Participants

Steven Borenstein; Senior Vice President and Corporate Counsel; $Vornado Realty Trust(VNO-N)$

Steven Roth; Chairman of the Board of the Trustees, Chief Executive Officer; Vornado Realty Trust

Michael Franco; President, Chief Financial Officer; Vornado Realty Trust

Glen Weiss; Executive Vice President - Office Leasing, Co-Head of Real Estate; Vornado Realty Trust

Steve Sakwa; Analyst; Evercore ISI

John Kim; Analyst; BMO Capital Markets

Jeffrey Spector; Analyst; Bank of America

Dylan Burzinski; Analyst; Green Street

Floris van Dijkum; Analyst; Compass Point Research & Trading, LLC

Michael Griffin; Analyst; Citigroup Global Markets Inc.

Vikram Malhotra; Analyst; Mizuho Securities USA

Michael Lewis; Analyst; Truist Securities

Alexander Goldfarb; Analyst; Piper Sandler Companies

Ronald Kamdem; Analyst; Morgan Stanley

Anthony Paolone; Analyst; JPMorgan

Nicholas Yulico; Analyst; Scotiabank GBM

Brendan Lynch; Analyst; Barclays

Presentation

Operator

Good morning, and welcome to the Vornado Realty Trust fourth-quarter 2024 earnings conference call. My name is Betsy, and I will be your operator for today's call. This call is being recorded for replay purposes. (Operator Instructions)
I will now turn the call over to Mr. Steve Borenstein, Executive Vice President and Corporate Counsel. Please go ahead.

Steven Borenstein

Welcome to Vornado Realty Trust's 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 annual report on Form 10-K for the year ended December 31, 2024, for more information regarding these risks and uncertainties.
The call may include time-sensitive information that may be 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 and Chief Executive Officer; and Michael Franco, President and Chief Financial Officer; our senior team is also present and available for questions.
I will now turn the call over to Steven Roth.

Steven Roth

Thank you, Steve, and good morning, everyone. At Vornado, business is good, really good and getting better. New York is our home, and everyone agrees that the New York real estate markets are hidden shoulders strongest in the nation.
As I have said before, while Newark has over 400 million square feet of office, we really only compete in a narrower market of about 188 million square feet of the better space. Availability in the better space market is 10.7% versus 20.1% in the not better space market. And that 10.7% availability is evaporating very quickly.
Park Avenue is already under 7%. Add to that, that the cost of a new build tower in New York has just about doubled over the last six to seven years. And with the cost of debt, it's a 6% new supply is frozen. There hasn't been a major new building start in five years and once started delivery takes five to seven years.
Taken together, this all creates a landlord market. We expect rents to rise aggressively, one might even say rents to spike. And in fact, rents have already some rise. So all good, very good.
Why New York? New York is America's World City, New York's human and physical capital is irreplaceable. We have the largest, most educated workforce, the best transit system for commuting from our vast suburbs. You may read this as a plug for the PENN District and I guess it is the largest number of corporate headquarters, the best restaurants and museums, and eight professional sports teams even though the damn Yankees can seem to beat the Brooklyn Dodgers.
I would like to focus on a few points in a handful of our recent accomplishments. Work from home was a scare. But as we predicted, it would not last that is not the last. Most have left their kitchen tables and are back at the office. Our stock price increased 49% in 2024 after increasing 35% in 2023.
In 2024, we leased 3.4 million square feet overall, of which 2.65 million square feet was New York office at market-leading $104 starting rents with mark-to-markets of 2.5% cash and 10.9% [GAAP].
For the second year in a row, we completed the most premium $100-plus deals in New York and 18 transactions for 1.36 million square feet. And we completed 3 of the top 10 largest office deals in New York. We completed 285,000 square feet of deals at [10-1] at $98 starting rents, exceeding our underwriting. We completed 25 retail leases totaling 187,000 square feet highlighted by Manhattan's first prime wire in the PENN District. We completed the UNIQLO sale at 666 Fifth Avenue at a record price of $20,000 per square foot.
Last month, we repaid at maturity our 3.5%, $450 million unsecured bonds out of cash on balance sheet and $108 million of our credit lines. Our entire portfolio was 100% LEED certified, and we have the simulation to achieve this milestone.
We are on the 2-yard line with a handful of important deals. We finally complete -- we will finally complete the master lease to NYU at our 1.1 million square foot 770 Broadway by the end of the month. This deal will relieve our balance sheet of $700 million of debt on this asset and eliminate 500,000 square feet of vacancy.
By the way, this large and impressive building on the edge of the NYU campus will be their Science Center. I have seen the plans. It will be a world-class education facility which will make NYU an even greater or lease higher education institution. That's great to NYU and that's great for New York. We will shortly refinance 1535 Broadway, which will allow us to redeem for cash over $400 million of our retail JV preferreds. And we have several asset sales in the works. Taken together, these transactions will shortly generate an incremental additional $1 billion of new cash.
At PENN 2, we are only weeks away from signing a 300,000 square foot lease. PENN 2 is being very well received by tenants and brokers with commentary that it is the best redevelopment anyone has ever seen, and together with PENN 1 has by far the biggest and best amenity package anywhere. We are also engaged in multiple tenant proposals at Vent, including negotiating an LOI for a major headquarters lease.
I'm predicting that PENN's will likely be 80% leased by year-end. We are achieving rents here above our underwriting. And accordingly, we have increased the incremental yield on page 16 of our supplement to 10.2%. We will deliver Pier 94 on Manhattan's West Side by year-end 2025, the first ever purpose-built film and television south pages in Manhattan.
Now for those interested in Alexander, our 32.4% owned affiliate. In the second quarter of 2024, we early renewed the 947,000 square foot Bloomberg office lease at 731 Lexington Avenue, whose expiry is now pushed out to 2040. At Rego Park in Queens, we are moving Burlington and Marshall, the last remaining tenants at Rego 1 to our adjacent Rego 2 shopping center, thereby filling up Rego 2 and creating a fully vacant blank canvas at Rego 1 for either sale or development.
Obviously, we believe this unique 5-acre parcel of land wonderfully located at the intersection of Queens Boulevard and Junction Boulevard and bordering the Long Island Expressway is worth more as land than the 66-year-old building.
I believe Alexanders stock substantially undervalues its assets, and we will have to do something about that. 350 Park Avenue development is on schedule. The new building is now fully designed and it will stand out as being truly, truly best-in-class. We are in the formal approval process under the Midtown East zoning and Citadel, our major tenant and Ken Griffin, our partner. We'll shortly begin moving out of 350 Park into swing space, so the demolition can begin early next year.
I end by noting how proud our Vornado teams all are of our accomplishments to date in the PENN district.
Take a look at Meta at Farley, PENN 1, PENN 2, the Moynihan Train Hall, the Long Island Railroad Concourse, the 33rd Street Plaza, and even PENN 11 and how excited we all are about the future of our city within a city. Next up is the Hotel Penn site, now down to the ground and ready to go.
Our PENN District is clearly a site to be seen. If you haven't already said it, please call me to a range of tour. Now to Michael.

