the sister companies in the industry, they're all extremely depressed, and they're doubly depressed from where they were pre-COVID. There is, in the stocks, in my mind, the sentiment that everybody is confused, uncertain, and worried about work from home and how it will affect the CBD office business. Okay? We acknowledge that. We believe two things. Number one, well, actually, a couple of things. Number one, we believe in New York. We are seeing in the field that people are committed to New York. They're committed to stay in New York. They're committed to grow in New York.
That's for the financial services industry, et cetera, the media industry, the entertainment industry, and double and triple for the tech industry, because the volume, the scale of New York can't be replicated anywhere. I mean, you know, just if you take 2 or 3 of the leading trillion-dollar tech firms, the leases they've signed in the last 14, 15 months, they need 15,000 engineers to fill that space. You can't get that in Austin or Nashville or wherever. Okay. The scale of New York is winning the day, plus the talent pool. That's factoid number one. Factoid number two is the business leaders that we deal with every day, they understand work from home.
They're grappling with what their policies are gonna be, what the hybrid solutions are gonna be, three days in the office, two days, four days in the office, whatever it is. They know that. They're grappling with it now. Yet, they continue to believe that they need office space, lots of it. In fact, higher quality office space to recruit their talent and retain their talent. We're finding in the marketplace a dichotomy between actually a very aggressive and robust demand for space from the big boys in each of the major industries and the skepticism of work from home in the marketplace. We're betting that our tenants know what they're doing, and we think that work from the office will win. It'll be nipped around the edges by some hybrid thing.
People will work from home some number of days a week. We talked to everybody, they want the people back in the office. That's the way to grow their businesses, and they're really serious about it. We think that that's the answer. We are very, very pleased with the demand for space, notwithstanding the uncertainty that's in the securities market.
Great. Just as a quick second question, Michael, the trade shows, you know, I know we're back a little bit in the third quarter, and I know, I think last quarter you had mentioned that, I think NeoCon was moving in the fourth quarter. Do you have any sense at this point as to how big trade shows, you know, could be in the fourth quarter? You know, I guess what's on the books for next year already, and how do the sizes shape up to kind of pre-pandemic?
You know, we had, since July, Steve, we produced eight trade shows, including our two largest shows, NeoCon and the Armory Show in New York. Obviously, there were travel restrictions, particularly internationally, which, you know, impacted attendance. I would say levels were probably closer to half of what they were historically, but, you know, they were put on successfully. We got the machine working again, and obviously, you know, performance, year-over-year was positive. You know, our expectation is that we're gonna put on a full set of trade shows next year. You know, we're gonna see a substantial recovery. You know, I think just being realistic, we don't think trade shows come back fully in 2022. It's probably 2023 before that, you know, fully stabilizes.
You know, in 2021, overall, trade shows don't contribute a lot to our variable businesses as we currently project. You know, next year, you know, we think the number will be $several million incremental. I don't wanna give you a number today just because, you know, we need to spend a little time with our team refining that, and obviously it's a guess, but we do think the trend line now that the machinery is working, people are getting used to it, you know, international travel's opened back up, you know, we'll see a decent recovery next year.
Great. Thanks.
Hey, Steve. The over-
Yeah.
Hey, Steve, the overriding fact is that these trade shows are desperately important to our clients as the major sales activity for each of these individual companies. The trade shows are here to stay. They're really important, okay? We can't predict what's going to happen, you know, this quarter, next quarter, but our budgets show that a couple of years out, the trade show business will get back to where it was pre-COVID. The main reason is because this is a really important business to our clients.
Great. Thanks. That's it.
Thank you so much. We have our next question from Nick Yulico [Analyst] (Scotiabank)
Thanks. Good morning, everyone. Just going back to the leasing activity, you know, you're talking about the pipeline being pretty strong, not that much in expirations next year. I mean, is there any preview you can give us about how to think about, you know, occupancy and how it could trend in, I guess, in particular, the New York City office portfolio?
Michael, Nick, Michael mentioned it in his remarks. We believe our office occupancy has bottomed. We're now at 91.6%, and we think it's gonna continue to improve quarter to quarter based on the action we have. Historically, we were at 96%, 97%, so you know where we are was all due to COVID. We're on our way back. We feel it's getting better and that we have hit the inflection point and going back up.
Okay, thanks. Second question is just, you know, about the Penn District. I know you talked about, you know, Hotel Penn, you know, being the prime development site in the city. Going back to your prior disclosures on that, you had, I think, about in your NAV estimated $500 million for that project, which is about $250 a foot of, you know, zoning, you know, per zoning, I guess.
