Vornado has disclosed that its joint venture with Crown Acquisitions has defaulted on a $450M non-recourse loan on the venture’s highest-profile retail asset—the ground-floor space at the St. Regis hotel, 100 feet of prime frontage on Fifth Avenue that Vornado brands on its website as the “epicenter of the Fifth Avenue retail district.”
The loan on 697-703 Fifth Avenue—the street address for the ground floor space at the St. Regis, which has its entrance on 55th Street—came due on December 21.
Vornado swung to a fourth-quarter loss from a profit after it wrote down the value of its equity investment in the joint venture, which includes a portfolio of Fifth Avenue and Times Square retail properties, by $596M, $483M of which represents its common equity investment in the venture, the company said.
As of Dec. 31, Vornado owned a 51.5% common interest in the joint venture.
In a Q4 earnings call this week, Vornado disclosed that the St. Regis retail space—now home to luxury brand outlets including Harry Winston, Bruquet and Blancpain—had to lower its rent on a retail lease renewal because the retail recovery in the Fifth Avenue district is still “sluggish and impaired,” according to Vornado CEO Steven Roth.
Michael Franco, the firm’s president, said in the earnings call that the lower rent made the St. Regis retail space “not refinance-able.”
“The loan went into default,” Franco said. “We were talking to lenders before that happened, we continue to talk to them today. And we’re in active discussions to restructure the loan and extend the mature.”
He continued: “if we can’t we can’t, and we ask them to go back to the lenders, just like everything we do, we’re going to be disciplined and thoughtful about whether it’s worth staying with the asset [and] investing capital.”
“I think we’ll end up with a deal because it’s in the lenders’ best interest, too,” Franco added.
Roth said the Fifth Avenue and Time Square retail markets are still struggling to recover.
“There are very few transactions on Fifth Avenue and at Times Square,” Roth said, during the earnings call. “So, you can make the assumption that this is still a sluggish, impaired market. It hasn’t recovered entirely. There is not the same lust for space that there was five years ago.”
Regarding the joint venture’s Times Square properties, Franco said Vornado has reached agreements on lease renewals at lower rents with Swatch and Levi’s.
“We are in active negotiations with those tenants as well as others,” Roth said. “The rents will be lower than in-place rents. We’ll retain the tenants but at lower rents.”
Franco said office leasing activity is slowing—in his words, “activity is lumpier.” He also said office tenants are still “grappling with” hybrid work policies.
Asked about the state of play in office occupancy levels and the widespread adoption of hybrid work strategies, Roth bluntly said that workers going into offices on Friday is “dead forever” and “Monday is touch and go.”
“I think we’re getting close to 60% now on Tuesdays, Wednesdays and Thursdays,” the Vornado CEO said. “I think you can assume that Friday is dead forever. Friday is going to be a holiday forever. Monday is touch and go.”
Regarding new development, Vornado signaled earlier this month that no new construction will begin in 2023 on the massive Penn District project, an 18M SF project that could include 10 new office towers around Penn Station. Franco said on the earnings call the delay could last up to two years.
Roth called new construction “almost impossible” because of current tight lending conditions.