Michael Franco

Thank you, Steve, and good morning, everyone. Comparable FFO was $2.26 per share for the year. As previously forecasted, this down from 2023 and due to lower NOI from the known move-outs that we discussed throughout the year and higher net interest expense.
But overall, our results were better than we had anticipated earlier in the year. This is primarily due to the acceleration of our leasing activity at 330 West 34th Street, where we recognize lease termination income in connection with executing a 304,000 square foot lease with WeWork on behalf of Amazon.
Also, net interest expense ended up being lower versus our original projection due to short-term rates coming down. By the way, we already have almost 80% of the vacant space from the known move out spoken for.
Fourth-quarter comparable FFO was $0.61 per share compared to $0.63 per share for fourth quarter 2023. This decrease was primarily attributable to higher net interest expense and lower NOI from the known move-outs. Partially offset by the lease termination income at 330 West 34th Street and lower G&A expense. We have provided a quarter-over-quarter bridge on page 3 of our earnings release and on page 6 of our financial supplement.
Now turning to 2025. Though our practice is not to give earnings guidance, we can tell you that similar to current consensus, we expect 2025 to be slightly lower than 2024. This is partly due to the previously mentioned lease termination income at 330 West 34th Street that positively impacted 2024 comparable FFO.
And as indicated during last quarter's call, the GAAP earnings impact and the backfilling of vacancies and the lease-up of PENN 1 and PENN 2 won't occur until towards the end of 2026, with full positive impact in 2027, resulting in significant earnings growth by 2027.
A few words on occupancy. Our year-ended office occupancy was 88.8%, up from 87.5% last quarter. With the pending full building master lease at 770 Broadway, our office occupancy increases by 330 basis points to 92.1%. As we previously mentioned, our first quarter 2025 occupancy will decrease to the PENN 2 being placed into service. We anticipate that this decrease will be temporary as PENN 2 occupancy stabilizes over the next year and we get to the low 90s.
Our New York leasing pipeline remains robust as we enter 2025. We have significant activity across our portfolio with 750,000 square feet in negotiation on top of the 1 million square foot master lease being finalized with NYU at 770 Broadway. Additionally, we have another 1.3 million square feet in various stages of proposals and negotiations.
Turning to the capital markets. Both the financing and investment sales markets are showing encouraging signs over the past few months. The CMBS market is wide open for large, high-quality assets such as ours with appropriate metrics and loan structures.
AAA and overall spreads for recent financings on the spiral and 299 Park Avenue have shown significant tightening over the past six months to levels consistent with pre-COVID. While we expect banks will largely remain the sidelines this year, some banks are beginning to look at financing smaller office deals. A hopeful first sign the trend we expect to continue.
The one negative is a short-term rate after coming down 100 basis points last year, look likely to remain around current levels for the foreseeable future, keeping borrowing costs high. The investment sales market continues to pick up also with some high-quality office assets trading recently, including interest in 320 Park Avenue on Munich Re and 1345 Avenue in Americas by Blackstone.
With that, I'll turn it over to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions) Steve Sakwa, Evercore ISI.

Steve Sakwa

Steve, thanks for those great comments about the leasing activity. It sounds like you're close to punching a few things into the end zone here. But maybe you or Glen could just provide a little bit more commentary around some of the timing for PENN 2, I guess, in particular, and just maybe the competitive dynamic that you're seeing for that space and the confidence level you had to raise the yield on PENN 2.

