Vornado Realty Trust (VNO) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us at the Vornado roundtable this afternoon. My name is Camille Bonnel, I'm the office REIT analyst here at Bank of America, and we have the full bench here from Vornado. Speaking with us today is President and CFO, Michael Franco. I have next to me, CEO, Thomas Sanelli, and in the middle is co-head of Real Estate and Head of Leasing, Glen Weiss; as well as Gary Hansen at the end, who is Senior VP and Controller of Alexander's. Michael, I'll hand it over to you in a second just for any opening remarks but we'll follow that with Q&A and try to keep this interactive.

How much time we have Camille?

About 30 minutes.

30 minutes, okay, good. Good afternoon, everybody. Nice to see a lot of old friends here. So we're happy to join, talk about our business, the office market, et cetera. Look, I think everybody knows Vornado, so maybe just a few general comments about the market and then we can dive into Q&A. How many are based here in New York. But, New York is clearly back and thriving again, leading the charge nationally and return to office and I think just citywide by pretty much any metric you look at, activity levels are back to pre-COVID, whether that's tourism, retail sales, leasing activity, et cetera. Businesses are back to work, certainly, Monday through Thursday or Friday commuters don't want to come in as much, but they're still working probably half the time. But it's basically back to normal. So that's critical the leasing side. I think pound for pound, we think we have the best office portfolio in the city, an interesting stat that we've assessed. We got about 4% of the market. And we've signed about 20% of the triple-digit lease deals since COVID started. So I think that's a pretty impactful statistics speaking to the quality of the portfolio and who our tenant base is. We have -- for those that -- you've heard us talk about the PENN District quite a bit. We'll talk about it more in Q&A. If you've not been over there, you should go over there and see it, the work is largely done. We've completely transformed the area in terms of straight scapes, new plazas, obviously, redeveloping PENN 1, PENN 2, Farley. That is the future work. I don't think there's a better example in the country. That's an unmatched amenity program. Tenants love it. We've added 70 new F&B opportunities above and below ground. So our job now is to lease up the vacancy, which we've got a lot of activity and Glen can talk about. I do think important to note that since we started the redevelopments, and again, PENN 1 , PENN 2, Farley is about 5 million feet, we've leased about 1.5 million of that. A lot of that PENN 1 is still leased, we turn it over as a constant. We've leased 1.5 million new square feet at $95 a foot on average in PENN 1, PENN 2, which if you think about we're leasing space in the low 60s, maybe mid-60s, pre-redevelopment so the program is working. Last couple of things I would say. I think most people had given up on retail written it off, I thought it was an anchor around our neck. We own some of the scarcest most prime assets worldwide Fifth Avenue retail from 50th to 57th is as good as it gets. We never lost confidence in that. Obviously, the mark went through a difficult time 2 years ago, but it's clearly come back now. As I said, retail sales are back to pre-COVID levels for many of the retailers above those. They're active in leasing, they're active in buying as you've seen. We've participated in that selling, and I think you'll see more of that on both fronts going forward. But the retail we own is as good as it gets both Fifth Avenue Times Square, Union Square, and we're happy to have in the portfolio. Last thing I'll say before we get into Q&A, Camille, is just from a balance sheet standpoint, we feel good about where we're at. We've got about $2.7 billion of liquidity, $1.1 billion of cash, $1.6 billion of undrawn capacity and our revolvers. That does not include the proceeds coming in from the UNIQLO sale early next year or late this year. And we've got some other things in the works. So we feel good about the balance sheet. We've basically addressed all our maturities in '24. And we're focused on next year. Again, we can talk about that in Q&A, but we feel good about that as well. So with that, I'm going to turn it over to you and fire away.

Yes. I mean today feels very different from when we were sitting a year ago. And I'm sure Glen will get into all the activity you've been doing through August and into the weeks of September. But just stepping back, I'm curious to get your perspective, Michael or team around what have been the most important changes you've seen in New York City or specifically at Vornado?

