Author Archives: Pirho

No Plans for Move to Vornado’s ‘Penn15’

It took only about a week, but it appears the plans that Vornado had for moving their existing tenant, Facebook, to the site of the Hotel Pennsylvania, is not going to happen.    In an recent article by The Real Deal, Facebook, has declined the offer proposed by Vornado to move to the not yet constructed building that was being proposed by the real estate investment trust.

“We constantly re-evaluate our facilities needs and we don’t have anything new to share about our plans in New York at this time,” Facebook spokesperson Anthony Harrison told Bloomberg in an email.

“Facebook Inc. won’t be taking office space in Vornado Realty Trust’s proposed midtown Manhattan skyscraper, a person with knowledge of the matter said after renderings showing the company’s logo on the building leaked on the internet.

Vornado had pitched the tower near the Pennsylvania Station rail hub to Facebook, which has been scouting out office space around New York City, said the person, who asked not to be identified because the matter is private. Facebook never seriously considered the building — dubbed “Penn15” by Vornado — as an option, the person said.”

https://therealdeal.com/2019/06/13/facebook-isnt-moving-to-vornados-hilariously-named-penn15-after-all/

Vornado at it again with 15 Penn Plaza

Facebook’s possible supertall, image via Vornado

One of the largest potential office buildings in New York City has long been in the works on the site of the Hotel Pennsylvania, at 401 Seventh Avenue, with renderings for a soaring supertall first released last decade. But now, YIMBY has the latest on Vornado’s newest vision for the site, which would place Facebook within a massive 2.8-million-square-foot tower designed by Rafael Vinoly, dubbed “Penn15” in the brochure.

Facebook’s possible supertall, image via Vornado

Facebook’s possible supertall, image via Vornado

While the renderings and design are fresh, Facebook has already publicly committed to One Madison Avenue in NoMad, so this ideation may already be moribund. However, the reconception is a likely indicator that the old design by Pelli Clarke Pelli has now fallen by the wayside, with the new scheme built around open floor plans and numerous outdoor spaces designed to lure technology tenants.

Massing diagram, image via Vornado

Interiors, image by Vornado

Interior view, image from Vornado

The new plan would span the same square footage as the old, however, the configuration of the tower would be dramatically different. Variable stacked floorplates would be interspersed and cantilevered atop one another, with each of the tower’s five components totaling 560,000 square feet apiece.

Facebook Tower Lobby, image via Vornado

Tower base, image via Vornado

All of the renderings for the plan feature Facebook’s logo emblazoned across either the page or the tower itself. The design of the base of the tower would be particularly elegant, featuring a terraced garden atop the first floor, and a soaring glass atrium in the middle of the structure. The combination would result in a surprisingly light impact on the pedestrian sphere for a supertall that would be both taller and visually bulkier than the Empire State Building, just a few blocks to the east.

Auditorium, image via Vornado

While Penn15’s rooftop would stand 1,400 feet above street level, its interior would only include 48 usable floors, with 43 of those dedicated to office space. The bottom of the tower would span three floors, including the lobby, streetfront retail, conference space, a restaurant, and two theaters, one of which could hold up to 700 people.

Terraced level, image from Vornado

Up above, the office floors are broken up by interspersed amenity and mechanical floors. While the ceiling heights for the office floors are not specified, they appear to be approximately 20 to 25 feet each, which would also be unprecedented for Manhattan.

15 Penn Plaza

Old Pelli Clarke Pelli plan for 15 Penn, image via Vornado

Additionally, since plans for 15 Penn Plaza were previously conceived by Pelli Clarke Pelli, the hotel has fallen victim to increasingly lurid headlines following its renovation. A baby’s death there earlier this year was ruled a homicide, there have been multiple suicides and accidental deaths at the property in recent and previous years, TripAdvisor reviews are exceedingly and overwhelmingly terrible with many guests believing the hotel to be haunted, and this abysmal purported re-enactment of The Shining was filmed in the hallways.

Hotel Pennsylvania TripAdvisor Review

No tentative completion date has been mentioned, and no commitment from Facebook has been formally announced. However, with the success of Related’s Hudson Yards and Brookfield’s Manhattan West just a few blocks to the west of Penn Station, redevelopment pressure in the vicinity is likely to increase, and it is difficult to imagine that a hotel where rooms are currently available for $75 a night has substantial staying power when its potential razing and redevelopment would be a boon to its owners, the neighborhood, and the skyline.

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31 COMMENTSON “FACEBOOK’S POSSIBLE 1,400-FOOT ‘PENN15’ SUPERTALL REVEALED AS VORNADO APPEARS TO CHANGE PLANS FOR 401 SEVENTH AVENUE, IN MIDTOWN MANHATTAN”

  1. This is not Miami. Those trees would be green only about 5 months out of the year.

    • Don’t worry about that. Trees typically don’t survive the rendering stage of a new development.

  2. That design especially the bottom of the tower that meets the street does not fit in with the very urban Penn Station area. It belongs more on Park Ave or better yet on Brickell Ave. Viñoly once again shows how out of touch he is with NYC.

  3. David in Bushwick | June 5, 2019 at 8:58 am | Reply

    A hideous, horrible, hulking monstrosity. Did a child design this or is it senility? What is the purpose of all that dead tree outdoor open space? Office workers aren’t allowed to leave their computer screen. This is a bad joke to the worst excesses of our current dystopian culture. And bringing up negative headlines about the Hotel Pennsylvania is simply a pathetic excuse for demolition of the historic building. We need the Trump Recession to happen soon to stop this crap.

    • Here here !! I have been making video shorts of our new New York skyline(s) and I call them “NYC before the Fall”….It’s going to happen quickly. We have to be ready for the unexpected, like 9/11. It is a nefarious critter of a design, worse thing is that it will house facebook.

  4. GrewUpInThe90s | June 5, 2019 at 9:09 am | Reply

    Did no one on the brochure team catch what “Penn15” looks like? I wonder if the team had any millennials.

  5. Penn15 Club? At the top?

  6. I mean someones gotta be trolling us with that name right?! 1,400′ Supertall PENN15 ?!??!?!?! nobody?! Maybe bring that one back to the smart guys at FB and see if they can workshop it a bit more..

  7. I love the height. But man I HATE the design. What a hulking monstrosity. Imagine what could be done with 2.85m square feet – this could be the site of NY’s first megatall. Anything but this horrible pile of garbage!

  8. “Facebook has already publicly committed to One Madison Park.” That should be One Madison Avenue, since One Madison Park is a condo residential tower.

  9. this will never look like the rendering —- if it did that would be awesome

    • Howard Miller | June 5, 2019 at 1:45 pm | Reply

      Hear! Hear!

      In fact, after reading so many others’ negative comments about this (likely too good to be true) refreshing and innovative “conceptual” design, I think I now know why NYC’s architecture of late, and especially those hideously ugly eyesores rising in Hudson Yards, are being “normalized” as acceptable designs when they’re as spectacularly bad as they truly are.

      Wow!

      No wonder our formerly majestic, admired and iconic, “picture postcard” skyline is being destroyed with the pathetically ugly, imposing, overly massed “Super Tall” eyesores seen of late polluting Manhattan with each building seeking to be even uglier than the next to it (with Hudson Yards being a perfect example of mind-boggling Fugly buildings!) as most of the negative comments seen here for a building that has more “WOW!” than ANY of the other FUGLY “Super Tall” monstrosities built/being built/proposed in recent memory!

      Like I said, it’s mind-boggling that so many want even more FUGLY crap instead of something unique and refreshing like this concept is.

      Oh, well – it’s all so sad and depressing.

      But, at least now there’s an explanation that accounts for the current era’s dearth of exciting architecture that future historians and architects will surely view with all of the disparagement and disdain it so richly deserves given how ugly and unimaginative nearly all of the Super Talls (and that fugly $8 billion bus station pretending to be a “World Class Transportation Gateway for the 21st Century” that is whatever that overpriced ugly thing rising at LaGuardia Airport) being built in NYC these days is 🤮

      • You make a fantastic argument.

        • I love Illuminati Hudson Yards. If I hated it, I would be miserable. It is all corporate architecture….as well as Agenda2030 housing galore all over , in Jersey City and Hoboken as well.

  10. desertmodern | June 5, 2019 at 11:08 am | Reply

    Incongruous blue crown notwithstanding, this is a pretty compelling concept. With only 43 office floors in 1400 feet, I suspect it will remain just that. One particularly negative rant equated this with “our current dystopian culture,” one I suspect most office workers are missing out on. “Unrealistically utopian” would probably be more apt.

  11. Real grass/sod or Astroturf?

  12. Penn15? Is this a joke?

  13. Calling this the Penn15 clearly shows that this must be a joke. The only truly good thing that could come from redeveloping this site, would be if they continue to include the re-opening of the Gimbel’s passageway which would allow seamless movement from Penn Station to 34th St/Herald’s Square, underground.

    • Nikolai Fedak | June 5, 2019 at 2:03 pm | Reply

      I don’t think Vornado would spend the time and effort to build this proposal and redesign if it were a joke, I think the name was either a poorly chosen mistake (it was written out as Penn 15 in spots but also appeared as Penn15), or a nod to ego.