Glen Weiss

Hi, Steve. It's Glen. How are you doing? PENN 2 is more than off and running every large head in the market has it in their top three list of what to see. There were only five buildings in Manhattan with blocks available of 500,000 feet or more. We have the best block.
So as you heard in the remarks, we have a lease out with one tenant that's going to get done in short order for 330,000 feet. We have an LOI and very serious ages for another very large headquarter tenant. And behind all that, we have tenants battling for space from anywhere between 60,000 and 200,000 feet. So PENN 2 is now the bullseye for many people searches, and we're in complete fifth year on our leasing.

Steve Sakwa

Okay. And just any comments on just kind of the rents, I guess, that you're sort of seeing. I guess that speaks to kind of the yields being pushed up at that by 70 basis points.

Glen Weiss

We've raised our rents across the entire building, from bottom to the top.

Operator

John Kim, BMO.

John Kim

I wanted to follow up on Steve's commentary on $1 billion of new cash proceeds you expect. You have $700 million debt pay down at 770 Broadway, $40 million freed up at 1535 Broadway as well. And then on top of that new dispositions, I was wondering how much in new dispositions that you anticipate?

Steven Roth

Well, the math of what you just said, the $700 million is going to pay off debt. There's a little more a couple of hundred million dollars more than that coming in on that building. It's $200 million-odd coming in from refinancing 1535. And there will be enough in short-term dispositions to round it up to $1 billion.

John Kim

And will those be focused on retail or noncore office? Or any color you could provide on what (inaudible)

Steven Roth

I'm not going to get specific about that, John.

Operator

Jeff Spector, Bank of America.

Jeffrey Spector

Thank you and congratulations on a great 2024. Can you tie Steve's comments on the slide --

Steven Roth

I can't let that go by without saying thank you.

John Kim

Okay. Absolutely. If you could please tie, Steve, your opening comments on the expectation for a rent spike to Michael's comment on growth in '27. I think we all understand '25. Can you tie in '26 at all to any of those comments, please?

Steven Roth

God, I don't know. We've been through these kinds of cycles four or five times. What I said, which I thought I was pretty clear was that there's lots of space in New York, but we compete in a much smaller subset of the better space, which is somewhat below 200 million square feet. So that's the first point.
The second point is that the current availability in that subset of space is 10% and going down very quickly because there's a shortage of space. We haven't had a recession and all of our clients are expanding and aggressively expanding in New York. The businesses are good. The stock market is good. So business is healthy and robust, and demand for space in New York is actually pretty terrific.
So with availability limited and shrinking and no new supply, that's critical, no new supply coming on the market for lots of the construction costs are historically high interest rates have not fallen -- have not fallen actually. Long-term rates have not fallen at all. And so the ability to create new supply is very, very limited, and I use the word frozen.
Take all that together, that's the landlords market. We expect rents to go up significantly next year. And there I use the word spike.
Now with respect to Michael's comments about 2026, you want to --

Michael Franco

Yeah. What I would say is that as we look at our portfolio, right, we've got a number of drivers. We have filling up the empties. We have a -- and so we know that significant part of that is going to come from PENN 2 and to some extent, PENN 1. We have the leases roll over. We're now on the other side of that as we move into a landlords market where we have positive mark-to-market. So it takes some time for that to flow through. '26 will be an improvement, but we think very significant when it comes in 2027.
I'll give you something else to think about, okay? Now in PENN 1 and PENN 2, we are leasing now in the $100 range, maybe just a pinch higher. There's nothing that said -- but if you go to our neighbors, if you go to Manhattan West and you go to Hudson Yards, the market rents for those buildings, albeit they are newer buildings, especially their new buildings, is substantially monumentally higher than $100 a foot.
As this market tightens and as the PENN district matures, it gets to be accepted as the single best location in the West Side, there's nothing that says that market rents in PENN 1 and PENN 2 can't go from $100 a foot to $125 a foot and then maybe even substantially higher.
That kind of appreciation in income will cause bad news to increase monumentally. So for example, help me on this Tom, $25 a foot times 5 million feet is $125 million a year, okay? $125 million a year is worth $1.5 billion to $2 billion of value [creation] without any capital expense. So we're unbelievably enthusiastic about the market, about the tightening of the market and about the inventory that we own.

Jeffrey Spector

Very helpful. And my follow-up question is on the comment that you're working with a large anchor not looking for specifics, of course, on who. But can you just talk about the demand for anchor space? Is it a particular industry, technology, financials? Is it more broad-based? And I don't know if you could tie that to the Hotel Penn site.

Glen Weiss

Hi, Jeff. It's Glen. Generally speaking, the big demand drivers are financial legal and tech. That's what we're seeing, not just in PENN but across the entire portfolio.

Operator

Dylan Burzinski, Green Street.

Dylan Burzinski

Steve, just wanted to go back to your comments on you guys not -- are you -- in your guys' opinion, the public market not seeing the value in Alexander's in your comments about doing some bit about it. Can you kind of talk about sort of what you mean by that, anything we could expect?

