Vornado Realty Trust (VNO) Q3 2025: Manhattan Office Rents Jump 15.7% as Leasing Pipeline Hits Decade High

2025-11-04 | By EarningsIQ Research

Vornado’s Manhattan office portfolio is capitalizing on a sharply tightening market, with average starting rents in the third quarter surging and leasing volumes on pace for the highest in over a decade. Robust tenant demand and limited supply have pushed vacancy in Midtown’s best buildings to near frictional levels, enabling Vornado to accelerate rent growth and mark-to-market gains. With a multi-year pipeline of signed leases and major redevelopments underway, management is positioning for a significant earnings inflection in 2027, even as 2026 is guided flat amid asset sales and redevelopment downtime.

Summary

• Manhattan Office Rents Accelerate: Vornado’s Class A leasing achieved double-digit rent growth, signaling landlord pricing power.
• Leasing Pipeline at Decade Highs: Signed and in-negotiation leases set up multi-year NOI growth visibility.
• 2027 Inflection Year: Major lease commencements and project completions expected to drive step-change in earnings.

Performance Analysis

Vornado delivered a standout quarter, with Manhattan office leasing volume and rents both reaching new highs. The company executed 21 New York office deals totaling 594,000 square feet at an average starting rent of $103 per square foot, with mark-to-market gains of 15.7% GAAP and 10.4% cash, and average lease terms over 12 years. The Penn District, Vornado’s flagship redevelopment cluster, continues to outperform, with Penn 2 leasing at $112 per foot and occupancy climbing to 78% post-quarter, on track to surpass 80% by year-end.

Financially, comparable FFO rose to 57 cents per share, up from 52 cents, driven by the NYU master lease at 770 Broadway and record signage revenue, while same-store GAAP NOI for New York was up 9.1%. However, same-store cash NOI declined 7.4% due to free rent and ground lease adjustments. Occupancy across the New York office portfolio increased to 88.4%, with management guiding toward low 90s in the coming year. The balance sheet continues to strengthen, with net debt to EBITDA improving to 7.3x and immediate liquidity at $2.6 billion.

• Rent Growth Surges: Average starting rents on new Manhattan leases reached $103 per foot, with select Penn District deals at $112 per foot.
• Leasing Volume Leads Market: 3.7 million square feet leased year-to-date, with 2.8 million in Manhattan office—highest in the market.
• Balance Sheet Delevered: Net debt to EBITDA reduced from 8.6x to 7.3x YTD, with $1.5 billion in gross proceeds fueling $900 million in debt paydown.

Management’s focus on prime assets and disciplined capital allocation has insulated the portfolio from broader office market volatility, with future growth underpinned by signed-but-not-yet-commenced leases and redevelopment projects.

Executive Commentary

Strategic Positioning

1. Manhattan-Centric, Prime Asset Focus

Vornado’s strategy is to concentrate on Class A and trophy office and retail assets in Manhattan, where supply-demand dynamics have shifted decisively to landlords. With 90% of its portfolio in prime Manhattan locations and a “stick-to-our-knitting” approach, the company is insulated from weaker national office trends. The Penn District, encompassing Penn 1, Penn 2, and future Penn 15, is positioned as a multi-decade growth engine, benefiting from infrastructure adjacency and a clustering effect that attracts high-credit tenants.

2. Leasing Velocity and Rent Mark-to-Market

Leasing activity is robust, with Vornado leading the city in both volume and rent mark-to-market. The company’s ability to sign long-term leases at rising rents—often exceeding $100 per square foot—demonstrates market power and sets a new baseline for future renewals. Management expects cumulative net effective rent growth to exceed 25% over the next four to five years, outpacing peers, as Class A supply remains tight and tenant expansion demand broadens across industries.

3. Redevelopment and Development Pipeline

Major projects, including the ongoing Penn District transformation and 350 Park Avenue (with Citadel as anchor), are designed to deliver best-in-class product at below-new-build cost, targeting unleveraged yields of 9-10%. The recently acquired 623 Fifth Avenue, 75% vacant, offers a unique value-creation opportunity reminiscent of the successful 220 Central Park South playbook, with delivery slated for 2027 at an expected double-digit return on cost.