I guess I'm wondering if that's still the thought on the value of that there, and then as well, how we should think about Penn One, where you have the ground lease reset coming in 2023, if you have any update there on how we should think about, you know, is Hotel Penn at $250 a foot number, a good way to think about, you know, the potential land value reset at Penn One?
We continue to be happy with the number that's in our NAV. We see no reason to raise it. With respect to the rent arbitration, we have no comment.
Okay. I guess, just in terms of, I mean, should we think about, you know, that $250 a foot value that was implied for Hotel Penn being a reasonable number to think about, you know, Penn One, which is right across the street?
You know, it would be inappropriate for us to lead you either way in terms of your internal calculation. I'm not gonna do that. I don't think it's appropriate. I'm not gonna talk about-
Okay. All right.
I'm not gonna talk about a very important financial arbitration in this format.
Okay. Yeah, I mean, just the reason I ask is 'cause you do have that footnote in the supplement talking about the ground value reset could be material impacting the yield on the project. At some point, it would be helpful to understand, you know, potential land value reset there. Thanks.
I think the disclosure in the footnote is appropriate. Obviously, the final answer is unknowable and you know, we'll go through the process, and we'll hope for the best.
Thanks.
Thank you.
We have our next question from Jamie Feldman with Bank of America.
Thank you, and good morning. I'd like to go back to your comments on retail. It sounds like you think it could be bottoming here. Just, you know, your thoughts on why and what we should expect going forward.
I mean, Jamie, look, I think the comments on retail are reflective of, you know, what we're seeing on the ground from tenants. You know, tenants were in a shell for a year. Obviously, you know, there were a few people on the streets. Vacancy was high, and not much was going on. Right now, the transaction machine is working again. People are back out on the streets. You're seeing tourism pick up, albeit it's all been domestic so far.
You know, international tourism will kick off actually in the next week, which should be another shot in the arm for the city. You know, we don't expect it to snap back to 60 million people immediately, but that's you know, the trend line from the city being open and the attendance at sporting events and Broadway shows and other things is quite good and quite indicative of what we think is gonna happen. You know, retailers wanna know there are shoppers out there. You know, there are clearly shoppers out there again. You know, we've talked about the flight to quality and the best locations, and that's continuing to occur.
We've been a beneficiary of that at a place like a Fuller, for example, at a place like a 770, which is a prime spot for Wegmans to go to. You know, fundamentally, we're just seeing more interest from retailers. By the way, that's all submarkets, right? The tourist-oriented submarkets of Fifth Avenue and Times Square, obviously you would expect to be the ones to come back to last because that's so dependent on tourism. With that now opening up, you know, retailers wanting to see it happen. You know, again, even there, you know, we're seeing inquiry from tenants in both those submarkets. Rents are obviously down. That's inducing demand. You know, there's discussions that are underway and you know, an action that's occurring.
You know, that's what gives us, I think, the confidence to make that statement. I think Steve was pretty clear. You know, activity has to happen before you start getting rental movement, and it's gonna take, I think, a decent amount of activity before that happens. I wouldn't expect rents to rise, you know, near term. You know, once we start getting some pace of transactions, I think that'll be a shot in the arm for the market.
To be clear, this is going to be a multiyear recovery. This is not going to be a rapid V-shaped rebound. It's going to take years for this market to recover, and it may never recover to the peaks that were five or seven years ago.
Okay. Thank you. I guess.
It has bottomed, and it will recover. You know, think about it this way: the shutdown from COVID was probably the most traumatic event that any of us have ever lived through. The total shutdown of the global economy, I mean, that's never happened before. Retailers, hotels, airlines, et cetera, all, I mean, the suffering was monumental. The first reaction from the retailers was to go into a shell, stop everything, and shed liabilities. The market went stone cold for the better part of two years. People are now understanding that there is life after it. People are succeeding. The better retailers are actually thriving from the pent-up demand, and we are seeing a very robust pickup in interest and demand.
We are not seeing an aggressive increase in pricing that people are willing to pay. We're bottomed. We're in a recovery. We are budgeting, and underwriting that the recovery will be slow-paced.
Okay, thank you. I guess as you think about them.
I'm sorry. Just to continue on that thing.
That's okay.
We did reaffirm our guidance on retail in my prepared remarks.
Right. Do you see, I know in your prepared remarks, you you'd mentioned the sales. I mean, do you see yourself selling more, or do you see yourself actually buying going forward?