Steven Roth

Well, thanks. If you take the asset of Alexander's and you do a sum of the parts analysis, that number by any construct has to be very substantially higher than the trading price of the stock. So it's a very simple concept. And it's based upon NAV. And if you just -- if you calculate the value of the asset piece by piece, it greatly exceeds the stock price.
Now think about it for a second. So Rego 1, which I guess you might say is a failed shopping center. We had IKEA moved out, so it's shrinking down. So we end up with a 66-year-old building. The capital cost of re-tenanting that building is huge, and obviously, not economic. So what we did very simply is we took the two remaining actually Burlington and Marshalls. Two great tenants. Marshall has been there for 30 years, 40 years. Very long period of time.
Anyway, so we move them into -- or we're in the process of -- we have signed documents by the way. We are in the process of moving them into Rego 2 which will fill up Rego 2, which is a relatively new shopping center we built it the better part of 10 years ago. So that makes Rego 2 a success.
And it empties out, Rego 1, which is a grand 5-acre piece of land, which will be either sold or developed. So that creates value. Now it doesn't have income today. So somebody who's looking at Alexander's from the income only approach is going to be substantially incorrect as to what the values are, but the piece of land is in the middle of Queens at the intersection of Main, Main, Main, and we think is extraordinarily valuable. So we'll see.

Dylan Burzinski

Appreciate those comments. And then I guess just one more broader strategic question. In several years ago, you guys slowed the idea of doing a tracking stock and ultimately shelved did until things started to recover in the New York office market. Now that things are seemingly recovering quite significantly, I mean, is that something that's back on the table? Can you kind of talk us through or that sort of fits in the grand strategic set of things?

Steven Roth

The easy answer to that is no. But I think about tracking stock at least every day. I think it continues to be a very, very, very good idea. I can honestly tell you, I can't get any support from the idea from any of you guys and even from my guys inside. But I continue to think about it every day. You never know it may come up as being a useful tool sometime in the future. But the short-term answer is no. I do think it's -- I do love the idea.

Operator

Floris Van Dikjum.

Floris van Dijkum

I was just curious, your commentary on rents, obviously, at the PENN Plaza district being significantly higher than what you probably originally underwrote. I recall you talking about $150 million, or we -- I guess we've estimated about $150 million of NOI growth at your three PENN Plaza district assets, PENN 1, PENN 2, and Farley. As you think now on the progression of market rents, has your NOI growth expectation increased? And I mean fully stabilized, this thing could generate more than $300 million of NOI.

Steven Roth

The answer to that is that, obviously, with the rents going up, that prediction will go up, but it will go up only marginally. And I'm told by my finance people who are smarter than I am, that it has to take into account that there will be capitalized interest rolling. That will roll off. So I mean, it's a complicated calculation that my guys can help you is offline. But basically, what I'm looking for is a pen to leases up. And as PENN completes its fill up, and then there is some retail space in the Farley building.
As all that happens, the income from that customer buildings were the beta part of $150 million. And that's incrementally going up. That doesn't count. So it will be more than that to pick it all together. So I mean, I read your piece that you put out, I think, last week, and I think it is absolutely directionally correct.

Floris van Dijkum

So Steve --

Steven Roth

Forest by the bar. As we keep developing the neighborhood, and for example, as I said in the prepared remarks, the PENN 15 site, the old Hotel PENNsylvania site is next up. It's already raised and down to the ground as we build a world-class office building, which I've said the building is frozen, but we're going to attack that as if the land cost in a (inaudible) is sunk. So if we look at it as having 0 land cost for the moment, we simply can get the new building off the ground. So anyway, if we -- as you look at this as an (inaudible),as we build on PENN15, a world-class office building.
That will inure to increase the market value of the across the PENN 1 and PENN 2 by at least $25 or $50 a foot. So what we think as we continue to work on our neighborhood, the value creation will be quite substantial, and I might even say, enormous.

Floris van Dijkum

Yes, if you start adding those pieces. The follow-up question, I guess, is -- on the acquisitions front, I know that it's hard to acquire assets. Maybe if you could talk a little bit about the environment and the types of transactions you're looking at and -- and where you think you're going to source or where you're more likely to source transactions? And would you consider allocating capital to outside of Manhattan to maybe markets like San Francisco or Chicago that are further behind in the recovery phase?

Steven Roth

That question is right up Michael's alley.

Michael Franco

Good morning, Floris. So I think in terms of acquisitions, you're accurate in the sense of it's been more challenging in New York, and as the cycle is turning here sellers are getting a little more optimistic. That being said, there's still a lot of maturities to work through, and I think that's going to present opportunities in the next year or 2. So -- but our target is it has to be the right asset to fit into our portfolio, right, from a quality perspective. So I think there will be some, but it's going to be fewer rather than more San Francisco, we are constructive on.
We believe in the market. I think we've been consistent on that. I think the signs are positive there, new leadership, Citi is certainly turning a corner.
So the answer is yes. We are open mine regarding San Francisco, Chicago. I think we're content with what we have. I don't think you'll see us add anything there. The market has many more challenges, and it's going to take some time for the other.
So we're not focused on that either. And I don't think we'll look beyond that.

Operator

Michael Griffin, Citi.