  14. I’m gonna have to say NIMBY for this one!

  15. Grotesque, horrendous, artless, graceless, ridiculous. I could keep going…

  16. “PENNIS” is a marketing fail if I’ve ever seen one LOL.

  17. A tacky POS, from an intrusive, unethical company. Their dystopian vision of life has become a reality,all they need now is a big fckin monument to remind us. Quite fitting..

  18. Would the removal of the “mechanical floor” loophole prevent them from building to this height at that site? the design is something that would work along the river or waterfront, but not at 32nd and 7th, lol. This screams “leak a cool design” to get attention – no way they expect it to actually be built. Any supertall at this site will be an extremely visible landmark – the expectation should be that the design is extremely iconic. This is not that.

  19. LUBOMIR FIRKO | June 5, 2019 at 10:19 pm | Reply

    That’s not Penn15
    It’s PENNIS

  20. Looks alright to me minus the very top. Needs some sort of crown.

    Maybe some setbacks as the tower rises?

    I do prefer the old design though.

  21. Where is the fishing wharf?

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Vornado 4th Quarter 2018

Vornado Realty Trust (NYSE:VNO) Q4 2018 Earnings Conference Call February 12, 2019 10:00 AM ET

Executives

Catherine Creswell – Director, Investor Relations

Steven Roth – Chairman and Chief Executive Officer

David Greenbaum – President, New York Division

Joseph Macnow – Executive Vice President, Chief Financial Officer, and Chief Administrative Officer

Michael Franco – Executive Vice President and Chief Investment Officer

Analysts

Stephen Sakwa – Evercore ISI

Emmanuel Korchman – Citigroup

Jamie Feldman – Bank of America Merrill Lynch

Adam Gabalski – Morgan Stanley

Alexander Goldfarb – Sandler O’Neill + Partners, L.P.

John Kim – BMO Capital Markets

Nicholas Yulico – Scotiabank

Daniel Ismail – Green Street Advisor

Michael Bilerman – Citigroup

Operator

Good morning, and welcome to the Vornado Realty Trust Fourth Quarter 2018 Earnings Call. My name is Michelle, and I will be your operator for today’s conference. This call is being recorded for replay purposes. All lines are in a listen-only mode, and our speakers will address your questions at the end of the presentation, during the question-and-answer session. [Operator Instructions]

I will now turn the call over to Ms. Cathy Creswell, Director of Investor Relations. Please go ahead, ma’am.

Catherine Creswell

Thank you. Welcome to Vornado Realty Trust fourth quarter earnings call. Yesterday afternoon, we issued our fourth quarter earnings release and filed our Annual Report on Form 10-K with the Securities and Exchange Commission. These documents as well as our supplemental financial information package are available on our website, www.vno.com under the Investor Relations section.

In these documents and during today’s call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release, Form 10-K, and Financial Supplement. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from these statements due to a variety of risks, uncertainties and other factors.

Please refer to our filings with the Securities and Exchange Commission including our Form 10-K for more information regarding these risks and uncertainties. The call may include time sensitive information that maybe accurate only as of today’s date. The Company does not undertake a duty to update any forward-looking statements.

On the call today from management for our opening comments are Steven Roth, Chairman of the Board and Chief Executive Officer; and David Greenbaum, President of the New York Division. Also in the room are Michael Franco, Executive Vice President and Chief Investment Officer; Joseph Macnow, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer; Mark Hudspeth, Executive Vice President and Head of Capital Markets; Matt Iocco, Executive Vice President and Chief Accounting Officer; and Tom Sanelli, Executive Vice President and Chief Financial Officer, New York Division.

I will now turn the call over to Steven Roth.

Steven Roth

Thank you, Cathy. Good morning, everyone. 2018 was a good year. Here are some highlights. Our leasing activity for the year across the entire business including New York, theMART, 555 California Street and Retail, totaled over 2.6 million square feet and 230 leases with industry-leading mark-to-markets of 25.6% GAAP and 18.4% cash.

At year-end, office occupancy across the board was 97%; and retail occupancy was 97.3%. These numbers in the very high 90s are typical of our performance year-in and year-out over the past 20 years. Thanks to Glen, and our best in the business leasing team.

We have begun closings that are 220 Central Park South super-tall condominium project. In the fourth quarter, we closed 11 units aggregating $222 million with a $67.3 million after-tax gain. And we have already closed in just the first five weeks of this year, another $290 million. Closings will continue throughout 2019, as we climb up the building. And the last of the 27 large full floor apartments in the tower is now committed and under contract. I’m guessing that this is the most successful project ever, anywhere.

We increased our ownership in the Moynihan Train Hall Farley project from 50% to 95%. We are in full blown construction here. And in 2020, we will deliver the best creative space in Manhattan. We love this asset. It is the link between our Penn Plaza neighborhood and Hudson Yards. It is a doublewide block with 150,000 square foot floor plates and high ceilings. It is a horizontal campus in an iconic landmark building much like the horizontal campuses favored by our fan tenants in the West. It is a truly unique asset.

In the Penn District, we are under way to transform PENN1 and PENN2 to create a two building 4.4 million square foot campus right on top of Penn Station. It will include a three block, Grant Plaza along Seventh Avenue covered by a giant new bustle across the entire 400 foot frontage of PENN2.

This plaza will extend 70 feet out from the building and will be 50 feet above the street. It will serve a dual-purpose. It will be striking, creating a huge covered plaza in front of our 1.8 million square foot PENN2, and the main entrance to PENN Station. It will bring the neighborhood into the modern age.

And at the same time, we will create 140,000 square feet of very valuable new best-in-class creative space. The scale of our campus here will allow us to provide our tenants with the biggest and best unparalleled amenity package. Even a giant step forward from what many of you have seen that we have done at theMART. Considering our redevelopment plans and everything that’s happening around us, we expect that incremental $30 uplift in rents here. This financial reward is the main event.

So putting 220 Central Park South and the Penn District together; big picture, our financial plan is to redeploy the proceeds of 220 Central Park South sales into the CapEx of Farley PENN1 and Penn2. Give or take, we expect to finance all this CapEx internally, probably with no or very little new debt. Given that the only cost of the capital coming out of 220 Central Park South is the accounting item capitalized interest, which in round numbers is about $25 million. This will be enormously accretive.

As is our custom, we published management’s estimate of NAV in the fourth quarter supplement. Please see Page 22 of the supplement. Our spot NAV is $97 per share versus $96 per share a year-ago. The math here reflects an increase in office NOI, partially offset by an increase in the cap rate on street retail, the 4.5% from 4.25%, which we believe more accurately reflect current market conditions.

Last month, we increased our quarterly dividend to $0.66 per share, at an annual rate of $2.64 per share, a 4.8% increase, this after a [7.78%] increase the year before. Based on yesterday’s closing price, the dividend yield is 3.8%.

It is very encouraging that Amazon shows New York for half of HQ2 and that Google, Disney, Facebook and many others continue to expand and expand again and again making New York their second home. By the way, the other half of HQ2 is going to Crystal City, Virginia, on land, we contributed to our JBG SMITH spin-off validating investments we made years ago. This is a really big deal. Kudos to Matt Kelley and the JBG Smith team.

Here’s an interesting tidbit that bodes really well for the future of New York. As David will tell you in a minute, a research piece just came out with the fact that New York has grown to be the leading tech city in this year’s index overtaking San Francisco. The point here is that New York has been steadily growing in creative class workforce, in creative employers, and in creative infrastructure.

Now, I’d like to cover the financial math. Financial results for the full year are as follows: net income was $2.01 per share, compared to $0.85 per share for 2017. Total FFO was $3.82 per diluted share compared to $3.75 for 2017. FFO as adjusted was $3.76, compared to $3.73 for 2017, consistent with our comments at the beginning of the year that 2018 would be flat. 2018 cash basis FFO as adjusted was $3.73, compared to $3.48 for 2017, up a strong 7.2%.

Companywide cash basis NOI for 2018 was $1.338 billion, compared to $1.315 billion for 2017. 2018 cash basis same-store NOI increased 3.9% as follows. New York office was up 7.5%. Retail was essentially flat down two-tenths of a percent. The total New York segment was up 4.3%. Retail produced $324.2 million of cash NOI at 2018, well ahead of the $304 million minimum we guided in the beginning of the year, which we increased to $315 million minimum in the third quarter.

theMART was down a funky 6.5%, as a result of a fourth quarter $12.1 million additional real estate tax accrual. This is essentially a timing mismatch between the GAAP required expense accrual in 2018, and the actual payment which we will make in 2019, which is when we will bill our tenants and collect approximately 80% in reimbursement income. Excluding this mismatch, theMART same-store would have been positive 8.8%. At 555 California Street, same-store was up 18.1%.

For the fourth quarter, our results are as follows: net income was $0.53, compared to $0.14 in the prior year’s fourth quarter. Total FFO was $1.10 compared to $0.80 for the prior year’s fourth quarter. FFO as adjusted, which excludes non-recurring items was $0.90 compared to $0.98 in the prior year’s fourth quarter.

FFO as adjusted for this quarter was negatively impacted by the following items: $12.1 million, or $0.06 from the already mentioned additional real estate tax accrual at theMART. $10.5 million, or $0.05 from expected retail vacancies and lower income from a few short-term deals; and $6.2 million, or $0.03 from expected vacancy as 90 Park Avenue and theMART. Space out of service at PENN2 and 825 Seventh Avenue and lower office termination fees. Of course, there were many positives, which partially offset these items. This is all, the normal EBIT flow of our business.