We certainly are open to buy. We are certainly probably the most expert in retail around. You know, we will buy the highest quality at very attractive prices, and there hasn't been that kind of availability or offering yet. I said. Let me give you a feeling for the five assets that we have either sold or contracted to sell, what our thinking was. Okay, number one, those assets this year actually have a negative income of more than $3 million. I think we said in the press release that the occupancy was 30%, and the vacancy therefore was 70%. That is accurate, of course, but there's one factoid that you have to consider.
There is one tenant in those five properties that is basically a swing tenant who is rebuilding a store. If you take that out, and we know for sure that that tenant is going to leave in a couple of years because it's a swing tenant. It's not a pop-up, it's a swing tenant. If you take that out, I think the occupancy is 11%. If you take that into account, and by the way, when that goes away, the negative earnings are greater than $3 million.
The capital, if you add the capital that would be required to lease up those five properties, and we have to lease up 90% of them, so that's almost a total lease-up job. You take the time, and you take our underwriting as to how long it will take to climb up to a decent return. Our judgment was that for our business, it's a proper strategy to sell those assets. The proceeds, where the assets are unencumbered, there's no debt on the assets. That will bring in $184-$185 million of new cash that we think we can put to better use.
Now, we are selling the Madison Avenue assets to a friend, and they are an extremely substantial offshore buyer who have a history of making very intelligent distressed buys. We know that, we respect it and, you know, we're friends. We laugh about it to each other. We expect that the buyer of the Madison Avenue properties will make money and have a very satisfactory investment, but it will be, in our judgment, over a 10-year haul. That timeframe made us to be a seller rather than a holder of those assets. We believe that the buyer will do well, and we think the seller, that's us, will do well. There's one last point. 25 years ago, Madison Avenue was an isolated oasis in New York.
There was one submarket that worked in terms of luxury, high income, et cetera, and that was the Upper East Side. Obviously, the luxury brands all clustered in Madison Avenue, and Madison Avenue had effectively an oligopoly or a monopoly on luxury shopping in the city of New York because all the customers lived within walking distance of that, and all the tourists basically stayed in Upper East Side lodging. Over the years, that has been diluted enormously so that every submarket, whether it be in Chelsea or Tribeca or the West Village or the Upper West Side, every submarket now is thriving with customers for these brands.
Obviously, over the years, instead of having one store on Madison Avenue, they now have five stores, one in the Meatpacking, one in Chelsea, one here and there. Madison Avenue has been deleted, diluted enormously. It was that socio-demographic thinking that also led us to be a seller of those assets. By the way, that thinking is totally different than Fifth Avenue or Times Square, which continue to be enormous attractions.
As you think about putting capital to work, I mean, do you still think luxury is the way to go? Or no, you're thinking actually more middle-of-the-road type brand?
You know, we're agnostic to that. You know, we are retail investors. We love our Times Square assets, which are not really luxury. We love our Fifth Avenue assets. We're agnostic as to the price point of our customers. We're in the landlord business, not in the retail business.
Okay. If I could just ask, you had talked about no debt on any of the assets at Penn Station, or at least the development, redevelopment assets. What's the plan there to put more permanent capital on those projects, and how do you think about using those funds?
We will obviously have a financing plan for the growth of the Penn District. We're very comfortable now having those assets unencumbered for the moment. I think it's premature to start getting into how we will permanently finance those assets if we do. Our balance sheet strength is based upon a mix of secured debt, unsecured debt, lines of credit, and unencumbered assets are an important part of that. Right now, we're very comfortable having those assets unencumbered. We're even more comfortable with having, I don't know, you know, those assets are worth an enormous amount of money, many billions of dollars. We're very comfortable having those assets available as a source of credit should the opportunities come up.
Okay. I assume that helps with the tracking stock if they're not encumbered, or does that have nothing to do with it?
The tracking stock will have its own financing plan, which we'll get to when we launch the tracker. But
Okay.
Yes, you're right.
All right. Thanks for your time.
Having low debt on the tracker is an important part of that strategy.
Okay. All right, thank you.
We have our next question from John Kim with BMO Capital Markets.
Thank you. Good morning. I realize the tax benefit at the margin is backwards looking, but are you surprised by the level of increase? Just given you renovated the asset five years ago. Over the last year and a half, almost two years, there's been a lot of disruption to the trade show and office occupancy of the asset. I was just wondering if you were surprised by the amount of increase on taxes there.
I didn't hear the question.