Michael Griffin

I appreciate all the color around the leasing pipeline and demand. I'm curious, maybe Steve or Glen, could you give us some insights into whether or not tenants are coming to you earlier to try to renew space just given that limited availability, and you've talked about landlord pricing power. Have you started to see concessions drop off at all as a result of this demand you've seen?

Glen Weiss

It's Glen. So in terms of the demand, we're seeing it from every angle, multiple expansions, multiple renewal discussions for deals that are years out from expiring and the demand -- the immediate demand for space from tenants who are either new to the market or want to move immediately is more robust than I've seen in many years. As it relates to concessions, I think they're neutralized. They've not come down generally yet, but rents have gone up. And that effectively, things are better. And as this market more and more become the landlords market, the concessions will come down.

Michael Franco

If I would add on to what Glen said. I think there's a couple of dynamics there, right? First, let me talk about these expansions. We're going through our pipeline in the last few days. And there's a handful of tenants that we did leases with very recently, they've already come back for more space.
And I think that's a reflection of a couple of dynamics that's occurred that occurred. One is I think there was a level of conservatism on behalf of tenants as they lease space coming out of COVID because they didn't know exactly how they use or how much they would need, right? And they're now awfully backed and they recognize that they need more as a result that.
Two, as both Steve and Glen said, business is booming, right? Law firms are booming, financial services, being techs booming, et cetera. So all these businesses are growing. So when you take both of those dynamics, you have a very robust market overlaid onto a very tightening level of supply of where these tenants want to be. So I think that's why Steve said what you said in terms of the expectation for rental growth over the next several years.

Michael Griffin

I appreciate the additional commentary there. And then just maybe following back up on your comments and prepared remarks around the financing markets and capital availability. Obviously, we've seen more transactions come to market as of recent, the CMBS market seems more open. For the mortgages that you guys have coming due this year, whether it's an 11, 888 those properties are very well leased. Do you have a sense or maybe give us some insight on where you'd expect the refinancing rate to be relative to the current interest rate? And any other commentary on sort of the debt capital markets would be helpful.

Michael Franco

Look, I think if you think about where we are today versus where we were, let's say, a year ago, I think it's night and day. and we really opened up the market on the office side with the Bloomberg financing. And since then, certainly with respect to New York State, there's been a floodgate of high-quality office had been financed. So you think about the transactions that have gotten done, many of them in excess of $1 billion in a couple of cases, multibillion.
So I think that is evidence of the -- just the demand from fixed income investors for high-quality New York City office, I think it's very encouraging. And so Obviously, our portfolio plays in that. So as we look out in terms of the financings that are going to -- that roll this year, like we're coming off some low rates in a couple of cases, particularly on fixed -- on a couple of fixed rate deals, I think we'll see upticks in rates there. At the same time, something like a Union Square the demand for high-quality retail is very strong and then they will be lower.
So net debt, I think it's probably a little higher, but we're also delevering with some pay downs of the $770 million, et cetera. So I think from Vornado's perspective, I think we obviously took some hits the last couple of years with interest expense going up pretty significantly. I think by and large, we're done with that in total? Could it be a little bit higher this year, maybe it could be a little bit lower, maybe I think we're sort of par year-over-year. And I think, generally, the worst is sort of over for us.

Operator

Vikram Malhotra, Mizuho.

Vikram Malhotra

Steve, I guess, you've done a great job on the penetrate on various assets. And you talked about sort of the I guess the next evolution or the next jump in loss stabilized NOI. I'm wondering from an actual development or an asset standpoint, what's next in pen? How would you sequence sort of various other parcels or redevelopment opportunities you have?

Steven Roth

Thanks for the question, Vik. We're studying that now. We believe that we should independent would have 1 or 2 buildings under construction and rolling forward for the next 10 years, but we're not ready to announce anything yet. Obviously, the PENN15 site is sitting there probably, I believe, the best site in Manhattan ex Park Avenue. So that obviously is the next site.
We are considering all options for that site. There will clearly be an office building on the front of that site, but we're also considering apartments as well.

Vikram Malhotra

Got it. And then just maybe to follow up. You talked about the office pipeline. I'm wondering if you can give a little bit more color on sort of how street retail is evolving on Fifth and Madison. Any color on tenants in the market there? And what pricing may be doing and how that translates into your leasing costs.

Michael Franco

Yes, Vikram. So on the retail pipeline, I'd say just on the market in general. The market continues to strengthen vacancy rates continued to decline and rents are certainly for the best spaces. I think returning to close to peak levels. So, we signed a significant lease in Times Square last year.
There's activity in that submarket. Again, we own the two best blocks, and we have some active dialogue going at some very strong rents, not too far off the peak there. Fifth Avenue, same dynamic in terms of tenants looking for space, I think we've seen certainly, since COVID, the most activity of retailers cruising around looking for space. And so I think that pickup.
And again, for the right spaces, I think tenants recognize they're going to have to pay rents that aren't too far off the peak there, if not the peak. So the bottom line is and what's driving all this is that the sales figures that the retailers are doing. And the recognition that New York remains the global city in the U.S., maybe #1 in the world, and they have to have locations here. So we're close to lease with some sort of new-to-market tenants as well as some tenants that are already here. We continue to have good activity throughout the PENN District, and we're working on some leases there as well.
So we're pretty constructive on the retail market as well. We own great assets and those tend to be where the retailers are most focused.

