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New York Office Giants Face Deteriorating Demand For Offices After Summer Of Hope

The slowing economy is causing a jittery office leasing market as tenants are increasingly hesitant to commit to space, which is having an impact on the bottom lines of New York City's largest office owners.

A rendering of the planned redevelopment of Penn Station, which is slated to include several new office towers developed by Vornado Realty Trust.

Vornado Realty Trust executed just 229K SF of office leases at its New York City properties during the third quarter, which CEO Steven Roth said was “well below” its typical period. The average term on the deals was $88.99 per SF and 5.8 years during the quarter, the company reported.

“As we enter the fourth quarter, caution is the word of the day," Vornado President and Chief Financial Officer Michael Franco said on the company's earnings call Tuesday. "There's increasing uncertainty in the world, and tenants are acting accordingly.”

"This is a little bit of the slowing market, and a lot of the result of timing,” Roth said, adding the firm has 1.5M SF of leases in its pipeline. 

Overall, Manhattan had a down start to the fourth quarter in office leasing. Some 1.9M SF of leases were signed in the borough in October, according to Colliers, a 40% drop from September and a 41% drop year-over-year.

The drop-off comes after the market saw a strong summer, when office owners and brokers said tenants were starting to get far more comfortable locking in long-term deals.

Piper Sandler Senior Analyst Alexander Goldfarb, who covers REITs, said there is no doubt the mood among the big office landlords has shifted.

“With the state of office right now, nobody is thinking that the glass is half full, everyone's thinking the glass is half empty,” he told Bisnow in an interview.

Vornado saw net income fall to roughly $7.8M in the third quarter from $37.7M the prior year, it said in its quarterly earnings release Tuesday. While the REIT's funds from operations and revenues were ahead of analyst expectations, Roth said it is rethinking the timing of a major development it has planned.

Vornado expects to complete the demolition of the Hotel Pennsylvania in the fourth quarter of next year, but while it had planned to replace it with an office tower dubbed Penn 15, Roth cast doubt on the plan on Vornado's earnings call.

“I must say that the headwinds in the current environment are not at all conducive to ground-up development,” Roth said.

He didn't respond to an analyst's question regarding whether the firm would consider reducing office space at the development in light of the current market conditions.

“That's not something we're going to get into now,” he said.

The company’s Farley Building development has 730K SF leased to Facebook’s parent company, Meta Platforms, which recently terminated a 200K SF lease on Park Avenue South four years early. Meta said last week it plans to spend $2B this year getting out of office leases, but Vornado executives said they don't expect any impacts on the Farley lease or at 770 Broadway, where Meta leases 800K SF.

“We're friends, we’re vendors to them, and we're happy and honored to be so,” Roth said.

Roth said the firm had prioritized extending near-term debt maturity, and now has nothing coming due in 2023. Trades have ground to a halt, but Roth said he is certain it will pass quickly.

"The debt markets and the capital markets are rioting. They are highly illiquid,” he said. “So that's a very big deterrent to asset sales … You have to just live through this and it ends. It’ll end sooner than you think.”

A rendering of SL Green's One Madison Ave. office project in Manhattan

It is a similar story for most of the publicly traded office owners, who say interest rates and spooked tenants are the biggest issues in their business right now. BXP President Douglas Linde said on the company’s earnings call last week that economic uncertainty is affecting office space decisions with clients.

“There is less urgency from clients to make new commitments,” Linde said.

The company recorded 1.4M SF of leases during the quarter, its strongest third quarter for lease volume since 2019, but Linde said demand from tech and life sciences is shrinking.

Goldfarb noted landlords with large, big-city portfolios are incredibly concerned about how issues around crime may be affecting return to office.

“Boston Properties up until this spring was bullish on the return of San Francisco. Then they finally acknowledged what everyone else knew — San Francisco's got really big issues,” he said. “The fact that [SL Green’s] pitch on the casino license for Times Square point blank has a paragraph addressing security and crime in Times Square, that tells you everything you need to know.”

The deals that are getting done are increasingly in top buildings, Savills Senior Director of Northeast Regional Research Marisha Clinton said. In the third quarter, 30% of the deals done in Class-A product were trophy buildings, per the brokerage.

“Third-quarter activity was better than expected, it was actually up 7.7% quarter-over-quarter and a little bit over 18% year-over-year,” she told Bisnow. “But a lot of that has to do with a lot of the trophy activity.”

At Empire State Realty Trust, the firm signed 34 new and renewal leases across about 335K SF at a weighted average lease term of approximately eight years, CEO Anthony Malkin told analysts on its earnings call last week. ESRT executives didn't say whether they expected leasing to slow down, deflecting an analyst's question about activity by touting its portfolio's ability to win tenants fleeing to trophy properties.

"We've invested $1B into our assets, upgrading common areas and building systems," ESRT Executive Vice President Tom Durels said on the call. "And we've redeveloped 95% of our tenant space to deliver modern, efficient office spaces that tenants seek today. So those tenants are looking at their alternatives, I think that we are well-positioned to outperform."

SL Green’s leasing pipeline fell below its previous quarterly pace at 700K SF, which Director of Leasing Steve Durels attributed to recently signed major deals like Franklin Templeton's 347K SF lease at its One Madison Ave. redevelopment. 

But just like BXP and Vornado, its activity with tech firms is significantly diminished, making up just 8%-12% of total leasing.

"A lot of the focus from the market is on the leasing performance and tenant demand, and on that front, we feel quite good about where we are given the portfolio is highly improved and our overall asset quality has never been better," SL Green CEO Marc Holliday said on his firm's earnings call. "The portfolio is still well occupied today at 92%, and we have marketing and capital plans in place that we believe will enable us to operate during this market cycle at or above 90% or better until things begin to turn around."