We run the business for cash. Here are the cash numbers for the quarter. Cash basis FFO was adjusted with $0.91, compared to $0.90 for the prior year’s fourth quarter. This quarter’s company-wide cash basis NOI was $324 million, compared to $342.3 million in the prior year’s fourth quarter. This decrease is primarily due to the additional 12 midpoint one-year real estate tax accrual at theMART in the fourth quarter and the sale of our interest in 666 Fifth Avenue in August.

Cash basis same-store NOI decreased by 1.7%, this flattish number masks a very healthy business. Here are the details. New York office was up a sound 5.8%, retail was down and anticipated 4.1% based on scheduled lease expiries and reduced rents on short-term renewals.

The total New York segment was up 1.9%. theMART same-store number is so heavily skewed by the real estate tax mismatch, that the number is not meaningful. Excluding this mismatch, theMART same-store would have been positive 2.7%. And 555 California Street was up a very healthy 15.8%.

Our Office business continues to perform very well. We continue to experience a robust demand from all matter of industries in all of our sub-markets. As I have said before, our tenants are optimistic, aggressive, growing and upbeat about New York.

Retail continues to be soft, albeit, we are finding sales volumes are leveling and there is increased retailer activity and tours. The two strongest retail sub-markets in town are Time Square and Penn Station, where we are the largest owner with the best assets.

And here I want to make a plug for the 120,000 square feet of retail we are developing in the Moynihan Train Hall at Penn Station. In addition to the teaming streets and the existing traffic in the nation’s busiest train station, all the pedestrian traffic to and from Hudson Yards and Manhattan West will funneled through us. As you would expect, we have tremendous retailer interest in this unique space. David will give you more facts and details in a minute.

Turning now to investment sales. After a slow start to 2018, the investment sales market strengthened over the course of the year ending strongly. Investor appetite for New York City office continues to be healthy though disciplined with a good mix of domestic and foreign capital sources easily replacing declining activity from China.

Demand for assets in the West and South of Manhattan and for smaller assets continue to be stronger, but investor interest is also active in midtown. Pricing has stayed fairly constant with cap rates in the mid fours. The market has suffered from a shortage of available quality product on offer and with a fair amount coming out in 2019, should get off to a strong start.

The debt markets continue to be constructive very strong in the first three quarters of 2018, but signaling caution and volatility in the fourth quarter. All in borrowing rates remain low by historical standards. It’s interesting to note that for us, secured non-recourse financing which is our main stay is now cheaper than unsecured public market full recourse financing by 25 basis points for sure and maybe even more.

We have a highly liquid fortress balance sheet with $3.3 million in immediate liquidity, measured leveraged and well staggered debt maturities. And this doesn’t count a couple of billion dollars to come from 220 closings and non-core asset sales.

Thank you. Now to David.

David Greenbaum

Steve, thank you. Good morning, everyone. 2018 was a historic year in Manhattan. We leased a total of 42.2 million square feet, the most active year in two decades, including 61 leases of 100,000 square feet or greater with 20 of those deals greater than 250,000 square feet. This enormous rising activity is due to the continued strong job growth in New York, both private-sector employment at 3.98 million jobs and office using employment at 1.4 million jobs are at all-time high.

Manhattan’s overall average asking rent ended the year at a record $76 per square foot with Class-A midtown rents north of $80 per square foot. The overall availability rate remained steady and actually went down in Midtown, even in the face of the delivery of some 2 million square feet of new construction. Financial service tenants continued to be a strong player in the Midtown market accounting for 41% of all leasing activity.

Large tenants continue to be attracted to new and redeveloped product, which captured significantly almost two-thirds of the year’s leasing activity. The Landmark announcements made by JP Morgan Chase to develop a new corporate headquarters on Park Avenue, Google’s commitment to a campus on Hudson Square, Disney’s announcement to build a new headquarters also in Hudson Square, Deutsche Bank’s commitments in Midtown, Pfizer’s commitment to Hudson Yards, and finally, Amazon’s selection of Long Island City for half of its second headquarters location, all reflect upon the great strength of this city.

Just last week, Sable’s the international brokerage house issued its Annual Global Tech cities report. Sable’s concluded that New York ranked first, as the world’s foremost center for tech, due to its deep talent pool providing the business environment, lifestyle and quality of urban infrastructure to position New York as the attractive location for both start-ups and multinationals alike. Our portfolio of redeveloped assets has experienced the benefit of enhanced demand from tenants and Farley PENN1 and PENN2 are up next.

Reflective of the strong overall marketplace in New York, as well as River North in Chicago and San Francisco, Vornado’s portfolio across all three cities delivered very strong results. For the year 2018, our leasing team has completed 230 leases, a total of 2.5 million square feet of activity, an exceptionally strong mark-to-markets across the board of 25.6% GAAP and 18.4% cash.

Focusing on our New York Office portfolio, for the year, our team completed 113 office leases, totaling over 1.8 million square feet at an average starting rent of $79 per square foot with strong, strong mark-to-markets of 33.7% GAAP and 22.7% cash. We remain full, with year-end occupancy at 97.2% and a very modest 625,000 square feet expiring during 2019, with approximately half of the expiring space coming from the to be redeveloped PENN1 and PENN2 campus.

Tenants in New York are growing. 38% of our activity in 2018 was with tenants new to and expanding in New York City, real, real growth in the city. Looking at the last three years, our leasing performance in the portfolio totaled almost 6 million square feet, at an average starting rent of $76.50 per square foot, underscoring a very high quality of our offerings and a strong profile of the tenants in our buildings.

During 2018, our trophy assets also continued to shine highlighted by 11 triple-digit transactions, totaling 445,000 square feet, comprising fully a quarter of our total annual activity at an average starting rent of $109 per square foot. Our New York Office 2018 same-store results show robust growth of 7.5% cash and 4% GAAP.

Now turning to the fourth quarter, we executed on 479,000 square feet across 27 transactions at an average starting rent of $73 per square foot and positive mark-to-markets of 6.9% GAAP and 1.2% cash.

Same-store growth during the quarter was a strong 5.8% cash, while GAAP was essentially flat. Notable fourth quarter leases included a new headquarters for sublease international at 650 Madison Avenue on the entire 38,000 square foot second-floor with this luxury residential brokerage house will take advantage of these buildings premier location, great branding opportunities and abundant outdoor space. This space previously was retail space, which we now have converted to office taking advantage of the highest and best use for this space similar to what we did with Kmarts third floor, at 770 Broadway.

In the fourth quarter, we also relocated CICC, one of China’s leading investment banking firms from our 350 Park Avenue into 20,000 square feet at 280 Park Avenue, where they will double inside. And the Interpublic Group expanded again at 100 West 33rd Street by 44,000 square feet, bringing IPG’s total footprint there to 662,000 square feet.

As we kick-off 2019, we are seeing very active demand in the market, but leases in negotiation totaling 460,000 square feet across all sub-markets, and another 600,000 square feet of deals in the pipeline. At 1290 Avenue of the Americas in 90 Park Avenue, two of our completely redeveloped buildings, we have seen multiple tenants bidding on the blocks of space available and our sweet spot in the market in the $80 per square foot to $90 per square foot range.

Now turning to our office development and redevelopment pipeline, where we remain very active. We’ve recently completed and brought to market the new build 170,000 square foot office building at 512 West 22nd Street, directly on the High Line, where we are in active dialog with multiple tenants.

Notably, these discussions are mainly with boutique financial services tenants, looking for a new home in Chelsea. As we have said in the past, the geographic boundaries for tenants in Manhattan to continue to expand, as demand for this type of product in this district is at an all-time high, rents in Midtown South for this product have now surpassed Midtown asking rents.

Construction progress at Farley continues, where you can now really get a sense of the grandeur of the new Train Hall. The Train Hall’s mid-block Skylight, one of two signature skylight is now complete. The skylight toward 50 feet above the mid-block whole that will include our retail restaurants and one of our three office lobbies.

The work on our office core and shell program has commenced with initial delivery anticipated by mid-2020. We are seeing great office and retail interest in the project from all industry types, as we are presenting the vision of this horizontal campus to brokers and tenants on almost a daily basis.

PENN1 is a tone setter for the new Penn District neighborhood, where we will create a hospitality rich communal workplace for our district-wide tenants from the lobby to the second and even to the third floor. Physical work has commenced both our facade restoration and elevator modernization programs have begun.

We’ve completed the necessary arrangements to relocate office and retail tenants at the base of the building, which will allow us to begin the real construction work on this transformational project, once these tenants move this coming summer.

At PENN2, we are finalizing our plans and permits with construction to commence during the first quarter of 2020. Here we have completed the necessary tenant relocations to make way for this fill building capital program, delivering 1.8 million square feet of unique modernized office space along with all new retail offerings, outdoor plazas and multiple amenities, which will also serve our tenants district-wide.

Collectively, the projects we are undertaking at Farley PENN1 and PENN2 are the catalysts to our recreation of the Penn District neighborhood in the epicenter of the new, New York. I encourage you to take a look at our Penn District plans, which are now posted on our website at www.vno.com homepage.