Steven Roth

I'll give you an anecdotal story. So we have an important asset on family. Actually, we have a lot of them. But one particular important asset on (inaudible), we had a major retailer come in knowing that the incumbent in that space had an expiry in 3 years and no renewal option. Trying to actually say, I would like to signed for that space now, and I'll wait for that tenant's lease to expire.
So that's things that happen only for extraordinary properties and tight markets. So that was kind of fun.
The other thing that I'll say is on Fifth Avenue tenants would prefer to buy rather than rent, and so the buy prices are higher than would be reflected by the market risk. So the arbitrage there is that it's more economic to sell some of these assets than to rent some of these assets. And we're open for business.

Operator

Michael Lewis, True Securities.

Michael Lewis

So Steve, you often emphasized you run this as a cash business, a focus on cash, which we agree with. The FAD of $1.75 per share in 2024 was the lowest in at least the last 25 years, probably longer. And I realize leasing up a lot of space cost money, but maybe help us understand the health of the New York office business in the context of REITs like yourself making less cash money than ever before. and this 25-year trend of that kind of consistently going down? And are we at an inflection and you expect that to kind of rapidly increase?
And do we get back to kind of pre-COVID cash flow levels?

Steven Roth

Complicated question. I'm familiar with the trend, I'm familiar with the capital intensity of our business I'm familiar with the fact that we're in the multi-tenant, we and all of our colleagues in the industry are in the multi-tenant business where the spaces turn over. I'm familiar with the cost of turning over those spaces all of which creates the trend that you mentioned.
So clearly, and Glen alluded to this, the PI and the tenant inducements to turn over a floor in a building is very sticky, and we're struggling to try to get them to go down, they will only go down in a very tight market. So that's in our future, not in our past. On the other hand, if you look at the rents, rents have gone up already to sort of alleviate that problem. So I'm expecting that the cash -- the actual cash flow or AFFO or whatever you want to turn it. We are at the bottom of that cycle, and that's going to go up in a market which I think is going to get much tighter.
Now, that is something that I'm predicting for New York. I believe New York is unique in the nation. Other cities as great as they might be around the country, I don't believe are going to benefit from that trend.

Michael Lewis

Okay. Great. And then my second question, I just wanted to ask about the New York office in-place rent versus market rent. So the in-place rent looks like it's right around $90 a square foot. Where do you think market rent for the operating portfolio are compared to that?

Glen Weiss

It's Glen. We say this often, quarter-to-quarter, it's going to ebb and flow flat, positive, et cetera. We feel confident that our mark-to-market will be positive. I'm not going to predict how much that means. But we like our spot in terms of our rolling expirations in the next few years.
We like where we're now pegging rents. As we mentioned, we've increased rents generally across the whole portfolio. So we feel good about that metric over the next 2 to 3 years.

Steven Roth

I'm not [natural] and I'll predict. So let's just go to PENN for a minute because that's easy. So I believe that we signed a wonderful lease for 730,000 square feet in the Farley building in the middle and the depth of COVID, I believe when that lease comes for renewal only in out years from now, the markets for that renewal will be very substantially higher than the in-place with. I've already said that I believe PENN 1 and PENN 2, which we are very happy to get $100 or a pinch more today that in the short-term future, 3, 4, 5 years from now, the market rents for those buildings will be very, very substantially higher. So that's what I think.
We're bidding on that.

Operator

Alexander Goldfarb, Piper Sandler.

Alexander Goldfarb

Steve, and first, congrats (inaudible) the improved yields at PENN and the positive reception you guys have had from the market. So that's quite a compliment from the market for you guys there. Two questions.

Steven Roth

Alex, thank you, my friend.

Alexander Goldfarb

No, it's true. I mean you spend time walking us through and it's evident at your ability to rethink in the campus environment. So it's good to see that the rents are moving the way you had hoped. My two questions are first on Alexanders, and I appreciate your comments. What would be -- what would -- I mean, right now, given how much of the original assets have been sold off, and I would think you could get a good price for the apartment tower in Rego 2.
Why not just blend in Alexander's into Vornado, you'd eliminate the G&A instead of paying a dividend, that cash flow would accrue to Vornado. You have 731, which certainly fits in your portfolio. Why not just incorporate Alexander's into Vornado. What would prevent that?

Steven Roth

Well, nothing is not tenacious. That idea has been floated for 20-odd years, and I have said we're not going to do that for 20-odd years. And actually, I probably will continue to say it now, the (inaudible) is the pricing of it, the melting of -- it's not something that's on the front of my mind today.

Alexander Goldfarb

Okay. I mean it just it has cash needs, and it's certainly as you wound it down, would seem to fit more and more, but I guess that's a conversation for off-line.

Steven Roth

Alex, let me give you a fantasy. Okay.

Alexander Goldfarb

I love that.

Steven Roth

Okay. I'm trying to please you. If we merged Alexander into Vornado, I have no idea how we would price it and how we could get both sites to be happy. Very difficult to do, okay? Operatively, if we left out as we are going to do, that's what I'm saying, as a freestanding independent public entity.
And we narrowed it down to nothing but the Bloomberg office building, which shortly will have approximately $100 million of net income. And that was the only asset in that property, and it had very low debt or maybe no debt, what would that sell for as a -- what would that sell for in the stock market. And I submit to you that, that would sell for much, much higher than the current trading price of the stock. That's just the fantasy though.

