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Roth and Bloomberg agree to ‘clever’ concession to extend HQ lease

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In return for keeping its global headquarters at 731 Lexington Ave., Bloomberg LP struck an unusual deal that could lower its rent by as much as 10%.

The exact amount won’t be determined until the new lease takes effect in 2029. Depending on market rates, there’s a chance former Mayor Michael Bloomberg’s company could pay higher rent for its 900,000 square feet of space in the tower at the corner of East 59th Street. But at least for now, investors reckon the new rent will come in at the lower end after Vornado Realty Trust reported last night the Midtown office market continues to hobble. 

Occupancy in the landlord’s Midtown office towers continued to erode last quarter and rental income fell by a surprising 5% while new tenants remain tough to find. Vornado’s share price fell by 7% in midday trading Tuesday.

Against this tough backdrop, Bloomberg’s decision yesterday to extend its lease until 2040 was a big win for Steven Roth, who is CEO of both Vornado and the real estate investment trust that owns 731 Lexington Ave., Alexander’s Inc. Vornado owns about a third of Alexander’s.

On an earnings call, Roth said that Alexander’s would be collecting $98 per square foot in net rent, after taxes and other expenses, when Bloomberg’s lease expires in five years. Under the terms of the extension, Bloomberg would pay a minimum net rent of $88.72 per square foot and a maximum of $108.44. The amount would depend on market rates in 2029 for Class A office space. 

“We have certainty on the bottom as to what the rent would be,” Roth said. “Both tenant and landlord think this is a fair deal and a clever way of handling the future.”

Roth committed to spending up to $124 million, or $135 per square foot, on improving 731 Lexington, which has been occupied by Bloomberg since it opened 20 years ago. Bloomberg also secured a year of free rent, which analysts say is typical for a deal of such magnitude.

Locking in a key tenant for another 16 years was perhaps the best news Roth could offer after Vornado delivered a disappointing quarter. 

The occupancy rate in its 20 million square-foot New York office portfolio declined to 88.2% from 89.9% in the prior-year period, due mainly to tenants moving out of premiere buildings at 280 Park Ave. and 1290 Sixth Ave. Rental income in the New York portfolio fell by 5.1%, weaker than expected. 

Next month Meta Platforms will move out of a third of its 775,000 square feet of space at 770 Broadway.

Filling vacant space remains a challenge, with leasing volume coming in at 291,000 square feet last quarter, down from 777,000 in the prior-year period. Concessions amounted to 14.5% of initial rent, a figure Evercore ISI described as “meaningfully higher” than the fourth-quarter figure of 11.4% and a signal that bargaining power is strengthening for potential tenants.

 

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Aaron Elstein , 2024-05-07 19:20:17

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