Maybe I'll start and these guys can hop in. I think the biggest changes are from a year ago while there was certainly leasing, I think there was still uncertainty on a part of companies. There was still hesitation on the part of many companies. I think all that's passed now, right? So I think we're beyond the point where companies know how they're going to work and how their employees are going to work user space and whatnot. And so I think you can see that confidence and certainly come through in the level of activity. I think that's the biggest thing. Second is we've talked about financial services and the legal side being strong. That's remained robust. But now you're seeing and we see it particularly with our pipeline, tech is definitely back, right? So that's a change. And then, look, I think as PENN is -- you can lay out the vision as much as you want, but until it's done, it's hard to fully get buy-in, and now that tenants can really walk PENN 2, it's a wow, right? And so again, I think that's translating into the low activity we have. Weiss, would you add to that?

Yes, I think that's all right. I mean, to me, it's the beat on the streets in New York, we're back. Look outside what's going on here today, I can't even get here. And the buildings are busier than they've been clearly since 2020. CEOs are making decisions. It's clear. This is the busiest summer I have ever had in 30 years of doing this in terms of leasing. No vacations. It is crazy. And when I was on vacation I was on the phone the whole time. Tour volume has peaked proposals. I mean the key is those CEOs have effectively mandated to return to the office, which in turn now has caused them to require space and make decisions instead of kind of [indiscernible] back and forth, what should we do, they're now doing and it's across most of the industry sectors. It is still definitely the better buildings are leasing and the commodity buildings are still falling behind. I will say one other thing that I think is important, the bread and butter of New York is the 5,000, 10,000, 15,000, 20,000 foot tenants, and they're now coming back. And that was the part of the market that was mainly concerning to me coming out of this thing. We always thought the bigger tenants would come back, but it was the bread and butter businesses of New York that are now coming back. And we're seeing -- we're filling in those spots this year in that size range, which I think is really important in terms of the blocking, tackling, the rhythmic volume that we like that we used to see prior to 2020. So we're certainly feeling as good as we have felt in a while. The proof is in the pudding. We've leased $1.6 million this year at $119 a foot average starting rent. Just think about those stats. And think about the stats and Michael gave you on PENN alone, 1.5 million feet at PENN 1 and PENN 2 post development, and there's a lot more to come in the pipeline. We talked on our earnings call, the last earnings call about our pipeline between leases out, proposals and negotiation. We have about 2 million feet of deals brewing in different stages, different types of tenants, different size of tenants, different buildings, but the buildings are really busy. So we're feeling very good about the rest of this year going into 25% for sure.

Could you give us some estimate of the net effective rent on the $95 and PENN in $160 as you mentioned..

I don't have the stats with me. I will tell you that what we've seen generally is TIs and free rent has stabilized. I don't see those rising any longer. We want them to come down. Rents in certain buildings have risen and continue to. I don't have them handy the TIs on those deals here with me. We have it in the supplement. So if you go to our supplement, we give you all that information. So it's there.

Any sense on the $95? What that would look like?

Net effective? I mean the average term looking at debt, average terms 12.5 years on leases signed. My guess is, I'm swagging it here, right? Probably average TI for that is probably the low hundreds, honestly, because a lot of that is -- there were some short-term renewals, there were low TIs in there. So my guess is it's no more than $10 a foot on average per year, it could be less. And then taxes OpEx that are probably 30:30, right? So net effective on those 55 million, right, if you take out after the TIs after capital.

The net rent after TIs.

65 pre TI and ballpark, right?

Glen, I was wondering if you can expand or clarify that 1.6 million square feet leased. Is that a year-to-date number? And do you have any update on how that volumes trended into September?

That's during Q2. Doesn't include what we're going to get on this quarter, which we'll get to after we publish. So we have about 500,000 feet of deals of leases in negotiation right now plus a lot of proposals over and above that.

