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Vornado Bowing Out of 666 Fifth Office Ownership, Turns Eyes Westward

The REIT has 3.7 Million Square Feet in Active Development on the West Side
June 5, 2018

Credit: Vornado Realty Trust.

Now that Vornado Realty Trust appears on its way to getting 666 Fifth Avenue’s office liabilities off its books, it can turn its attention to the trove of real estate it owns in two key submarkets: Penn Plaza and Times Square.

On June 1, Vornado announced it had entered into an agreement to sell its 49.5-percent interest in the office condominium at 666 Fifth Ave. (pictured, right) in New York City back to Kushner Companies, with the transaction expected to close during the third quarter of 2018.

Kushner Co. had sold the stake in the 1.4 million-square-foot space to Vornado in 2011 for $646 million, or about $900 per square foot, according to CoStar data.

Vornado will net about $120 million in proceeds from the sale. The New York City-based REIT will also garner $58 million in net proceeds on its share of the mortgage loan. The entirety of that mortgage will be repaid.

Within the pages of an investor filing submitted the same day, Vornado noted in fine print that the office condominium carried almost $700 million in debt, and that it had excluded its share of the debt and the net operating income from its most recent pro-forma.

In 2011, 666 Fifth Avenue Associates LLC took a $1.214 billion mortgage on the office condominium, with Jared and Charlie Kushner among the guarantors. The document specified Vornado was not a guarantor.

Vornado said it retains ownership of 114,000 square feet across two separate retail condominiums within the building. It acquired that block in 2012 from the Carlyle Group for $707.82 million, or $6,200 per square foot, according to CoStar data.

Vornado and Kushner Co. did not immediately respond to requests for comment on the transaction.

Vornado is now signaling to investors that the REIT’s focus must turn west. Over one-half of its total office square footage is located on the west side.

Vornado feels very good about that fact, calling its stock the "only significant way to invest in the fast-growing West Side of Manhattan." And it appears to be directing much of its energy on this part of town, with its plans to redevelop Penn Plaza.

Roughly 88 percent of the 35.9 million square feet of office and retail space that Vornado holds in its portfolio is based in New York City. It owns 2.7 million square feet of street-level retail space, the lion’s share of which is centered around Fifth Avenue, Madison Avenue, Penn Station, Times Square and SoHo.

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Credit: VornadoClick the images to enlarge.

The company has 3.81 million square feet of office space across six projects in active redevelopment, three of which are on the west side. The largest, One Penn Plaza, spans 2.53 million square feet.

As of March 31, 2018 Vornado had earmarked $200 million for renovations at the property, to begin in the fourth quarter of 2018. It expects to fetch $84 per square foot rental rates following the renovation, compared to $64 per square foot today.

Also part of the Penn Plaza redevelopment plans is the Farley Office and Train Hall project, which Vornado is working on with the Related Companies. That will bring a combined 730,000 square feet of office space and 120,000 square feet of retail space to the Penn Plaza area.

Vornado said Farley is expected to deliver in the third quarter of 2020 and to stabilize in the second quarter of 2022. It has earmarked $515 million for its share of the budget.

A few avenues to the West lies Hudson Yards, which when completed will garner asking rents ranging from $84 to 130 per square foot.

"Transformation of the neighborhood will also substantially enhance the value of Vornado’s Penn Plaza retail holdings," the company wrote to investors on June 1.

Credit: Vornado.

As it relates to its other retail holdings, spread along upper Fifth Avenue and Times Square, Vornado has noted that its properties there are locked up for term with high-quality tenants.

Vornado’s street retail comprises 23 percent of upper Fifth Avenue’s frontage. It owns both 1540 and 1535 Broadway in Times Square, with the buildings housing 96,000 square feet and 64,000 square feet of retail, respectively. The majority of its leases along Fifth Avenue and within Times Square expire after 2028.

Soon, Vornado will add another Manhattan retail building to its portfolio. In SoHo, it is building 606 Broadway on a $30 million budget. The six-story, 41,000-square-foot storefront is expected to come online later this summer and stabilize in 2020.

Future West Side development opportunities on Vornado's list include the 2.8 million-square-foot Penn Plaza Hotel and the Penn2 building, around 1.8 million square feet.

About 21.4 million square feet of new office space will come online in Manhattan by 2022, but 8.7 million square feet has already been preleased, according to Cushman & Wakefield.

Vornado sees 7.5 million square feet of vacancy arising from "relocations to new construction," leaving 20.2 million square feet to be filled. New York City will need to add 16,000 office jobs annually for five years to fill that space. But there’s reason for optimism: the city has added 31,000 office jobs annually for each of the last eight years. According to local government estimates, the city is on track to gain an average of 23,700 residents per year for the next 30 years.

Diana Bell, New York City Market Reporter  CoStar Group   
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