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Vornado Eyes Selling Fifth Avenue Retail As Office Occupancy Drops

280 Park Ave., where SL Green and Vornado secured a loan extension.

Vornado Realty Trust is still wrestling with the headwinds facing New York's commercial real estate market, but international luxury brands have given its executives cause for optimism.

The REIT, one of Manhattan's largest owners of office and retail space, reported its funds from operations during the first quarter were $104M, down from $119M the prior year. The dip in cash flow pushed the company to a net loss of $9M for the quarter, after turning a $5.2M profit in Q1 2023.

Vornado's office portfolio was 89.3% occupied at the end of the first quarter, the REIT said in its quarterly earnings release Tuesday. That is down more than a full percentage point from where Vornado ended Q4, at 90.7%.

The company expects occupancy to decline this quarter due to planned move-outs, Vornado President and Chief Financial Officer Michael Franco told investors on the call. NYC has a “backlog” of large office leases in the works, he said.

For Vornado, that includes 370K SF of leases in negotiation, plus 2.5M SF of proposed leases in different stages. Demand remains consistent from legal and financial services firms, with the tech sector showing renewed sparks of interest after downsizing in recent years, he said.

Still, the market remains competitive as tenants shop around for the best value space for their needs.

“Overall, asking rents are stable, even rising in the top-tier properties, but concessions remain stubbornly high across all submarkets,” Franco said.

Vornado offered a concession package to persuade Bloomberg to stay put at 731 Lexington Ave., where the $98-per-SF rent could be lowered by as much as 10% once a 2029 appraisal takes place. In the meantime, the landlord is staring down a maturity this year for the 56-story Midtown office tower in a higher interest rate environment than the last time it took out a loan on the building.

Vornado CEO Steven Roth said on the earnings call that for that building, “My personal favorite is to pay the debt down and maybe even pay the debt off.”

“When a 3% loan matures into a 7% market, there really is no place to hide,” Roth said on the call.

But Vornado has persuaded lenders that it can handle its debt maturities. Just last month, it modified the $1.1B CMBS mortgage it has on 280 Park Ave., buying itself and co-owner SL Green until September 2026 to pay off the loan against the 43-story, 97% occupied office tower.

While interest rates and sluggish office demand are taking a bite out of Vornado's bottom line, Roth and Franco said the combined $1.8B Prada and Kering dropped on Fifth Avenue retail buildings around the beginning of the year is good news for the REIT's portfolio.

“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,” Roth said. “It should be noted that in New York, we have much more prime retail space than anyone else by a wide margin.”

When analysts asked whether those comments meant Vornado could be in the market to sell some of its properties, Franco said it is a distinct possibility.

“The animal spirits are alive and well amongst retailers. They see that Manhattan is thriving again — their sales numbers reflect it,” he said. “I don't think you've seen the last of the retailer purchases, and obviously, given our portfolio, we are a fertile ground. So we expect to be in the mix there.”