4. Balance Sheet Management and Capital Allocation

Vornado has aggressively delevered, pre-funded its development pipeline, and maintained ample liquidity, allowing flexibility for opportunistic acquisitions, share buybacks, or further debt reduction. Management is non-committal on asset sales, prioritizing value maximization, and remains open to redeploying proceeds into high-return internal or external opportunities as they arise.

5. Ancillary Revenue Drivers: Signage and Retail

The company’s dominant position in Times Square and Penn District signage provides a high-margin, perpetually controlled revenue stream, with 2025 set to be a record year. Retail repositioning, especially on 34th Street, is expected to unlock value from previously underperforming assets, further enhancing the Penn District ecosystem.

Key Considerations

Vornado’s quarter underscores a decisive shift in Manhattan’s office market and the company’s ability to monetize premium locations with rising rents and long-term leases. The strategic context is defined by:

• Supply Constraint Tailwind: Midtown Class A vacancy has dropped to 6.2%, enabling Vornado to push rents and reduce concessions.
• Pipeline Monetization: Over $200 million in signed-but-not-commenced leases will begin contributing primarily in 2027, supporting multi-year NOI growth.
• Development Discipline: Redevelopment projects are budgeted at half the cost of new builds, with targeted yields well above market cap rates.
• Balance Sheet Headroom: Immediate liquidity of $2.6 billion and improved leverage ratios provide resilience and optionality.
• Retail and Signage Upside: Record signage revenue growth and retail repositioning offer incremental high-margin income streams.

Risks

Key risks include timing uncertainty on lease commencements, exposure to macroeconomic shifts in office demand, and the potential for litigation or regulatory setbacks related to ground leases or redevelopment approvals. While management’s Manhattan focus insulates from national office malaise, execution risk remains around the scale and timing of major projects and asset sales, as well as interest rate volatility impacting cap rates and financing costs.

Forward Outlook

For Q4 2025, Vornado expects:

• Occupancy to continue rising toward low 90s percent as pipeline leases commence
• Leasing activity to remain elevated, with Penn District projected to surpass 80% occupancy

For full-year 2025, management raised FFO guidance modestly and reiterated 2026 will be “flattish” due to non-core asset sales and redevelopment downtime, with a significant earnings inflection in 2027 as Penn 1 and Penn 2 lease-up fully materializes.

• 2027 projected as a “significant earnings growth” year as signed leases commence and major redevelopments deliver
• Continued focus on deleveraging, opportunistic asset sales, and potential share buybacks

Takeaways

• Landlord Market Emerges: Vornado’s ability to sign long-term leases at rising rents confirms a decisive shift in Manhattan’s office market, with supply constraints driving pricing power.
• Multi-Year Growth Visibility: Signed leases and redevelopment pipeline provide line-of-sight to a 2027 earnings surge, with over $200 million in incremental income set to come online.
• Balance Sheet Provides Flexibility: Deleveraging and pre-funding of development ensure resilience and optionality as Vornado navigates asset sales and new project opportunities.

Conclusion

Vornado’s Q3 results underscore its leadership in the Manhattan office recovery, with strong rent growth, robust leasing, and a disciplined balance sheet setting the stage for outsized earnings growth in 2027. The company’s unique positioning in the Penn District and focus on prime assets offer investors differentiated exposure to the most dynamic segment of the U.S. office market.

Industry Read-Through

Vornado’s performance and commentary provide a stark contrast to the broader U.S. office sector, where oversupply and weak demand have weighed on rents and valuations. The Manhattan Class A market has entered a landlord-favorable cycle, with low vacancy and surging rents benefiting owners with scale and redevelopment expertise. Peer REITs with exposure to New York’s prime corridors may see similar tailwinds, while landlords in secondary markets remain challenged. The redevelopment and signage monetization strategy also highlights the value of ancillary income streams and mixed-use clustering in urban real estate portfolios.

VNO Real Estate Office Redevelopment Manhattan Leasing Signage Balance Sheet