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Vornado Realty Trust
Q4 2019 Earnings Call

Feb 19, 2020

Michael J. Franco -- President

Let me now turn to the New York market. The Manhattan office market continues to fire on all cylinders, fueled by strong job growth and unabated tenant demand for office space, particularly for landlords with new or redeveloped product [Phonetic]. The city added 19,000 office-using jobs during the year, bringing office-using employment to an all-time high of 1,470,000 jobs. And the recently announced large future office commitments from major companies in the city point to continued strong job growth.

Leasing volume citywide in 2019 totaled 43 million square feet, the highest activity in 20 years. [Indecipherable] tenants continued their strong demand accounting for one-third of all activity during the year, with the tech sector alone leasing 7.5 million square feet. This sector has become a dominant powerhouse in New York as tech companies are attracted by the city's dynamic economy, deep and diverse talent base, and leading universities.

.....According to a Cushman & Wakefield year-end report, asking rents for Class A product in the Penn District submarket, which includes Hudson Yards and Manhattan West, reached a historic $109 per square foot, a very good sign for our 5.2 million square feet currently in redevelopment in the district.

As a company, we are heavily focused on the transformation and repositioning of our Penn District holdings as a new epicenter of New York. Our redevelopments are now in full construction mode. 2020 will mark an important step in the district's transformation as the majestic Moynihan Train Hall at Farley and our 850,000 square feet of office and retail space at Farley will be substantially completed at yearend.

As you walk around the district today, you see the incredible amount of activity under way. The redevelopments of Farley, PENN1, PENN2, the grand new entrance to Penn Station on Plaza 33 where work has begun and the scaffolding in the LIRR concourse where redevelopment will shortly commence. In total, there is over $5 billion currently being invested in the district and its infrastructure between Vornado's $2.2 billion and the government's $3 billion.

During the fourth quarter, we bought out Kmart's 141,000 square foot lease at PENN1, which had another 16 years to run, for a $34 million payment, of which $10 million is expected to be reimbursed. Steven [Indecipherable] about this for years and years, and we think we timed the buyout at exactly the right time and got at a fair price. Despite the nominal short-term FFO loss from Kmart's rent, this was a big win for us and allows us to immediately integrate this space into our overall redevelopment plan for PENN1, the adjacent plaza in the LIRR concourse, and [Indecipherable] space with high-quality retailers [Indecipherable]. Overall, a big uptick for the neighborhood.

During January, we executed a relocation transaction with the Information Builders, which will move them from the tower of PENN2 into separate spaces at PENN11 and PENN1 totaling 78,000 square feet. This deal was the last piece of space we needed to get back to execute the redevelopment at PENN2. Moreover, the starting rent with Information Builders at PENN1 is in the mid-$90s per square foot, reflecting the market's confidence in the district's transformation and as this extraordinary development begins to take shape.

In addition, as I'm sure most of you saw, the Governor made a major announcement in January, expressing the State's intention to further modernize and expand track capacity at Penn Station through the creation of the Empire Station Complex with an expanded terminal in a block south of PENN2 increasing train capacity by approximately 40%.

This announcement represents another validation of Penn Station/Empire Station as the key transportation hub in the region, and a further commitment from the government to invest in the area. The government expects ridership at Penn Station to double in the next 10 to 15 years. The state intends to fund this expansion through the creation of a new district, which encompasses our Penn District holdings and by capturing future increases in tax revenues from new developments in the designated district. We look forward to working with the state, city, and other important stakeholders to help realize the Governor's very important vision.

With the explosion of tech demand in New York City, particularly on the west side, our Penn District assets are very well positioned to be at the center of this activity. It's in the hottest submarket in the city.

We're going to be delivering Farley, PENN1 and PENN2 totaling 5.2 million square feet near term with an ability for tenants to grow with us over time in our massive campus located right on top of transportation. We're confident as our plans become reality that office tenants will truly appreciate the unique and differentiated product we're delivering.