Impact of Tenant Incentive Costs on Profit Margins Becoming More Significant

The financial cost of luring tenants to Manhattan’s office buildings has come into focus as million of dollars are spent by office landlords on new lobbies and other improvements in the last few years to make their buildings more appealing. The April 10th annual letter to shareholders by Vornado Realty Trust revealed that the real estate investment trust (REIT) “must first commit as much as $300 per square foot divided equally between tenant improvements and free rent” to induce companies to take space at the REIT’s buildings, which equates to “more than $40 per square foot over a 10-year lease.” According to details within the annual report, as of December 31, 2023, Vornado’s Manhattan office properties spanning a combined total of 20.383 million square feet had a 90.7% occupancy rate and weighted average annual escalated rent of $86.30 per square foot. In comparison, occupancy rate and weighted average rent in 2019 were 96.9% and $76.26 per square foot respectively across the Manhattan office portfolio that totaled 20.666 million square feet at the time.