Now turning to our flagship New York retail portfolio, for the year, we leased a total of 255,000 square feet. Same-store results were flat year-over-year, negative 2.2% GAAP and negative 0.2% cash. Retail portfolio occupancy stands at a strong 97.3%.

During the fourth quarter, we completed nine retail leases comprising 26,000 square feet with positive mark-to-markets of 3% GAAP, and 1.1% cash. Notable deals included a lease with HSBC Bank at our new 606 Broadway in SoHo, Wells Fargo’s lease of the entire retail box at 968 Third Avenue and the announcement of Ballast Point breweries first New York location at 330 West 34th Street.

Ballast Point will bring their West Coast craft brewery and restaurant concept to the Penn district, but they will have an indoor restaurant experience on 34th Street, and an outdoor Garden for its patrons on 33rd Street, directly across the street from what will be the main entrance to our future Farley building office occupancy.

We also completed a lease for a new flagship location with Krispy Kreme at the Crowne Plaza Hotel at the corner of 48th Street in Broadway, which will include a 4,500 square foot retail component as well as a large exterior digital signage presence.

At theMART in Chicago, 2018 results reflect continued strong leasing performance at this 3.7 million square foot campus. We completed 243,000 square feet of leases for the year, comprised mainly of a variety of showroom tenants and very strong starting rents of $53.50 per square foot.

During the fourth quarter, we completed 46,000 square feet of showroom deals at an average starting rent of $61 per square foot with positive mark-to-markets of 8.7% GAAP and 3.2% cash. We currently have in office lease out for 36,000 square feet with a well-known technology company and have multiple other prospects, the remaining space vacated last year by Publicis on floors four and five.

In San Francisco, we completed a stellar year at our 555 California Street campus taking full advantage of this marketplace, where the demand for space continues to surge amid limited availability. Our same-store results for the year were a very strong 14.9% GAAP and 18.1% cash. In 2018, we leased 249,000 square feet at an average starting rent of $89 per square foot resulting in very healthy mark-to-markets of 34.3% GAAP and 13.4% cash. We are now at 100% occupancy.

At 315 Montgomery, we do have a renewal leasing negotiation for 56,000 square feet, which we expect to close during the next few weeks. And our 345 Montgomery redevelopment work is in full force with concrete work substantially complete and steel work having begun.

We remain on time with respect to our delivery of the building to reach spaces by the end of the third quarter of this year. We are very pleased with our overall 2018 companywide results and continued to see strength in all three of our markets. These leases are credit to the quality of our portfolio and the dedication and teamwork of all of our enormously talented professionals. Back to Steve.

Catherine Creswell

We’re ready for Q&A.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] The first question in the queue comes from Steve Sakwa from Evercore. Your line is open.

Stephen Sakwa

Thanks, good morning. Steve, you and David both kind of mentioned the Amazon situation. I know there’s been a number of different press reports out there about maybe the city, having some issues coming to terms with Amazon on the Long Island City project. And I’m just wondering, what that sort of signals as it relates to kind of new business coming here and kind of any thoughts you have around that deal maybe getting consummated?

Steven Roth

That’s a hot potato. First of all, folks like Google and Facebook and on and on and on have no trouble expanding growing relocating, locating in New York through the conventional way of dealing with basically as of right real property. Amazon chose to take a different tact. And that’s fine. I would say, it’s my personal opinion that if – it’s my personal opinion that the deal that the Governor of New York and the Mayor of New York made with Amazon was a terrific deal for the city and a terrific deal for us.

I mean a huge company with an enormous number of important high paying jobs et cetera. If the political climate in New York blows this deal, it would be the stupidest damn thing I’ve ever seen. And that’s what I think. Now we have, as I said before, obviously, we are heavily involved and I’m the Chairman of the company, the Crystal City company, which is welcoming. So I think maybe some of the folks in the auction to take a much more welcoming savvy point of view on this deal.

Stephen Sakwa

Okay. My second question, as it relates to kind of the buyout at Farley, I think your overall cost in that deal might be sort of around $1,100 a square foot. I’m just wondering if you could sort of talk about your expectations sort of for leasing at Farley timing and remind us what your expectations are for a return on that project?

David Greenbaum

Steve, good morning. Listen, we think the Farley Building as a horizontal campus in New York. It is totally unique in terms of the space that we will be delivering. We have told you in the past, that we think rents at this building are triple-digit numbers and by the way, as you think about rents in the city, generally, when I mentioned earlier, some 44 million square feet or 42 million square feet of activity for the year, some 4.2 million square feet across the city last year was leased at over at over $100 rents.

So these triple-digit rents as it relates to redeveloped and new construction clearly have become the norm. We think again our building is differentiated in a significant way from substantially all of the new well called vertical product. We remain in discussion with a number of tenants for this space. As I said, the space will be delivered for tenants to begin build out sometime by the middle of next year, very excited about the fact we now own 95% of this asset.

Steven Roth

Yes. Our financial plan here Steve, is that we are basically going to build this deal with cash. Cash coming out of 2020, so that our cost of capital here is the lowest in the – the lowest that it’s possible to be. And we have enthusiastic – very enthusiastic reactions from the brokerage community and the tenant community. And as I said and David also said, we love this one.

Stephen Sakwa

Okay. And then I guess my last question just around the uplift, you talked about it, I guess, 2PENN and maybe the uplift at 1PENN. I think you quoted a $30 per square foot figure. Just kind of help us think through how you’re sort of framing that out, or thinking about the uplift in sort of the rent differential that you would expect there to be between some of the new product that Manhattan West and Hudson Yards and maybe ultimately your finished project at 1PENN and 2PENN?

David Greenbaum

Well, I mean, I think it’s pretty simple. The in-place rents are high ’50s, low ’60s, on average with current leasing being a little bit higher than that, but the average in the buildings are those numbers. We think the finished product will be worth in the marketplace. Let’s say, pick a number, $90 a foot. So that’s a $30 uplift. Now out of that uplift has become a marginal increase in expenses, the cleaning doesn’t get to be any higher or the operating doesn’t have to, the taxes may go up a little bit. So basically, that’s a fairly pure number, and we’re pretty excited about it.

We determine what we believe, the future market – we got to remember this is trended now for a couple of years. We determine what we believe the future market will be, based upon what we see all around us, what new building, new builds are going forward, other spaces going forward and the fact that we have the best location on top of Penn Station. And we have experience in transforming these buildings both at theMART and in New York at many different occasions. And we have history and what the transformation yields in terms of tenant demand and pricing. So that’s our best judgment and we’re pretty certain we’re right.

Stephen Sakwa

Okay. That’s it from me. Thanks guys.

David Greenbaum

Thanks, Steve.

Operator

Thank you. The next question in the queue comes from Manny Korchman with Citi. Your line is open sir. Please proceed.

Emmanuel Korchman

Hey, good morning, everyone. Maybe if we can just sector Farley for one more second. In the past, you’ve discussed a potential life science component there and build out to support that. And now it sounds like you are squarely focused on a more traditional, if you will, tech tenant. Am I reading that correctly?

Steven Roth

You know, maybe, where an equal opportunity landlords, I mean, when an important tenant at the proper pricing comes in, a strong tenant, we’re very happy to welcome everybody with open heart. So we have some interest from science tenants, we have more interest from creative class tenants, we even have interest from some fairly significant financial firms. So once again, this is not a special purpose building. It’s a building designed to service the entire market.

Emmanuel Korchman

Thanks for that. And then in terms of street retail transaction activity has been a little bit lighter. What gives you confidence that cap rates haven’t moved up more than the 25 basis points, Steve applied to the cap rates in your NAV analysis. And maybe with that, can you talk about the potential new legislation related to a vacancy pack?

Steven Roth

The cap rate we put in this year’s NAV is our best estimate of what the marketplace is. So it’s a very thin marketplace, but these great scarce unique assets trend pricing that – we believe we’ve hit it right on the button, okay. The second question was what about legislation, Manny?

Emmanuel Korchman

On the retail vacancy tax, it’s getting proposed, I guess for the umpteenth time?

David Greenbaum

Well, I think the key thing there is the umpteenth time. Everybody is concerned about the fact that there are lots of vacancies on the streets of New York, it’s not good for anybody. It’s especially not good for the landlords. Okay. So I don’t understand why the politicians – and we talked to these folks all the time. I don’t understand why the politicians don’t recognize the fact that it’s landlords want to fill this space up more than they want the space filled up.

And so obviously, the landlords that are professional will go to the clearing price for the space. So I think it’s extremely what’s the word, it’s a bad piece, it’s a bad idea both in concept then in execution. And I don’t make predictions, but I’m fairly confident that it will go, it will pass by. By the way, just as I’m saying, we’re confident – just as I’m going back to what Steve said, that just as I’m fairly confident that the Amazon deal will get completed.

Emmanuel Korchman

Okay. Thank you.

Operator

Thank you. The next question in the queue comes from Jamie Feldman with Bank of America Merrill Lynch. Your line is open. Please proceed.

Jamie Feldman

Great. Thank you and good morning. It sounds like you’ll have a lot of move-ins and move-outs in the portfolio for the rest of the year and even as you’re kind of getting ready for the 2PENN redevelopment emptying out that building? Are you able to give us more color on what same-store NOI could look like, what earnings could look like? Just some, a bit of a guide as we kind of – as you get the portfolio ready for those big changes?

