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Vornado Posts Huge Loss On Manhattan Retail As NYC Market Reality Sets In

One of New York City’s largest commercial landlords saw significant losses to its office and retail holdings in the three months ending in September, another sign of the weakness in Manhattan’s real estate market.

Vornado CEO Steven Roth at REITWeek 2014

While the New York-based real estate investment trust said it turned a nearly $53.2M profit in Q3 — down from $322.9M in Q3 last year — it saw some of its major assets drop in valuation and wrote off $26.3M in rents it won't be able to collect. Its performance was propped up by $591M in quarterly condo sales at its 220 Central Park South tower. 

“Our financial results, as well as our peers’, are suffering. But it's important to appreciate that today's quarterly results are a reaction to a short-term crisis and are certainly not predictive of the future,” Vornado Chairman Steven Roth said on his company's earnings call Wednesday. “We are in the midst of a once-in-a-century pandemic. Every medical scientist worldwide is working 24/7 on therapeutics and vaccines. So it is our hope that we can win the battle with this disease in months, not years.”  

Vornado's revenue was down $102M year-over-year in the quarter. The REIT’s stock, which is traded on the New York Stock Exchange, lost 7% of its value Wednesday after its earnings call in the morning. It grew less than a percentage point Thursday, despite the S&P 500 index rising by 2%.

Vornado posted an office rent collection rate of 93%, according to its regulatory earnings filings, and 82% of its expected retail rent. Its overall occupancy is at 94.3%, down from 96.8% at the end of Q3 in 2019. Its retail was 79.9% occupied at the end of the quarter. 

Vornado's biggest loss of the pandemic has come from its portfolio of pricey Fifth Avenue and Times Square retail. It sold a 45.5% stake in the properties, which span 489K SF of retail and 327K SF of office, along with signage, parking and a Broadway theater, to a group led by Crown Acquisitions last year at a valuation of nearly $5.6B. 

This year, Vornado has written down the value of that portfolio, taking a loss of $409M. It acknowledged its portfolio might not have hit bottom yet. 

“The value of our real estate assets may continue to decline, which may result in additional non-cash impairment charges in future periods and that impact could be material,” Vornado stated in the filing. 

Q3 was the first quarter since the pandemic hit that can give true insight into what a coronavirus-era market truly looks like, market researchers have told Bisnow in interviews over the past month, citing the timing of lifting stay-at-home restrictions. 

The city’s real estate market has felt the wrath of a socially distanced world. For now, there is uncertainty around the future of the workplace and — at least temporarily — a shift away from the office to working from home. 

“What we're finding when we talk to the large CEOs is that they very, very much are shying away [from forcing their employees to go back to the office],” Roth said. “They will not open their offices up by edict. And they very much respect what their employees perceive as being a health risk and that's something that we have to live with right now.”

Roth said Vornado hasn't mandated all of his employees return to the office, instead implementing a team system, where employees go into the office on alternate days to decrease office density, he said. It is also not forcing any of its employees to come back if they feel uncomfortable with doing so.

421 Eighth Ave.

“Most of our peer companies have basically returned to office work, 100% of the companies. And they have done it by edict,” Roth said. Related and SL Green have each publicly stated their workers have 100% returned to the office.

“In respect for our employees, we have basically said that if you are uncomfortable with the health risk of returning to the normal office environment or etc., then by all means, please continue to work from home. Now, we're not going to let that go on forever.” 

While New York's faltering has made more headlines, Vornado's D.C.-area property spinoff underperformed its old parent. JBG Smith, for which Roth still serves as chairman, posted a $23M Q3 loss and reported collecting just 63.1% of its retail rents.

Vornado's reported financials are roughly on par with its peers. 

Empire State Realty Trust's office occupancy was at 85.9% in the third quarter, while SL Green reported 94.2% occupancy. ESRT's office rent collection rate rebounded from 86% to 96% quarter-over-quarter, while SL Green collected 96.9% of office and 92% of retail rents in the quarter.

While the major retail corridors have clearly been hit hard, Roth said he is hopeful about the retail space in the Farley Post Office at 421 Eighth Ave., where Facebook recently inked a 730K SF office lease, the largest in the city this year. 

“I've nicknamed … this project … 'The Funnel,'” he said. “Because really, what happens is that all of the population of Hudson Yards and all of the population of Manhattan West, which are huge developments with huge office populations, immediately and contiguous to us to the west, has to funnel through this retail corridor to get to the trains and get to the commuting subways and trains.”

Roth went on to call the retail space the best retail in the city at the moment “by a factor of two or three.” 

CBRE doesn't consider the Hudson Yards area a major retail corridor and didn't include a specific breakdown of asking rents or space availability. However, it did break down other key markets, such as Times Square, which saw an 18% year-over-year decline in asking rents. 

Ultimately, Vornado’s condo sales at 220 Central Park South — a total of 19 suites and units sold between July 1 and Sept. 30 for a total of $591M — carried the profit made in the REITs quarterly numbers, despite the luxury condo market continuing to be substantially oversupplied. Since the beginning of the pandemic, Vornado sold 30 units for a total of $939M, it said. Overall, it has collected more than $2.5B from sales at the Billionaire’s Row tower.