And I know we're just a few weeks after your conference call, but is there any further update that you can provide around 770 Broadway?

We cannot. No. Sorry.

I know we teased you a little bit with that, but we felt like we had to give a couple of different factors. And so there's really not more we can say about it. But if we complete it, then it will take care of that vacancy, and I think it will be a transaction that everybody will feel good about.

And I wanted to build on your comments around tech is being back in Manhattan. And where are you seeing that demand within your portfolio?

So we're fortunate to have the big 4 right? We have Apple, Amazon, Google and Meta. So we know every day what they're doing. And they're all busy in their own ways right now. So you'll see some things happen in our portfolio. Hopefully, by the end of September, things will get signed, and we're able to talk about it more on our next earnings call in terms of what's happening. But they're back. Some of them say, well, we are in expansion mode and thinking big about their businesses. And if you look at their stock prices, you could see why, right?

I would say, Camille, the only thing I would add is look at the pipeline and where are they focused? It's multiple buildings. But I think the concentration is in PENN, right? And -- which is obviously good for us. I mean we're anchored. We're book-ended by Apple and Meta on either side of Penn we know from having those 2 tenants and what went into their thought process, right? The proximity of the engineering talent in New Jersey was critical. And so when we see the dialogues we have now which are everything from some of the small users that Glen referenced to the big companies, I think, again, the accessibility to the biggest part of the workforce, which PENN offers given the transit access has been a differentiator. So we've got activity in a few spots in the city, but the dominant part when we look at the pipeline, it is in PENN.

I see much of the scaffolding around PENN has been taken down now and you're very close to the finish line on those projects. Just wondering if you can talk a bit more about your vision and strategy in that market? And how is the change going forward?

I think it's changed dramatically. And thank you for noticing. It's made a big difference in terms of our tour experience and people are noticing and it's proven in the activity we have. We're deep in negotiations right now on a couple of large transactions that we're hoping to land, particularly in PENN 2. And PENN 2 continues to outperform. We have a lot of good activity there this quarter as well. But if you walk it, I mean everyone comes away and says, they've done this. It is great. You walk out of the trains. The restaurants are open. The bars are open, the plazas are open. The trees are blooming, the flowers are out there. And it feels great. And I will tell you, Plaza 33, the pedestrian park that we opened up a couple of months ago is perfect for what we were trying to envision here for the district to just breathe life right into the whole place, and it feels great. So if you go down there, whether it's mornings afternoon, or evening, I was out there down there last night for a dinner with some clients. I mean, it feels tremendous. It does not feel like the old PENN Plaza, that's for sure. And that's made a big difference for us. So when the CEOs come to tour PENN now compared to even 90 days ago, it's unbelievably different, the experience, and they come away saying they have done it. It's not a maybe, they have completed it, which is important for us, obviously.

Camille, I would just add on to that. So in terms of the vision, I think getting this first phase done was critical, right? Because it is the significant and of itself, but is the tone setter, right? And having all that done, having to be an area where you can be there from morning until night. You don't have to leave to go get something to eat. People can hang out. We have a number of rooftop restaurant deck opportunities that people utilize. I mean all that's really important to the user experience, right? And so we're now in the process of filling out the retail in a number of the parts of the district with uses beyond F&B, that's a key part of it. And then eventually, development will make sense for the sites that we have, and we'll capitalize on that. But, I think the first thing was change the district, attract the right sort of tenants that can afford to pay the rents we want. We're doing that. Hopefully, we're going to complete some of the things in process now. And I think that will be another huge step and then we just -- we keep rolling into what's next. But we feel good about this first 5 million square feet we've done, a lot of income still to come from that. And then, as I said, at some point, development will make sense on the additional sites.

And sticking on around development. We've seen Citadel still remains very committed to New York City. Are there any updates on how they're thinking about their option at 350 Park.