David Greenbaum

Yes, you’re talking about guidance. And as you know, we don’t give guidance. We do guide for what we think are extraordinary things. For example, when the patent office moved out and what was it, the BRAC when we had all of that dislocation in Washington, better part of 10 years ago, we did guide for that because we thought it was something that was very difficult to predict that everybody was focused on.

Last year, we did guide to what the minimum the retail cash NOI would be and I’m happy to say we missed it by $20 million to the positive side. So having said that, so we will think about your question because it’s a valid question. I will tell you one thing. I for one as an operator don’t understand how folks think about this. When we empty out a slug of space that’s paying us $55 a foot to transform the building and two years later or 18 months later, we let that space for $90 a foot, we think that that’s a huge asset and that’s a very important part of our business and our colleagues as well.

So whereas – what I’m really saying is that I wish you folks would look upon the fact that we are going to kick out $50 tenants and move in $90 tenants as a huge uptick in shareholder value. We hear what you’re saying about guiding and everything, we’ll think about it, but that’s not the normal way we run our business.

Jamie Feldman

Okay. That’s a fair point. I mean, I think it’s more just about setting expectations and I mean, I don’t think anyone disagrees that it’s the right thing to do to kick out tenants and redevelop the buildings, it’s more just – so the market has a sense of what to expect as we are heading into quarterly earnings each quarter.

And then moving on, I know Manny had touched on cap rates. Can you just talk generally about your thoughts on the 2019 transaction market? You said you thought office will probably pick up in terms of volumes. Maybe what’s on the market and what do you think cap rates will look like?

Steven Roth

Michael Franco is here, who is our Chief Investment Officer. I’m going to let him answer that question.

Michael Franco

So Jamie, good morning. I think after a pause coming in the year, there’s a number of things that are hitting the market. Some new product like the condo, interested 30, Hudson Yards, you’ve got some other, call it, Midtown buildings, maybe lesser quality coming out on Lex, but I think the sweet-spot is going to continue to be that under $300 million to $400 million size, where a lot of the deals were last year. But we also have some bigger deals coming out, whether it’s a couple of things that SL Green is putting out or some of the other assets in the Garment District.

So it looks like near-term, there’s probably $5 billion to $6 billion of office product that is recently hit or will hit in the next 30 days. I think it’s probably higher quality than what we saw for the bulk of last year and we’ll see how it plays out, but I think the investor interest, at least from what we’re seeing, hearing, is active and I think you’re starting to see investors perceive value in Midtown as well, just sort of on a price per square foot standpoint, where most of the assets are trading for $1,000 a foot or less, which is, as we’re seeing now, is some of the new builds that are going out at $2,000 a foot or north. That’s a pretty attractive basis. So the market feels like it’s picking up in terms of quality and I think we’ll see investor interest reflect that.

Steven Roth

I would put my $0.02 and I agree with what Michael said. I think the first thing is that buildings have been pricing now at $1,000 a foot in that neighborhood a pinch more or a pinch less for years now. The investing marketplace has gotten used to that number and considers it to be fair value as I do. So there is no sticker shock and people are getting used to the pricing of what first-class Manhattan office buildings trade for. So I think that there is a very deep market of investors who want to invest in New York.

I think it’s basically the strongest market in the world. We know what’s going on in London, we know what’s going on in Europe. I mean, Tokyo is doing great, that’s a whole different kettle of fish. So what I’m saying is we think New York gets way more than its fair share. We think pricing – investors are used to the pricing and we’re anticipating a strong investment sales market next year.

Jamie Feldman

Okay, thank you. And then finally, Steve, you had mentioned as source of capital non-core asset sales. Are you thinking more operating buildings or maybe you’ve seen a decent move in some of the REIT stocks, some of the equities you guys are holding?

Steven Roth

All of that is on the for sale list. I’m not going to predict timing and I’m not going to predict, which specific assets. But I mean, we were pretty transparent in what we intend to do to realize over $1 billion of sales. It’s pretty obvious what we’re doing in terms of timing those sales with our CapEx needs, et cetera. So that will all roll-out over time.

Jamie Feldman

Okay, thank you.

Steven Roth

Thank you, sir.

Operator

Thank you. The next question in the queue comes from Adam Gabalski with Morgan Stanley. Your line is open. Please proceed.

Adam Gabalski

Hey, guys. Thanks for taking the question. Just on street retail, given what we saw happen with rents in 2018, do you guys have any thoughts on where you could see street retail rents bottom and start to inflect positively? And also, whether or not Vornado is considering taking advantage of any distress you’re seeing in the market?

Steven Roth

We love the stress, Adam. We can’t wait for some distress. We have the capital base, the appetite and most importantly the expertise to be interested in growing in this asset class at fair prices or maybe even a little bit below fair prices, so there’s that. We’re not seeing a lot of that.

We’re beginning to see the first inkling of assets going back to lenders now and so that’s the beginning of that cycle. With respect to rents, the biggest problem on rents are that there are fewer tenants trolling the marketplace looking for space. So we don’t yet know what the bottom price is.

If you follow this market as most other markets, it will take a while, maybe a year, maybe two years for some of these vacancies to be cleaned up by bottom fishers and then the market will level and start to grow again. So we have the enviable position of not really having – I mean, we have a vacancy here, we have a vacancy there, but in terms of the mass of our portfolio, it’s under lease for long-term with good tenants and so we’re fine.

Adam Gabalski

All right. That’s very helpful. Thank you. And then just one more on street retail, I know the Massimo Dutti and Westbury expirations got pushed out a little bit. Can you just talk about the latest update on those leases and then what the impact will be to street retail NOI in 2019?

Steven Roth

Once again, that’s a guidance question. I don’t think the Massimo Dutti lease was pushed out. So I don’t think that and the neighboring MAC lease has – goes into the 20s, 24 I think. We have people cruising the Massimo Dutti space. We have nothing to report yet.

Adam Gabalski

All right. Thanks. Appreciate it.

Operator

Thank you. The next question in the queue comes from Alexander Goldfarb with Sandler O’Neill. Your line is open. Please proceed.

Alexander Goldfarb

Good morning. Steve, I appreciate your comments on guidance. So I guess, let me try to ask it this way. If we look over this year – well, Steve, you got to try, right, every New Yorker has got to try. If you look over earnings this year and next, obviously theMART had – you guys created values, the taxes went up, you’ll recoup part of that, but still that’s a net headwind.

PENN2 is going to come offline, I think, next year. So that’s some NOI that will come off in the near term, obviously you guys will boost rents and grow it eventually. But you then have the Cube at 555 that will get filled and produce NOI.

So just with all the different pieces that are coming and going, including some of the street retail vacancy that – I mean, street retail that you talked about before. Directionally, do you see over this year to next that net NOI will be growing, stay flat or reduce just with all the different moving parts?

I think to Jamie’s question, earnings have been flat the past few years. So just trying to get a sense for how, directionally, people are thinking about it because I think we all agree you’re creating value at the NAV and property level, but just from an FFO, that part stays flat?

Steven Roth

I don’t want you to hold me to this, but I would just say, directionally, if you think flat, that would be a good thought. Okay? So there is – I mean, the business is, some people refer to it as noise. I refer to it as the normal ebb and flow of our business. Tenants move in, tenants move out, rents go up, rents go down, whatever, okay.

So if you take it all together, the office business in three different jurisdictions, arguably the best building in San Francisco, arguably the best financial asset in Chicago and our New York business and our retail business, overall, I think it will all known together as flat, but that’s not a guide and don’t hold me to it. Okay.

Alexander Goldfarb

Okay. And then the second question is just bigger picture, I guess, this morning or yesterday Silverstein said, he may go spec Downtown, obviously Brookfield has talked about going spec on the Far West Side. Do you view this as marketing bluster, like trying to drum up business or are you concerned that we could suddenly have another supply wave, where we’re just sort of working through the previous few years of supply delivery, which has pressured rents in New York?

Steven Roth

Hey, these are major, major people. They don’t bluster, okay. They may bullshit a little bit, but they don’t bluster. So you got to remember that both of these firms are firms that deal with promoted third-party capital, okay. So what their – my guess is and I haven’t talked to either of them about this, if they can get the – an investor who has the appetite, they’ll build the building, why not, okay.

So I think that’s totally possible and whatever. There is a large appetite of invested capital for buildings for – even for development and brilliantly located spots, like Park Avenue for example. So I have no idea what Larry and Rick are going to do and they’re both seasoned guys. Rick has got fund money that he has discretion over, so he can build it if he wants to. Larry will raise third-party capital if he can and we’ll see what happens.

Alexander Goldfarb

But you’re not concerned about another supply sort of glut pressure in rents though, it doesn’t sound like?

Steven Roth

A building here, a building there, a building in the next place, these buildings, they won’t take five, seven years to create. They are like pulling teeth. They will not have a dramatic influence on the 400 million square foot New York City office business. The last time that this happened was in the early – in the 80s, where there was a zoning change and then the entrepreneurial developers, there was a rush to beat the zoning change and 20 million or 30 million square feet was created in one slug. That is not happening now and will not happen now.

