Vornado CEO: New York Leasing Stats Tell a Misleading Story

Despite some significant struggles in the New York office sector since the beginning of the pandemic and its ongoing underperformance, Vornado Realty Trust is still bullish on the city.

On Vornado’s second-quarter earnings call, Chairman and CEO Steven Roth pointed to a potential buyer that he said was a Fortune 100 occupier household name. The company dropped out of the market during COVID but has come back. “They were originally looking for 300,000 square feet to house 2,800 employees,” Roth said. “Post-COVID, after extensive study and space planning, they now need and are seeking 400,000 square feet, a 30% increase to house the same 2,800 employees.”

In both instances, Roth said that its projected in-office occupancy is the same 60%. “The fact that this occupier needs 30% more space post-COVID is contrary to all analyst expectations, but that is the fact,” Roth said. 

Another sign of the REIT’s bullishness: It is raising its asking rents at the PENN District, even though it’s still under construction. “The market is understanding our ambitious plans to make the PENN District, the crown jewel of the west side of the new New York,” Roth said.

Roth said that leasing and occupancy statistics in New York tell a misleading story. Although overall availability may be 18%, assets newly built or repositioned since 2000 have a direct vacancy rate of 11%. In addition, he said 88% of new leasing activity in Midtown was a Class A product. “It’s clear that the market is voting for new and repositioned assets,” he says. “As you would expect, Class A assets command higher pricing than Class B.”

Since the largest employers have mandated a return to work by Labor Day soon after, things should continue improving. Some want their entire staff back in the office while others are allowing work from home, according to Roth.

“As I have said before, I do not believe that the office will be threatened by the kitchen table,” Roth says. “And I do not believe that even one or two work-from-home days per week by some number of a tenant’s employees will be a negative to us. I, for one, am unable to predict whether it will take a month or a quarter for office buildings to be back to full up and the canyons to be teeming again.”

Vornado’s office occupancy ended the quarter at 91.1%, down two percentage points from the first quarter, according to CFO Michael Franco. This was expected and driven by long-expected move-out at 350 Park Ave. and 85 Tenth Ave., as well as 825 Seventh Avenue coming back into service, he said. “With the activity we have in our pipeline, this quarter should represent the bottom of our office occupancy, and it should improve quarter by quarter from here,” Franco said.