John, look, I would say, you know, anytime, you know, your taxes go up 40-something%, you know, you're surprised at the magnitude of that. We knew there would be an increase. I think the magnitude surprised the entire market. We were not alone, right? I think there's been a number of articles written about how most of the large landlords have been impacted by similar increases. It's high. We're certainly going to appeal it. We don't make any promises on that, but, you know, it is what it is. As we said, you know, the meaningful portion of that will be reimbursed by tenants, beginning in 2022.
You know, we're you know, I think we're no different than the balance of the market, frankly.
A few years ago, you gave indication that you thought you could collect 80% of the tax increase as a tenant reimbursement. Do you feel like you could still attain that level of reimbursement from your tenants?
Yeah. I mean, I think. Look, it's obviously dependent on the occupancy in the building, which is down a little bit now. I think, you know, 75%-80% is not a incorrect assumption. You know, it'll be in that neighborhood.
Okay. My second question is on Facebook, or now it's called Meta, I suppose, looking to expand in New York. I'm wondering if they do expand at 770 Broadway, can you accommodate them without losing Verizon as a tenant?
No.
The net impact would be like, nothing?
You know, first of all, these are important clients, and these are pending transactions, so we're really not gonna speak about anything. We're really not gonna get into the detail of it. Obviously, if a tenant moves in and a tenant moves out, the net result will be pretty much the same.
Are they looking elsewhere in your portfolio?
Say it again.
Is Facebook looking elsewhere in your portfolio to expand?
We're not gonna comment on Facebook or pending transactions with important clients.
Okay. Thank you.
Thank you. As a reminder, if you have a question, please press star then one to queue up. Our next question is from Alexander Goldfarb with Piper Sandler.
Hey, good morning. Morning down there, Steve. So just wanna go back to Michael's opening questions. I think you can appreciate the skepticism. I mean, the original Penn Station was around for about 50 years, and you guys have been talking about the redevelopment for 20, clearly enhanced by what's gone on the west side. If you're a VNO shareholder, you may or may not be able to hold the tracking stock when it's spun out for whatever fund mandates you have. If the whole thing that we've been looking at the past 10, 15 years has been this holy grail of confluence between Midtown South and the far West Side, now Penn Station's gonna be there, and you're a VNO shareholder who has held out for that.
How is the tracking stock helpful in that if not every VNO shareholder can own the tracker? You know, that's where a lot of that revenue growth or, sorry, earnings growth is gonna come from those lease-ups. I think that's the area where people are grappling, which is how does this help an existing VNO shareholder not be able to actually own a tracker versus right now they can pencil and model all this upside that you guys have been laying out?
Well, obviously, if you sell the tracker, you're not going to benefit from it. I mean, that goes without saying.
Right. Not every fund can own the tracker because of mandates.
We are unhappy with the fact that, as you say, some of our shareholders will have to sell the tracker. We've done the calculation. We think at the margin, it is not a significant transfer. You know, it's unfortunate that some investors have to sell it, but what we're looking at is the greater good, is the investors that can keep it or buy it, we think will be enormously enhanced by the transaction. Said another way, we think that the Penn District's future in the larger company, where it's diluted, is not as good an outcome as if it's separated, where it's a pure play for the Penn District. We understand what you're saying. We're unhappy about the fact that some funds will have to sell. They are not large numbers.
We think it's handleable. But what we believe is the greater good will be enhanced by the idea.
It's still a synthetic, Steve, isn't it? I mean, it's just laying, you know, sort of paper claim to the. It's not like Alexander's, which physically owns those assets. It's just laying claim on paper. It's a synthetic. It's not like it's direct, correct?
The answer is yes. You know, that's sort of argumentative, Alex. The tracker should perform as the asset, the underlying asset that it is, that it tracks, as they perform.
Okay.
Alex, if you think about, I think your Alexander's analogy actually is an interesting one. If you think about Alexander's is an externally advised entity, right? The public owns one-third.
Yes.
That stock has done, when you look at it, from the time that development really commenced substantially in that company, has done extraordinarily well. I think the corollary here is actually quite similar, right? Where, you know, we're in the yes, we've been talking about it for a long time, but the reality is the development really just commenced in the last couple of years, right? It's underway right now with Farley, Penn One, Penn Two, and obviously a lot more behind that. So, you know, we've talked about the public owning, you know, a portion of it, not all of it, probably less than half of it.