Alexander Goldfarb

Thank you, Steve.

Steven Roth

By the way, as an aside, okay, we love to build new buildings. I mean, we’re pretty good at it. We have – we built the Bloomberg building, we built 220, so we know how to do it. It’s part of our skill-set. But our main business is in the core of properties that we own now. And if somebody is going to build a new building and get $120 a foot rents for it, that creates the absolutely wonderful price umbrella that we function under in the $80-$85, $90-$95, $100 range. Okay? So that’s all fine.

Alexander Goldfarb

Thank you.

Steven Roth

Thanks, Alex.

Operator

Thank you. The next question in the queue comes from John Kim with BMO Capital Markets. Your line is open. Please proceed.

John Kim

Thank you. Thanks. Just want to follow-up on Alex’s last question. Given Manhattan West directly competes with Penn Plaza, does that potentially change the timeline of the redevelopment of PENN2?

Steven Roth

Absolutely not. Absolutely not. PENN2, we are going as fast as we can on PENN2. We’re going to deliver the product as quickly as we can. We think it’s unique product and we think that’s all fine. The more people that are in our neighborhood in first-class property with first-class tenants, the better it is for the entire neighborhood, us included. So we don’t look upon them as a competitor, we look upon them as a colleague and as a good neighbor.

John Kim

Okay. With your NAV at $97, can I just ask what your updated views are on a share buyback? Given you now trade at a 28% discount? And I don’t know if you saw this morning, but Simon just announced a $2 billion buyback program during the call?

Steven Roth

No, I didn’t see that. Our views on the buyback are the same as we have communicated over the last year or so.

John Kim

Which is you look at it, but it’s lower on the priority list?

Steven Roth

The answer is that our views would change if somebody were to do a buyback that was successful. So that hasn’t happened yet and so we’ll watch and learn, keep our money in our jeans and we’ll see. So the answer is, it’s right – as of right now, our thinking about buybacks is pretty much the same as it’s been over the last year or so.

John Kim

Okay. And then a final question, this might be for Joe. But at 220 Central Park South. You had on your balance sheet condo units ready for sale at $99 million and that’s lower than what you’ve already closed in January. So I’m wondering, if this is a good indicator of what you plan to close on over the next quarter going forward?

Joseph Macnow

I think in Steve’s remarks, he commented that through the first five weeks in January, it was another $290 million. We anticipate substantial additional closings in the remainder of 2019 and quarter-by-quarter they will be more reclassified for accounting rigors into that category, that’s your question. But yes, we expect substantially more closings. Remember, all of the full floor apartments have been sold for the remainder of 2019.

Steven Roth

Check me on this Joe. My understanding of the accounting convention is that when an apartment gets a TCO, a temporary certificate of occupancy, it gets reclassified into – on the balance sheet as apartments available for sale.

Joseph Macnow

That’s correct.

Steven Roth

So that the number that you’re looking at is – got nothing to do with sales, nothing to do with future financial activity, it has entirely to do with how many apartments in what order we have gotten because on.

Joseph Macnow

And this is number as of the end of the year, not a number into 2019. It will grow in 2019.

Steven Roth

And so our plan is that we get TCOs on the apartment serially as we go through right before we sell them. I hope that helps.

John Kim

Yes, it does. Is there a good run rate that we should be modeling? Is it $200 million to $300 million per quarter?

Joseph Macnow

No. We haven’t given the information by quarter. And to take that noise out of earnings, we’ve shown it as non-comparable because, again, it is one-time, albeit over $3 billion in total. But no, we have not given that by quarter and I don’t think we intend to.

Steven Roth

It’s going to roll out over the next year, okay. I mean, pretty simply, whether it’s another $100 million or $200 million, more one quarter or less one quarter, doesn’t matter, it’s going to all rolled out and be sold over the next year.

John Kim

Great, thank you.

Steven Roth

Thank you.

Operator

Okay. The next question comes from Nick Yulico with Scotiabank. Your line is open. Please proceed.

Nicholas Yulico

Okay, thanks. Couple of questions, first on, how we should think about – you talked about the $25 million of capitalized interest from 220 Central Park South. I think the plan is to paydown debt from the sales of the condos, which would lower your interest expense, but then you are also losing that capitalized interest benefit over time. So can you just give us a feel for how we should think about that impact to your interest expense over the next year?

Joseph Macnow

Well. Hi, it’s Joe. Good morning. We’ve said publicly that we’re going to paydown the construction for its mortgage, which was originally in the amount of $950 million. At year-end was a little over $700 million. Today is a little over $400 million. And that – the balance of the proceeds are going to be used, as Steve said earlier, to fund the needs of PENN1, PENN2, Farley, the entire pipeline of what we have in development.

We’ve shown you in the NAV $1 billion, that’s not – and somebody wrote in one of the reports, that’s an increase from the prior year quarter. It’s really the same number and that comes from the $3.2 billion of sales proceeds $200 million of taxes is $3 billion, the cost of the job was $2 billion, that’s $1 billion. So I think that’s where we are.

Nicholas Yulico

Okay. I’m just trying to think about capitalized interest, which is at its highest level for your Company. Last year is kind of a benefit for interest expense and how does that change going forward as 220 Central Park goes away versus you spending on your new redevelopments?

Steven Roth

Centrally put, our financial plan is this. The first sales that come out of 220 go to paydown a secured loan of $950 million, which is now in the fours and will quickly go to zero. So that eliminates the interest expense for that loan. And by the way, that loan is the lowest cost of capital in the industry.

Then all of the capital that comes out after that, which is going to be the better part of a couple of billion dollars, okay, will go into CapEx or other purposes. So when you think about it, I mean, we are going to be building these buildings with no interest cost and therefore the profit in those buildings will be higher, the accretion to our P&L will be very substantial.

Nick Yulico

Okay, thanks. And then just going back to the Retail segment, can you – I know, you have the benefit this year from Levi’s, Sephora, Forever 21 lease commencements. As the offsets you do have some of the move out, Massimo Dutti and then the expiration this year, I think there was also some temporary occupancy renewal item at Westbury. So do you mind just giving us a feel for the expirations and the move-outs, the temporary occupancy issue? I mean, how much of offset that is to your – the benefits you are getting from lease commencements and lease escalations in the portfolio?

Steven Roth

I mean, that’s a detailed guidance question, again. Basically, in the beginning of last year, we said that our retail cash NOI would not go below $304 million, okay. That number was adjusted to $309 million because we bought back some of the Retail – it was the other way around, $309 million, we bought back some of the Kmart space in favor of Facebook, so that number went from $309 million to $304 million.

In mid-year last year, we said that that minimum number, this is a minimum guidance that we gave last year for Retail would be no less than $315 million cash NOI, okay. We came in the year at $324 million, okay. So we’re happy about that. It’s too sensitive a number for me to give you something off the top of my head. But once again, we are guesstimating that the retail business cash will be flattish this year.

Nick Yulico

Okay, thanks. Appreciate it.

Steven Roth

Yes, sir.

Operator

Okay. The next question queue comes from Jamie Feldman with Bank of America Merrill Lynch. Your line is open. Please proceed.

Steven Roth

Jamie, welcome back.

Jamie Feldman

Thank you. Good to be back. I just had a quick follow-up, I don’t want to prolong your call. But in the foot – on the 10-K on Page 31, you have a footnote talking about where you think you can get rents leased or kind of renewals done in 2019. And it looks like on office, you’re looking at about an 11% leasing spread, it looks like on, should retail, you’re looking at positive depending on where it is in that range, but generally positive.

I just want to get your thoughts on, are you seeing rent growth? Is this kind of a flat – a look at market rents being flat? I just want to get your thoughts on where market rents are going and if there’s any way to tie this into kind of leasing spreads for the year that would be helpful?

Steven Roth

Jamie, first of all, my congratulations for ferreting that information out. I think that’s genius. Joe, what are you guys saying?

Joseph Macnow

I was just going over with David that what Jamie is referring to is the office expiries in 2019 have an average embedded rent of $65.58 and Jamie took the midpoint of our guidance for what that will we let at and that was $73, so he did the math and said it’s 11% mark-to-market. That’s close.

David Greenbaum

So Jamie, I think the important point there is this – the number that’s published. Effectively it is only relevant with respect to the 600,000 to 700,000 square feet, that’s actually expiring next year. So it’s not reflective of mark-to-markets across the portfolio, it’s not reflective of where we think rents are across the portfolio, we’re specifically looking at the space that’s coming up over the course of the next year and in fact some of that space that’s coming up comes in at 2 Penn Plaza, which in fact is going to go out of service.

Jamie Feldman

Okay. And then just…

Steven Roth

Jamie, your observation that next year’s numbers will benefit from expiries at a low number in the mid 60s as opposed to $10 or $20 higher than that is a valid observation. So we do expect to have a low double-digit mark-to-market in 2019.

Jamie Feldman

Okay, thank you. And then just general sense of rent growth in the market…

Steven Roth

…little higher. Go ahead, Jamie.

Jamie Feldman

Just general sense of rent growth. I mean, would you say rents are rising or would you say they’re still generally flat?