Alexander Goldfarb

Second question is, Michael, you walk --

Steven Roth

What I'm really saying is, from a value point of view, we think that we can make Alexander's value to be above what were might be willing to pay for it and then Alex and the shareholders will (inaudible). That's what we're pursuing.

Alexander Goldfarb

Okay. Michael, you appreciate the comments on '25 some perspective. But you guys have outlined some asset sales vacating at 350 Park and just the remnants of refinancing. In addition, you have the capitalized interest, I think, $51 million at PENN 2 that would burn off from that when -- as those leases take effect. So as we think about the next 2 years, how much FFO net is coming off of Vornado relative to FFO coming on from TEN?

Michael Franco

Yes. I think that -- look, as we said a couple of things. One is in terms of capitalized interest, right? We've talked about that being lower this year versus last year given PENN 2 is going to roll off this year. And I think that's why consensus is down appropriately, and that's reflected here.
So 350 when that comes off, we don't think that has much of an impact relative to the master lease we're getting today. There'll be no debt on the asset at that point, we'll get capitalized interest on that. So that's not going to really have an impact on the numbers.
So like we've talked for the last year about the success we've had backfilling 770, 1290, 280, now leasing at PENN. That's going to start flowing through a little bit this year, more materially next year and dramatically in 2027. And so to model that out as you want, based on that comment, but I think that's our trajectory.

Operator

Ronald Kamdem, Morgan Stanley.

Ronald Kamdem

Just two quick ones for me. So one is on just on the same-store NOI for New York office ended down 3.3%. Just as you're thinking about the next 2 to 3 years, just any high-level thoughts on what that same-store number could look like in this sort of strong environment?

Michael Franco

Ronald, I don't have those numbers in my fingertips, and I don't want to give you numbers that are too much of a guest and so on. So let us look at that and we'll try to give a little more visibility there.

Ronald Kamdem

Going back to the -- I had the same sort of question on CapEx, maybe asking it a different way. When I think about sort of the $250 million of CapEx spend this year, which includes $72 million on sort of first-generation space. Any sort of thoughts about what '25, '26 could look like? Are we coming down from those numbers? Are we staying in place?
Just any sort of thinking on CapEx as we're thinking about the model.

Michael Franco

I mean I think the we raised it a little bit because -- and it's the best guess every year, right, in terms of timing of when you make those payments, and it doesn't necessarily line up until we actually finalize the lease. But we know the leases that are in process. We have an expectation of what we're going to get done beyond that. And so I think it's reflective of the pretty strong leasing environment in addition to some base building capital. So, last year, I think we're dead on our prediction.
Most years, were, frankly, not because you're taking a high level of guest so I think directionally, we're still in the same bucket, 250, 275 is frankly not that different, right? It's just a matter of what space you end up leasing in a particular year, how much capital is spent on the portfolio beyond that.
So I think that's a pretty good number directionally for this year, just given some of these big leases that are in the works on PENN and beyond. And as we get into next year, we'll see what's left. But I think that number will start coming down as the portfolio fills back up.

Operator

Anthony Paolone, JPMorgan.

Anthony Paolone

Yes. Steve, you mentioned just viewing the cost basis around the Hotel PENN side at sunk at this point. Can you tell us just like what it costs to build something and go vertical right now then? And what kind of yield on that you would want? What do you think the building costs?

Steven Roth

By development -- my young development sauce as $1,900 a foot X land for a Class A building. I won't have to test that.

Anthony Paolone

In the yield?

Steven Roth

Well, if you put land in, so we get to a number which is -- but the 2000 and -- I don't know, pick a number, $2,500 a foot, some number like that, I don't know. And you put a yield on it, what would you build for now and with a debt market of 6%. Let's say, you need to get 7% or 8% or something like that because equity is more valuable than debt. So what, 7% times $2,500.

Michael Franco

175 million.

Steven Roth

Now that's a number that's net of taxes and operating costs. So that -- so the answer is that to build a new building today, the rents that you would need to get are in the high 100s. You're shaking your head, why are you shaking your head?

Michael Franco

I agree, which is why it's -- you talk about being frozen, the math doesn't work.

Steven Roth

So -- but think about that for a second. So one of the reasons that I'm so enthusiastic about the rents at PENN1 and PENN2 and the rest of our perturbing from $100 a foot is because you asked us figure that a new build is $200 a foot or something like that, maybe less, maybe a pinch more. So the in-place buildings and the better inventory in the great locations will become much more valuable. That's the whole bunch lines of -- that's the punch line to today.

Anthony Paolone

Okay. I guess that's what I wanted to understand. I mean you mentioned your vantage point being that sort of cost thus far as sunk. And so I guess you're just looking at the incremental and what it could do for the whole area, not so much thinking about that $2,500 basis and a yield on that?

Steven Roth

Yes. But the fact of the matter is, is that I own the land. I have -- I bought the land a long time ago. I have no debt on the land. And so given a choice between leaving the land empty or building on it, we'll make those choices.
That's what we get paid to do.

