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 Cushman tells office investors to look to sunbelt markets

•CME to introduce bitcoin futures*

Consumer confidence at highest since 2000

•Vornado’s Steve Roth says teardown of 666 Fifth isn’t feasible*

Houston layoffs expected in Vistra takeover of Dynegy

Home prices accelerate in index of 20 US cities



New Zealand bans foreign home buyers after price surge

Canada’s economy unexpectedly contracts in August

Euro area inflation (un)expectedly slows*

BoJ trims inflation outlook* (again)

•Economists see vote for rate hike this week in the UK

•Disappearing bank jobs are not coming back*

1) Homeownership Rises, As Do Vacancies

In short: The share of Americans who own their homes rose to 63.9% in Q3, up from 63.7% in Q2 and 63.5% a year earlier. However, with higher ownership (suggesting more purchases of second homes) has come higher vacancy rates. On a YoY basis, vacancies stand at 7.5%, up from 6.8% a year prior. I suspect Amazon will definitely be looking at this data…

In which major metros is home ownership the highest?

 Pittsburgh (74.0%)

•Raleigh (70.0%)

•Nashville (68.8%)

•Baltimore (68.4%)

And where are vacancies the lowest?

•San Jose (2.4%)

•San Francisco (3.3%)

•Seattle (3.6%)

Notice any trend with regard to popular areas for corporate relocations?

By Major Region



2) Vornado's Earnings

In short:

 Total revenues increased 5.2% year over year, with results reflecting growth in occupancy and same-store net operating income (NOI) in the New York portfolio.

•Of office properties in which VNO has a stake, during Q3 they leased over 450,000 sf in space over 33 transactions, with average starting rents of $83 a foot. Average lease size? 13,700 sf.

100,000 sf of leasing activity or 22% was at triple-digit numbers; At One Penn Plaza, VNO achieved $70 average starting rents, a new record.

•The company was extremely optimistic about prospects for the Farley redevelopment; Roth would not call a bottom in retail when asked.

•VNO took a $44.5 million non-cash impairment on their shares in Pennsylvania REIT.)

  New York Office Portfolio theMart (Chicago)
Q3 2017 leasing 452k (Vornado's share: 405k) 36k
Q3 2016 leasing 335k (Vornado's share: 308k) n/a
Q3 2017 occupancy 96.9% (up 110 bps YoY)* 98.7% (up 50 bps YoY)

*includes entire New York portfolio, not just office.



Comments form their earnings call

On Office

 “Today, the hottest submarkets in town run from Hudson Yards to Penn Plaza and extends south through Chelsea and Meatpacking. Anticipating these trends, we have structured our office portfolio, so that half of our square footage is in this district.”

•“The 14,000 new jobs for the 3rd quarter is well within the range we like to see…[in order] to absorb the new supply coming online over the next 5 years.”

•Financial services employment in Q3 finally reached its pre-financial crisis level, even as there was a modest decline in TAMI jobs.

•Their “single the largest block of space currently available is 70,000 square feet at One Penn Plaza.” They “see a relatively quiet 4th quarter as…[they] continue to address [their] lease expirations of 950,000 sf in 2018 and 775,000 sf in 2019.”

On Penn Plaza

Over a third of their lease expirations over the next two years are concentrated in One Penn Plaza but they “are now finalizing our plans for the total redevelopment and modernization of this asset, including a new lobby storefronts plazas, amenities spaces and state-of-the-art infrastructure.”

Their work is now well underway to transform the Farley building into the dramatic Moynihan Train Hall, with 730,000 sf of “best-in-class creative office space on unique floor plates and 120,000 sf of ancillary retail space.”

“Imagine the reaction we get when we take people upon to the roof we show them the potential for a 50,000 square feet outdoor deck.”

“We have begun to introduce the office space to tenants and brokers and the early response has been a “wow” as you would expect for an asset as unique as this one.”

“What we think is truly unique about the Farley building is the ability to deliver truly a horizontal campus in New York” (like those of Facebook and Apple in CA.)