David Greenbaum

I’ll come back to what I said a little bit earlier, Jamie, and that is while if you look at a single spot number and say Manhattan rents generally over the last year went up 3%, 4%, 5%, whatever the number is, again I think the key is and we’ve emphasized this in any number of our calls is looking at the sub districts in the city, where we’ve seen the highest rent growth.

So I mentioned Midtown South, which obviously includes our West Chelsea assets, asking rents in Midtown South have increased dramatically over the last couple of years. The same thing is true obviously in Hudson Yards and in Manhattan West, where rents started out several years back in the mid 70s and those numbers today are in the triple-digits. The most telling thing as I said earlier is what we’re seeing today is triple-digit rents are no longer a sticker shock to tenants as it relates to new product and redeveloped product.

So generally, I’d say we are seeing a bifurcation in the marketplace between buildings that are older buildings, not redeveloped, where rents are flat and maybe even trending down a bit to the redeveloped product and newbuildings, where we are seeing rents increasing. And then the other thing I would add to all this is from a concession point of view, we see concessions that basically have leveled off at this point in time. All encouraging from a net effective rent point of view.

Jamie Feldman

Okay. All right, thank you. And I have to be on a driver client is even smarter than I am that pointed that out to me, just full disclosure, but thank you for your help.

Steven Roth

That’s all very interesting. I’m happy to give you the credit. Thanks.

Jamie Feldman

All right. Thank you.

Operator

The next question in the queue comes from Daniel Ismail with Green Street Advisor. Your line is open.

Daniel Ismail

Thanks. Good morning, guys. Just a quick one from me. On the NAV page, looks like you raised the cap rate for residential by about 50 bps. Can you provide any more color on that? And is that speaking to just weakness in the rising market in New York?

Steven Roth

We are not that smart to know whether it’s exactly this or that or the other, we just thought 3.5 was a very aggressive number. It’s a small number in our portfolio. It doesn’t affect the NAV substantially and we thought the better part of conservatism and the better part of valor was to take it up a notch.

I am sure that the residential gang would fight me and say the number is really 3.5 or 3 or 2.5 or whatever it is, but we are comfortable with 4. And from our point of view, it doesn’t make any difference, whether it’s 3.5 or 4 in terms of the shareholder value of our Company.

Daniel Ismail

Fair enough. Thank you.

Steven Roth

But we have limited market knowledge. To support that, we have some. But I mean, we’re not going to die on our sword over that number.

Operator

Okay. The next question in the queue comes from Manny Korchman with Citi. Your line is open. Please proceed.

Michael Bilerman

Hey. It’s Michael Bilerman here with Manny. Good morning, Steve. Steve, last July, late July…

Steven Roth

Hi, Michael. I was wondering, where you were hanging?

Michael Bilerman

I’m hanging. You made a comment last July, when talking about the NAV discount that you have fluctuate between being frustrated and being test. And you said, we can quote you on it, so I’m quoting you on it. The NAV went up over the course of the year, right? You’ve been executing and getting additional office NOI as the lease has started and a number of other value creating activities.

And so, I’m just wondering, at what point should the market expect any sort of future ways of narrowing this gap, and I know you’ve talked about the share buyback being not something that you’d want entertained because others haven’t been successful at it in your mind. But when should we expect something else that that may occur, if anything?

Steven Roth

Once again, as I said before, we think we’ve done more in terms of restructuring our business, focusing our business, spinning off this, spinning off that, selling non-core assets, et cetera. Anybody in the entire industry and once again, we still think the stock is significantly undervalued. And we continue to work hard on it. We can’t really tell you and we are not going to speculate and we’re not even going to hint anymore as to what we might do. When we decide to do something, that’s when we will announce it.

Michael Bilerman

Do you feel like the time to do something is getting shorter, given what’s going on in the marketplace that you’d want to make a decision about what route to go to narrow this gap that arguably you’ve been frustrated with? It’s not something that’s a new and I totally agree with you of all the value creating things that the Company has done over the last number of years to highlight that value and increase that value. I just don’t know whether you feel like time is getting short to want to take advantage in the marketplace that may be changing?

Steven Roth

What do you mean by take advantage and what do you mean by may be changing?

Michael Bilerman

Well, I don’t know, I think there’s a lot of uncertainty out in the global marketplace and you don’t want to be in a situation, where you can’t get to that NAV in the event that we have a softer economic environment or there’s some other external event that occurs.

Steven Roth

Well, I think that would be the opposite of what you just said. If you’re hinting that we may have a recession and the stock market may go down, that would be the time that we would want to avoid buying stock at this price, you think it’s going to go lower, I don’t know. I mean, I’m not…

Michael Bilerman

Well, I don’t think stock – I’m not saying stock buyback, I can see that your view on that, that may not be the route to go, I’m thinking more broadly strategic in terms of liquefying additional assets, may be doing additional spin or split offs, doing some other may be type of sales transactions to narrow the gap between what you believe is $97 and the stock that’s in the $70s?

Steven Roth

My answer to that is yes. I mean, we appreciate your advice, believe me, that’s something that we focus on every minute of every day. And I’ve been cautioned by some of my friends out there not to speculate, not even to hint that what we might do, just shut up and do it and that’s what we’re going to do.

Michael Bilerman

Okay. And I look forward to seeing what comes out. I appreciate it. Thank you.

Steven Roth

Thanks, Michael.

Operator

Okay. And the last question in the queue comes from Steve Sakwa with Evercore. Your line is open. Please proceed.

Stephen Sakwa

Thanks. Just a follow-up. David, you had kind of touched on this, just in terms of like the TI leasing commissions, they’re running a little over 12% in New York. I’m just curious, how you sort of see that number trending over the next year or so? I mean, if rents are up, you see CapEx and TI leasing commissions kind of being flat so that number can go down or do you see that 12% holding steady?

David Greenbaum

Leasing commissions realistically are a function of a percentage of the rent. So leasing commissions realistically are going to track directly as it relates to rent. So unless I’m missing something, I want my leasing commissions to be generally as high as they can be because it’s going to reflect a significant rent growth. So I think the only variable relates to TI allowance and as I said, I think those numbers have plateaued.

Stephen Sakwa

Okay, thanks.

Operator

We have no further questions in the queue at this time, so I will now turn the call back over to Mr. Steven Roth for any closing remarks.

Steven Roth

Thanks, everybody. I just want to emphasize one thing, which is, in my remarks, I said that our financial plan is to take the very significant billions coming out of 220 Central Park South, which has a zero cost of capital and putting it into our developments, which will be enormously accretive. We’re very excited about our future prospects and growth and all of our conversation about 220 has focused only on One Penn and Two Penn and Farley and not all the other assets. So anyway, we’re very enthusiastic. We look forward to talking with you again next quarter.

The Original Penn Station

A small documentary that was brought to light by the good folks at Rebuild Penn Station, shows the different movies that Penn Station was shown in before its demise.

A Long Long Time Ago …

100 years ago, today, a very special building opened. It was the largest in the world of its kind and would go on to house some of the biggest stars in the world throughout the course of decades. It was operated by a well known hotel chain whose head loved the building so much, he decided to live in it until the day he died. It was designed by the finest architects in America- if not the world. It was a treasure to the city it so proudly stood in. Most importantly for me, it became a treasure in my life. For reasons I can’t fully explain, I remember some spark going off in my head when I first saw the building as a kid with my father. I vividly remember seeing it out of the corner of my eye and asking him what building it was.

My father passed down to me the appreciation of history and traditional architecture. From a young age he would show me books and articles about the original Penn Station and its eventual demise. All of that had an impact of how I viewed the world growing up but my thoughts weren’t solidified until that day I saw the hotel. Shortly after I first saw the building, I learned of the intentions to demolish it. From then, I guess you could say a healthy obsession began. I started researching the hotel and learning absolutely everything I could about it. Little did I know the crazy journey that was about to begin.

As I went through the courses of life, I kept continuing to learn about the building. I discovered what the original interiors looked like, how they were modified, who modified them and when, etc. Seeing the loss of the original interiors tore me apart inside but it inspired me to take certain paths in my life. It pushed me into this fantastic creative world I may have otherwise not been a part of. I took up an extreme interest in architecture and design. I studied it in school and later on in college. While being an architect ended up not being my calling, I stayed on that creative path and now work in a major photo studio for a high end department store. If it wasn’t for this building, I’m not sure where my life would have gone, what choices I would have made and what people I would have met. I have zero regrets whatsoever.

As far as Hotel Pennsylvania’s journey, it didn’t fair so well. As the city began to decline, so did the hotel. Perceptions of traditional architecture changed and became very unfavorable. Combine that with a very aged structure and you have a recipe for disaster. As mentioned above, in an attempt to keep the building up to date, the interior was virtually gutted and replaced with the bland modern design we see today. Some relatively substantial pieces of the original interior are hiding behind sheetrock and other coverings but the damage has been done, unfortunately. The hotel’s story hasn’t been the greatest, but life has taught me to focus on the positives. The building is currently undergoing a much needed renovation which will hopefully clear its reputation and bring it into the 21st Century. Luck and a lot of prayers are needed going forward but hopefully in 100 more years someone will still be celebrating the hotel! It is with great joy to be able to say today: Happy 100th Birthday Hotel Pennsylvania!