Anthony Paolone

Okay. I understand. And then just a quick follow-up. I think you bought a nonperforming B note on a Midtown deal last year. Can you give us any update on that or plans or what's happening there?

Steven Roth

No, sir.

Operator

Nick Yulico, Scotiabank.

Nicholas Yulico

Great. In terms of the PENN project, can you just talk a little bit about whether any the sublease space that's available in Hudson Yards is if you're actually finding that to be competitive when tenants are looking at your project?

Glen Weiss

Nick, it's Glen. So the answer is yes, which if you think about it, PENN2 and PENN1 are competing with new space. That's a great thing. And as Steve said, our pricing is not near their pricing even the sublet pricing. So we feel good about the fact that tenant touring the West side whether it's the sublet availability in Hudson Yours or Manhattan West or PENN1 or PENN2, we are squarely in that mix every day.
So we like that. We feel very competitive with it, very comfortable with it.

Nicholas Yulico

Okay. And then second question is just going back to the yield on PENN2, can you just remind us, I think that the yield when you quote the yield does not include TIs and leasing commissions being built into the cost there. So if we assume that I think at one point in the notes, I saw that it was around $140 was around like a TI leasing commission cost there per foot. I just want to see if that's still right. And if we build that in, is the yield on the project inclusive of that, closer to like 7.5%, 8%? Is that ballpark correct?

Michael Franco

Yes, yes. I mean the answer is that we'll calculate. I mean, I think the thesis is that we would have had to spend the TI dollars, leasing commissions anyway, right? And typically, given what's happened when you're spending those to generate rents that were not economic now, given the quality of the old building. So we thought the incremental cost, it was cost that we would -- that we spent that we wouldn't have had to spend, right? That's how we got to the members in the supplemental. And what's the yield on that -- so we can factor in the TIs, et cetera, to see, but we would have spent that money anyway.

Nicholas Yulico

Okay. So -- and then as the TI leasing commission per foot there was just some around $140, is that number?

Glen Weiss

It's about right, maybe a touch higher depending on the deal.

Operator

Brendan Lynch, Barclays.

Brendan Lynch

It looks like you've got about 14% of ABR expiring at 555 California in the third quarter and 18% for the year. Any details that you can give on renewal discussions. It sounds like you're optimistic on San Francisco in general. Just get some more color please.

Glen Weiss

It's Glen. We remain extremely bullish on our building in San Francisco 555. It's the best of building the city, probably the states and certainly 1 of the best in the country. So when you look back from 2021 forward, we had a full-loaded hundreds of thousands of feet expiring from '21 to '26. We have leased almost 700,000 feet thus far during that period.
We have some more expirations coming in '25 and then some more in '26. We're attacking those now. Some of those tenants will stay but may not stay. But we feel great about what we've done -- our rents are clearly leading that market. It's not even close.
And our tenant roster continues to be 5 star. So we feel great about 555 as we sit here.

Brendan Lynch

Great. Maybe just one follow-up on that. Is the 14% in the third quarter, is that one tenant? Or is that split between multiple different tenants?

Glen Weiss

The third quarter of -- so in '25, there is multiple tenants expiring, call it, 5 or 6 tenants throughout the year in different quarters. None of them is huge. But as you add it up, you get to that role.

Operator

Steve Sakwa, Evercore.

Steve Sakwa

Just one quick follow-up. On 770, I realize at least Steve isn't quite finished, but it sounds like it's going to get over the finish line soon. Are there any sort of unique accounting I guess, adjustments that we need to be taking into consideration given the unique nature of this? Or is this just a typical normal long-term lease that would have straight-line rent, and we'll have to figure out what kind of the GAAP rent is and straight-line adjustments. I realize you get a lot of cash upfront. But -- just trying to think if there are any nuances of this deal because it is a little bit different.

Steven Roth

I'm not going to comment on that transaction. It will be final. It will -- it is finalized actually. But it will be announced, I would hope by the end of this month. And so the announcements that we make will press release and we'll have all the details that we need to give you guys so that you can understand it. But I mean, you get -- so I don't want to get into the detail now prematurely.

Operator

John Kim, BMO.

John Kim

Steve, you mentioned the lack of new office development in New York for several years. and how tough it is as far as getting the math to work on some of these sites. But how many projects do you think will get off the ground right around the same time as 350 Park. There's been a few out there in various stages.

Steven Roth

None.

John Kim

There's not enough demand.

Steven Roth

No, there's plenty of demand. There's just not the cost of building I don't know what's going to happen with the cost of steel now, but who knows. The cost of building and the fact that interest rates remain stubbornly high and the backup availability of aggressive capital will make the market frozen. Now 350 Park is a isolated different point of view because we already have a lease for a major tenant, and we already had a 60% capital part there. So 350 Park will get off the ground.
My prediction is that almost no other building will get off the ground. And by the way, that could very well include for the for the short term, PENN15.

John Kim

Where would rents have to go to justify new development.

Steven Roth

I've already answered that question. $200 a foot is an interesting bonus.

Operator

There are no further questions at this time.

Steven Roth

Thank you all for participating. I think you can tell from the remarks of our management team. We are extremely enthusiastic about our business and extremely enthusiastic about New York and wildly enthusiastic about the PENN District. So thank you all very much for participating, and we'll see you next quarter.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.