You know, if you think about it's kind of like Alexander's in the sense of that public tracker is sort of an externally advised entity managed by Vornado, very similar to Alexander's. In terms of the shareholders that, you know, there's no. The only shareholders that are gonna be forced to sell this are some of the index funds. By the way, not all of them, not most of them, but some of them. Any investor that is a active investor that makes, you know, dedicated decisions about specific companies can continue to own both pieces. By the way, they can sop up even more of the tracker. You know, we talk about this like there's four sellers, there's no buyers.
On the other side, you know, we know for a fact there are investors that have tremendous belief in the Penn District, would like to just own the Penn District, like the higher risk, higher reward, believe in what's going on in that part of the city and what we're doing, and you know, prefer to own that directly and not with everything else. You know, there's gonna be, you know, obviously it'll settle out when we distribute it. There'll be some net selling from some of the funds, as you alluded to, that have to sell. We also think there is a group of investors that are not in Vornado that will sop up that demand, or.
Our goal is for that to trade, you know, very well, and I think your Alexander's analogy coming back, that is a very good analogy in terms of the trajectory of that company once the development commenced.
Okay. Steve, going back to the politics, clearly the mayor's race, you know, we can only do better, and either candidate is, you know, obviously much more pro-business, much more understanding of the city than the prior. When you look at the governor's race, you know, Hochul is definitely tracking to the left as she tries to veer off, you know, Attorney General James. If you look at what's going on in the Good Cause Eviction, probably end up with statewide rent control. Why are you optimistic at the state level that it will be as productive and supportive of real estate and business in New York as the mayor's election when you know, when you look at the politics, it seems to be taking the opposite angle?
I can't answer that question, Alex. I mean, you know, we've met the governor. She's a seasoned politician with a 25-year career. She has an entire career of being supportive of business. She understands what's going on in New York. She understands the Penn District, and we believe that she will be a perfectly fine leader. Other than that, you know, I can't get into it. I want to get back for a moment to Michael's very fine answer to your question about the tracker. There are trade-offs here. In order to create a separate legal entity, a spinoff, for example, which we have done twice before with JBG Smith and Urban Edge, we would have to have a totally separate management team, totally separate board, totally separate everything.
That's an untenable. That's not a doable prospect, and it's untenable, and we can't do it. We need the same people with our leasing and development team, for example, okay? Also, it would be very. The additional overhead would be enormous. The trade-off is that we can use the same team, the same board, the same governance, but we can get investors to be able to invest in whichever part of our company they want to or both, okay? It's interesting. I expect that many investors will continue to hold both securities, which is actually the same thing as if we did nothing in terms of separating the tracker.
at the margin, there will be a new group, as Michael said, of investors who actually have an enormous level of enthusiasm for the West Side of New York, for tech coming into New York, and for what we're doing in the Penn District. at the margin, we think it will be a very successful investment.
Okay. Thank you, Steve. Thank you, Michael.
We have our last question from Ronald Kamdem with Morgan Stanley.
Two quick ones from me. One is just going back to sort of the retail portfolio. Just curious in terms of just more commentary, when retailers are looking at space today, you know, what are they focused on? Is it, is it occupancy costs? Is it gross margin? Is it foot traffic levels? Just sort of what's making the marginal decision for retailers maybe today that may have been different sort of pre-pandemic and so forth? Thanks.
It's the same as it's always been forever, and that is what sales volume can they do in a particular store versus the cost structure versus the rent. Things are a little different today than they were. Some stores in Manhattan were sort of flagships at advertising for the brand. That's kind of gone by the wayside. Retailers today wanna make money at each individual store. The number one statistic is what their expected sales volumes will be versus what the health index would be, the occupancy cost.
Great. If I could just follow up on the Wegmans deal. Just any sort of color on what the opportunity could be in the portfolio? Is there anything different about sort of their lease structure versus the typical structure? Any color would be helpful.
I don't think I have anything to add there. I mean, we're replacing. First of all, 770 Broadway is the Facebook building. We're replacing Kmart with Wegmans. That's a huge uptick. The rent is significantly higher, and it's a traditional lease. It's a long-term lease, and we're very, very excited about it. There may be other opportunities with Wegmans in the rest of our portfolio.
Great. That's it for me. Thank you.
Thank you. We have no further questions in queue. I will now turn the call over to Mr. Steven Roth, Vornado Chairman and CEO, for closing remarks.
Thank you. One final important note before we end this call, and that is that this is Cathy Creswell's final earnings call before she retires. I wanna thank her for her many years of service and friendship. We wish her well, and I'm sure everybody on the call wishes her well. We'll see you at the next call. Thanks very much.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.