We're getting close to the point where the options open up, right? I think the options open up at the end of October. So I'd say that something has to happen then, but it's possible or something to happen then. We talk to them all the time. And I think we've said this, we're an active design of their building, right? So we're getting everything to build, right? We've secured the air rights. We're going through the [indiscernible] process in order to achieve the additional zoning bonus that's available in Midtown East. Were designed the building. And so now it's just a matter of what they want to do and then what we want to do. So we're not quite there, but we're taken all the stuff necessary to do it. But I think the interesting thing is that, it used to be where when you had a certain delta between new building rents and maybe some older building rents, right? Tenants would get a little bit price sensitive. That's not the case, right? Tenants are well -- I don't think we've ever seen a disparity between I'll call it, trophy space and other spaces we've seen today, right? I mean tenants are -- I don't want to say they're price insensitive, but they're so focused on talent retention, attraction, creating the right environment that they're willing to pay up for that in the right locations. And Hudson Yards is achieving north of [indiscernible] a foot. Park Avenue is achieving north of [indiscernible] a foot. I mean, we get reverse inquiries already. Notwithstanding the buildings, if we started the day between demo you're 5, 6 years away from delivery, incomings already, if we want to take space in that building, right? And the rents that they would have to pay, which would be well in the 200s, they don't blink an eye, right? So I think that's a healthy dynamic. And so we remain constructive on the opportunity as to Citadel, and we'll see in the near term. whether that gets off the ground or it takes a little more time. But I think they remain as constructive and be in New York as important as they ever have.

And can you remind us, are there any contingencies on that option, whether like you have to deliver certain planning proposals?

I mean the answer is, I would say, nothing substantive. For us, as I recall, there's a put, there's a development JV. There's no contingencies on the part of the call and on the development side. Everything that has to happen for that to get off the ground is in the work. So it really just comes down to what do they want to do and ...

What do we want to do, we like our position.

And similarly, can you talk to your strategy or strategies that you're implementing in your other markets like Chicago, San Francisco that are helping rejuvenate that office environment?

Sure. So I mean San Francisco is the best tenant roster probably of any building in the country. And that's something that we pride ourselves on. We are attacking all of our expirations, '25, '26. We believe we'll be enormously successful in keeping everybody and there's competitive space out there. There's 30-plus percent vacancy in the market, but this building continues, continues, continues to beat the market. We do not rest on our laurels. We're bringing certain themes that we've done, particularly in PENN2 555, not spending enormous lot of money, but I'll call it nice amenity touches to the asset. In the lobby, furniture technology, we just freshened up our town hall. We brought in some new food and beverage, which is breathing someone say, refreshed new life, new hospitality into the campus, which I think the tenants are loving what we're doing there. Most of them know we've done in New York. So they'll call, hey, Glen, can you do something? Could you [indiscernible] a PENN 1 or 555 that kind of thing, which is a good thing. We like that. So in San Francisco, particularly, we feel very good about where we are. Our dialogue with the tenants has gone very well, and we feel good.

I'd just add one thing for Chicago. I think -- correct me if I'm wrong here. I think since COVID started, I think we leased 750,000 feet at 555. We have another -- I won't give the exact number. We have a significant amount of renewals in process. And I think they maybe by lease, but certainly, in total, I think every one of those has been a positive mark-to-market. So when you think about what's going on in San Francisco, which it is challenged, right? It's got its challenges. Certainly, the broad market, as Glen says, in the 30-plus percent vacancy. Again, I think that speaks to the quality of the asset, the quality of the sponsorship. It's not like the tenants don't have options. I mean, there's 5 or 6 buildings at the true trophy buildings obviously outperforming the market significantly. The 555 is even within those 5 or 6 outperforming the market. And I think there's a number of factors there, but it's pound for pound and one of the best office buildings in the country. You build that same building today. So anyway, that's San Francisco.

How you would define the best tenant roster [indiscernible]?

Goldman Sachs, Morgan Stanley, UBS, [indiscernible], Kirkland and Ellis, Microsoft, KKR, McKinsey. It goes against credit grant. Huge credit, huge brand.