These pictures were taken exactly 100 years apart. January 25th, 1919 – January 25th, 2019

Image may contain: outdoorImage may contain: outdoor– Steven Lepore, Co-Admin

Rebuild Penn Station

Our friends over at Rebuild Penn Station, posted this video on YouTube, presenting their ideas, and hopes for rebuilding Penn Station, and putting it back to its original form.  Included with this video is a mention of how the Hotel Penn will fit into the redesign.

City Council Sues City Over Two Bridges Towers Approval

LOWER EAST SIDE, NY — Two days after the City Planning Commission approved four towers to rise in Two Bridges, the City Council and Manhattan Borough President Gale Brewer followed through on their vow to sue city officials to stop the plan from moving forward.

Council Speaker Corey Johnson, Councilwoman Margaret Chin and Brewer filed the joint lawsuit Friday to force a Uniform Land Use Review Procedure, or ULURP, of the high-rise developments proposed by four developers.

The suit targets the Department of City Planning and its director, the City Planning Commission and its chair and the Department of Buildings to halt construction on the project until the proposal goes through “the public review process it legally requires,” according to the City Council.  

“The Council is taking legal action to correct mistakes made by the City in trying to rush through a massive multi-site development without the public review process that projects of this size legally require,” said Johnson.

“We expect projects which produce almost 3,000 units of new housing to go through the public review process mandated by the City Charter so we can assess the appropriateness of these developments.” 

The controversial “minor modification” does not require the massive developments planned by JDS Development Group, CIM Group, L+M Development Partners and Starrett Development to go through ULURP. The towers — one set to soar more than 1,000 feet high — will bring some 2,700 new units all together and 690 apartments earmarked as affordable.

The City Planning Commission approved the project in a 10-to-3 vote on Wednesday.

The Two Bridges area, which used to be an Urban Renewal Area, allows for greater flexibility on land-use regulations when it comes to building residential projects that span multiple property lots because it was designated a Large-Scale Residential Development (LSRD) area in 1972. 

Friday’s lawsuit claims city planners usurped the City Council’s authority by approving the project and argues that the project is in violation of the LSRD special permit.

“Conveniently, DCP has improperly designated these modifications as “minor”, which would exempt these projects from the entirety of the ULURP process and deprive the Council of its oversight and regulatory role over these projects and the Borough President of her role to review and make recommendations,” the suit states. 

“Projects of this magnitude are required to undergo the full battery of hearings and oversight that ULURP provides.”

The Mayor’s office and the Department of City Planning did not immediately respond to requests for comment. Manhattan Borough President Gale Brewer called the Department of City Planning’s process and standards for reviewing the project “made up.”

“I don’t like suing the mayor or his agencies, but if that’s what it takes to get the residents of Two Bridges the full review and real negotiation they’re entitled to under the law, then I’m all in,” Brewer said in a statement.

Save The Clock Tower

The former home of the New York Life Insurance Company, located at 108 Leonard Street, is being converted to residential Condos after a legal battle with preservationists. Back in the late 1920’s the city took ownership, after the New York Life Insurance Company moved out to 51 Madison Avenue, across from Madison Square. The interior has been given landmark status, but developers, and the LPC are breaking the rules. “Under city law, an interior landmark is supposed to be open or accessible to the general public regularly. But the ante room and some other interior landmark spaces will only be open to residents.”

108 Leonard rendering

Preservationists are up in arms about the space being closed off to the public. Along with the anteroom, the clock which has always been maintained my clock aficionados since it’s restoration in 1980, is also a landmark feature and will be converted to electric, because of the building’s conversion to residential. Preservationists lost a lawsuit filed in 2016, which now put the clock in jeopardy, despite the Commission’s ruling in favor of keeping it mechanical.

A historic depiction of the building when it was headquarters for New York Life Insurance.CreditThe New York Public Library/Picture Collection

 

550 Madison gets landmark designation | Real Estate Weekly

 

The city’s Landmark Preservation Commission has designated the former Sony Building at 550 Madison Avenue a landmark. Calling the 37-story office tower a leader in postmodern design, LPC vice chair Frederick Bland said, “This is the building that established postmodernism as a legitimate architectural movement. It deserves to be preserved for future generations.” Built between 1978 and 1984 by American architects Philip Johnson and John Burgee, the tower was billed as the world’s first postmodernist skyscraper and set the stage for the postmodernism movement.
While it was first known as the AT&T building, the phone company sold the building to Sony in 2002 and it soon became known as Sony Plaza. In 2013, the Chetrit Group and Clipper Realty purchased the building for $1.1 billion with a plan to covert the building into luxury condos.

When that plan fell through, Chetrit and Clipper sold the building in May 2016 for $1.4 billion to Olayan America, the American subsidiary of the Saudi Arabian investment conglomerate, The Olayan Group.
In a statement issued following the LPC decision yesterday (Tuesday) Olayan said, “Since acquiring the building, we have taken our role as stewards of this important building very seriously. We look forward to an ongoing dialogue with the LPC and other stakeholders to preserve 550 Madison’s legacy as a commercial Class A destination in East Midtown, with smart and sensitive modifications to serve modern tenants.”

The Olayan Group has so far invested $300 million to renovate the building and return it to its class A office status.

Olayan expects the upgrades to command higher rents, but will now also have to be compliant with the landmark status of the building’s exterior.

Despite that extra layer of bureaucracy, Olayan said, “We are proud that 550 Madison is now an official New York City landmark, claiming its place in our city’s architectural heritage.

“Ownership strongly supports designation of the iconic office tower and applauds the Landmarks Preservation Commission’s decision.”

Source: 550 Madison gets landmark designation | Real Estate Weekly

Cuomo Seeks State Control of Penn Station Neighborhood

ALBANY — A proposal being floated by Gov. Andrew M. Cuomo during the 11th hour of budget negotiations would create a large, state-controlled development area around Pennsylvania Station, giving the governor greater sway over one of Manhattan’s name-brand landmarks and a powerful talking point against his intraparty rival, Mayor Bill de Blasio.

The state would have its primary development agency, the Empire State Development Corp., work with another agency controlled by the governor, the Metropolitan Transportation Authority, to control and redevelop a multiblock area around the station.

The governor’s initial proposal — outlined in a two-page document dated Tuesday, less than a week before the state’s deadline to adopt its budget — freed the new joint entity from a raft of zoning, environmental, and land-use laws. But those ideas were abandoned as news of the proposal broke and brought about a serious and immediate blowback, from Democratic lawmakers in both legislative houses in Albany, and from city leaders, including the City Council speaker Corey Johnson and City Hall officials.

“It completely erases any role for the city, local officials or the surrounding community,” said Alicia Glen, deputy mayor of housing and economic development, citing concerns about environmental review and potential loss of tax revenue from new buildings. “It’s beyond the pale.”

By late Wednesday, the governor’s office was assuring lawmakers that the proposal, which was obtained by The New York Times, was merely a draft, and an early bid in what was expected to be heated negotiations over any redevelopment plan.

“Penn Station is currently untenable. It is congested, chaotic and poses a serious threat to public safety in this time of heightened terrorist threats,” said Dani Lever, press secretary for Mr. Cuomo, noting that the state was already investing in a new train station across the street from the current station. She added that the proposal was lawful and would include “consultation with community leaders and elected officials, environmental reviews and local government reviews.”

But early reaction to the initial proposal, which was reported by Politico New York Wednesday afternoon, included concern that such a impactful, long-ranging plan could be adopted so quickly for the neighborhood.

State Senator Brad Hoylman, a Democrat who represents the area surrounding Penn Station, described the local community boards as “preserving the character of their neighborhood.”

Wiley Norvell, a communications adviser in City Hall, said the city has been in talks for months with the state, the M.T.A. and Vornado, a major property owner in the Penn Station vicinity, over possible development plans for the area. But Mr. Norvell said that there had been no discussion of the sort of proposal that the Cuomo administration is now floating. He said the city first saw the proposal on Wednesday and did not get the text of the proposal from the governor’s office.

There were some supporters for the governor’s approach, as well. Kathryn Wylde, the president of Partnership for New York City, sent a statement late Wednesday saying that Penn Station “requires substantial investment of funds that the M.T.A. currently does not have.”

“The governor’s commitment to make this a state priority is a positive step forward on a project that will not happen without extraordinary intervention by the state,” Ms. Wylde said.

The governor has sought to impress his powers on Mr. de Blasio on a variety of occasions, from putting state police troopers in the city to criticizing how the city handled the Ebola scare. But on Wednesday, Cuomo administration officials stressed that the proposal was still in discussions — even the exact borders of such a project were in flux.

But the overall goal remained to turn Penn Station, long derided as a dark and dismal rail hub, into a modern facility, while also incorporating commercial, residential and mixed-use development surrounding it. In addition, such a project would provide jobs, increase the tax base and “enhance the recognition of the city and state as a worldwide center of commerce,” according to the draft proposal.

Whether any such proposal could gain legislative approval, particularly with the budget ticking down, is questionable. Richard Gottfried, a veteran member of the Assembly who represents the Penn Station area, said he only heard about the proposal on Monday, and thus far did not like the idea.

“The area around Penn Station is not some undeveloped, poverty area needing government investment in order to prosper,” said Mr. Gottfried, a Democrat. “If anything, it is attracting more investment from the real estate community than it can handle.”

William Neuman contributed reporting.