Vornado Seeks Good Real Estate in Distress

According to Vornado Realty Trust, the REIT that is one of Manhattan’s largest owners of office and retail space, less-than-stellar results reported in its Q1 2024 earnings last week were not unexpected.

Vornado reported a net loss of $9M in the first quarter as occupancy in its office portfolio slipped to 89.3% from the 90.7% reported in Q4 2023. Funds from operations during Q1 were $104M, down from $119M in Q1 2023.

“After completing a slew of large leases in December and finishing last year with a market-leading 2.1 million square feet of deals, we expected a more muted first quarter of completed transactions, given where our deal pipeline stood in the negotiation process,” Michael Franco, Vornado’s president, said during an earnings call.

The REIT is moving quickly to address the dip in office occupancy, due primarily to move outs at three Vornado properties including 770 Broadway and 280 Park Avenue, Franco said.

“We are pleased to report that we have already taken care of half the 2024 and 2025 expirations in these properties, with more activity on the horizon at each,” Franco said.

Vornado is projecting a rebound later this year and a strong 2025. CEO Steven Roth also hinted that the company may be poised to acquire some “good real estate in distress.”

“We continue to prospect for good real estate in distress, where our best-in-class operating platform can be helpful to the lender. We expect these opportunities to accelerate,” Roth said, during the call with investors.

According to Franco, New York’s office leasing market is showing signs of strengthening.

“While first quarter office leasing in New York took a bit of a breather from the strong year-end, there is a healthy backlog of activity with a number of large deals in the works,” Franco said during the call.

“Overall, tenant space requirements continue to trend upward, sub-lease space continues to fall, best-in-class renovated and amenitized product located in transit hubs continues to dominate leasing and the new supply pipeline is close to zero,” he said. “The financial services and legal sectors are continuing to drive the leasing activity, as both are in growth mode.”

“We are also seeing the first signs of life in the tech sector again after a couple of years of being on pause or downsizing,” Franco added. “Our experience is, when they grow, they tend to lease big chunks of space.”

Vornado’s leasing pipeline is filling up, he said.

“In addition to the significant Bloomberg lease renewal of almost 1M SF we just completed, our leasing pipeline is strong, with 370,000 SF of leases in negotiation and another 2.5M SF of proposals out on the street in different stages. Much of this activity is not only addressing current vacancy, but also forward-looking expirations,” Franco said.

Roth exuded optimism about an office recovery.

“I continue to strongly believe the contrarian bull case I made in my annual shareholders letter, that basically with frozen supply—i.e. no new developer office starts and none on the horizon—tenant requirements picking up and vacancies shrinking, I couldn’t be more optimistic about the future,” the Vornado CEO said.

Roth noted that Vornado is benefiting from what he called a “gold rush” of retail luxury brands buying prime locations on Fifth Avenue.

“The gold rush on the part of the luxury brands to own, control, and dominate the very best locations is accelerating and the knock-on effect on prime New York City retail space is palpable,” he said.