Not a [indiscernible] for those tenants.

And they like in the same place together.

I think just before we go on to Chicago, I think one of the concerns around San Francisco in that market is it really needs some new life to fill in for tech. And I think we're realizing that AI will -- it's an optimistic industry that can grow financially, we need -- that market needs entity needs to be more diverse. So are you seeing businesses based on tenants or new -- existing or new tenants that you're talking to, starting to think about San Francisco or moving there?

We're a bit insulated from needing new tenants. So I might not have a perfect purview of it. But I will tell you that the city is definitely improving, I would say, last time we were out there. Streets feel better, safer. People feel more confident in the city. Restaurants were busier than enough time before that. Leasing has picked up some in the market, not just at our building. I mean there's some action out there. But in terms of some magic new entrant, yes, there is AI activity. But otherwise, I would say it's more musical chair action than a new industry coming in right now that I could speak of.

I would challenge your comment a little bit, in the sense of agree with Glen's comment, I think the city does feel better. I think the political wins have shifted some and this upcoming election will be important one as well. But I think the trend is actually positive. They're not as fast as really like that, it is positive. But, look, the reality is San Francisco has always been a bit more volatile than the other major cities, right? And it's going to be a tech-oriented market, right? That's not going to change, right? Notwithstanding, we are a financial services tenant building, which we like. The city is going to still be heavily dominated by the tech industry, and that's fine in my opinion, right? I mean that is the -- New York is almost on par with San Francisco, tech-wise, but you're proximate to some of the leading universities, VCs, et cetera, out there that are going to continue to invest to create companies. We weren't talking about AI 2 years ago, and now it's at least, I don't know, 8 million feet in the city or 6 million, some huge number, and that's going to keep going. So tech is what's going to drive the broader market back, and I think that's fine. Tech will resurge. It is resurging generally, and there's new companies started all the time out there. And so it's just a matter of how long it takes.

And Tech hasn't been in Manhattan for very long, at least from what I recall. So do you see potential for that industry to actually grow to the scale that they've built in the West Coast?

I think definitely. We should talk about some of your conversations you hear from them in terms of what they tell you.

I think it's going to be a grower. I think no doubt about it, and that's going to happen. And we're seeing in New York. And if you think about tech, I think since 2013-ish, New York has clearly become the second hub in the country with California being the first till, and in terms of AI, I think you're going to see the same exact thing. And we're seeing some of those discussions now.

What's the average size that the AI businesses are looking at?

It's on the smaller side right now. There's a couple of larger ones, but 10,000 here, 20,000 here, maybe a 30,000, the smaller variety for now. There's one larger one out there that has a lease out, but otherwise less than 50,000 feet, I would call it.

And any thoughts on Chicago?

Sure. So we just completed the deal that we're going to announce soon, a big deal in the building, a tenant in the building, expanding by a big margin. We just signed that up, which we're going to announce soon. Activities picked up in the more off the heels of completing the [indiscernible] program last year with the fitness, the conference, the outdoor park, et cetera. I think the market is improving. I will say it's not a big tenant market right now. There's not big headquarters deals happening, but there's action. There's action between, call it, 20,000 to 100,000 feet. There's activity. The leases out that we're trying to get done right now, we're filling the gap. So tours have definitely picked up. So I think it's getting better, but it got ways to go still to get to where New York is particularly.

I'd say it's behind San Francisco.

Behind San Francisco, definitely.

So it sounds like you have some really good activity, potential catalysts on the horizon. Michael, I was wondering how we should think about the potential earnings growth from these leases given like where we are in the year, anything you're likely to sign today probably follows in 2026. So what are the key pieces we should be thinking about?