On Amazon

“As you would expect, the Farley building was front in center in our submission to the city for inclusion in the city's proposal to host Amazon's HQ2 headquarters. We pointed out that we could accommodate Amazon’s near-term needs with significant room to grow in the existing buildings and development sites. The city noted that the area is accessible 15 subway lines for 4 commuter rail lines and Amtrak with direct connectivity in place or planned to all 3 regional airports.”

With Amazon already having committed to 800,000 sf in two sites that bookend our Penn Plaza holdings--450,000 square feet at our own 7 West 34th Street and an additional 360,000 sf in Manhattan West across the street from Farley--whether New York wins the HQ2 or not, Amazon will have a long-term significant presence in the district for years to come.”

On Retail

VNO considers their retail to be quite secure…”at all of our Upper Fifth Avenue and Times Square properties, we have only one lease expiry in the next five years.” They also have low debt (<20%) on their retail assets.

“We leased 38,000 square feet, including a 16,000 square foot lease to Sephora at 1535 Broadway in Times Square. This store will be Sephora's largest in the US and will replace their existing store across the street, which we understand is their highest grossing in the US….We are in final draft of a 12,000 square foot lease with a major national retailer, also at 1535 Broadway. With these two deals, we will be 100% leased at our two Times Square properties.” They did note that rents on these two deals at 1535 were within “spitting distance of the top tick.”

The general retail market even on the streets of New York continues to be quite soft."

“It's a challenging environment for street retail.”

“I am not willing to call a bottom” on retail.

“If we can hold street retail level until this cycle ends, that would be doing very well.”

On WeWork

"I won't comment on valuations, but I think that we welcome them to the neighborhood. We're happy to have and we think they'll improve [the neighborhood]"

On Investment Sales

“Investment sales activity is down appreciably from last year, largely a function of buyer caution, lesser quality product being brought to market and owners electing to refinance rather than sell. Given this relative strength in the debt markets, many others are opting to refinance rather than to sell. We will continue to prune our focus on our business.”

They see about $1B in sales proceeds over the next several years; some of these sales will be “tax-protected” such as their sale of shares in LXP (20% taxable) and UrbanEdge (50% taxable.) Their eventual sale of PREIT will be at a loss.

These figures don’t include the tax shield benefit of their $400M loss on Toys R Us.

They will likely dispose of a shopping center and other assets in the Washingon market that were not part of their spin-off.

On Redevelopment

1290 Avenue of the Americas—considering re-development of the space (has early termination right with a bank branch that they just signed for 3 years.)

Two Penn—the redevelopment will be “simple or complex” and it would be “inappropriate to give any information right now.”

One Penn Plaza: expects to have necessary “actions by the City Planning” agency in place in H2 2018, but they will “ commence the redevelopment program even in advance of those final approvals.”

(The approvals relate to conversion of the plaza space.)

On 666 Fifth

Noted that the asset is overlevered, especially the office part. Their plan as to what to do with the asset is “evolving.” Note: VNO owns 100% of the retail space and 50% of the office space.

The “well-located” property will “likely revert” to an office building.

“I don't want to speculate whether we are a buyer or a seller or increasing our position that in the deal.”


Largest Sources of revenue as of Q3 2017


3) A Look at Q3 Wages and Benefits

In short:

U.S. labor costs accelerated in the third quarter, leading to the biggest year-on-year increase in 2-1/2 years. Unlike the wage data from the monthly payroll report, the Employment Cost Index (ECI) includes the impact of benefits and assesses total compensation holding the composition of jobs constant, making it a better predictor of core inflation.

Wages and salaries, which account for 70% of employment costs, rose 0.7% in Q3, up from 0.5% in Q2. On a YoY basis, wages and salaries are up 2.5%, following a 2.3% increase in the 12 months through June 2017. Private industry wages rose 0.7% in Q3, versus a 0.8% gain in the manufacturing sector and a 0.6% increase in construction wages.



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