I know you are going to ask that, Camille. I think it's early to give you too much visibility there because there are a lot of moving pieces as evidenced by things like the UNIQLO sale and working on some other things. But I think that -- like I think you're correct that a lot of the activity that Glen is working on, for example, in a PENN 2, that really won't hit the income line until by the latter part next year, more lately '26, right? So we do think that '25 as we still sort of not huge growth, hopefully, some growth, right? We have to see what sort of the ins and outs are. I think '26 is when you'll see meaningful growth and then thereafter. So, again, I think until we get a little further on the year, we see exactly what gets done leasing, other monetization transactions, I think it's just too early to comment because there's some things that could swing it a number of different ways. But I think in general, in terms of the submitting I think we look [indiscernible] like, we know '26 major inflection point where the next year is up. Some -- it's not going to be as dramatic as '26, right? And we'll see based on everything we have in the works, what next year looks like. But I think '26 is the -- is sort of the key step function of.

And just to clarify on that trajectory, is that on your same-store NOI, core portfolio or at an earnings level because if you think about PENN 2 delivering, well, PENN 1 completing this year and the capitalized interest hitting the balance sheet or income statement next year. Can you just talk about the time that and then...

I'm going to let Tom talk about the capitalized interest. But I think the answer to your question is, yes, at same store.

On the capitalized interest, PENN 2 is in that number in 2024 and the piece that will stay in 2025, but it obviously starts phasing out. So the second half of '25 you start seeing the capitalized interest roll off. And then obviously, we don't project anything in 2016 at this point for capitalized interest.

Okay. Great. I had a question. Where do you think cash rates are [indiscernible] high quality [indiscernible].

The answer is we don't know, all right? These assets frankly rarely trade, right? That's the bottom line. Even in good times, if you look back on Fifth Avenue transactions, they really trade. We did an analysis recently a Fifth Avenue going back to 2010 of cap rates. I think it averaged low 4 cap rate for all buyers, right? So where is it today? I don't know that it's that far off user person, right? And we're not going to sell Fifth Avenue asset unless we get a phenomenal price, right? And so do I think that there are investors that would pay let's call it a 4 cap, yes, right. I mean our investors that appreciate these are scarce assets. They're 6, 7 blocks. They're not going to make any more of it. Now the users on some of it, so it's even less available for third parties. So look, we've been approached by investors on Fifth Avenue. And, I would say we haven't engaged significantly because, just for variety of reasons, don't want to get into. But I think on Fifth, I think investors are -- I think they appreciate the scarce of the asset. I think Times Square a little different because now you get in the signage and to investors, how do they think about that, right? And the scale of the assets, in some cases, is larger. But again, I think for the best assets, I think you'll see aggressive pricing. I think users are more likely to buy on Fifth and Times Square, where somebody is probably not going to buy a whole block as opposed to maybe a condo interest in something, but the interest in street retail is high, and I think investors have certainly gotten more constructive because it's financeable and they view the best assets is durable and New York is one of those markets where retailers want to be forever. And so yes, it may go up and down, but the trend line over time has been up.

Michael, I just wanted to go back to your balance sheet because I can't remember a time where you really had to access the capital markets. Now with rate cuts...

Much, much to your [indiscernible]

Just wondering, like, given the expiry profile of the business, is it something that you're looking to do to term out your debt? Or is asset sales still your preferred source of Liquidity?

Look, we look at all options and we look at them constantly. So we are very attuned to what can get done in the marketplace, debt and equity-wise, mortgage-wise, you name it. For a while, the mortgage market was not that hospitable right? That's obviously changed a lot for retail, and it's now changing for office, which is good, right? And then we're seeing the baseline of a market forming for office and want to start seeing that things do tend to tighten. Obviously, with what looks like a pending Fed cuts, treasure being down I think that's going to create a little more stability in the markets, too, on the traditional CMBS side. Unsecured markets tightened quite a bit in the last 6, 12 months. So we look at everything, and I would not rule anything off the table other than I don't think we're going to issue equity anytime soon. But in terms of other products, I mean, we'll look at everything. And so our goal is both to term out our debt as well as to take down our leverage levels. And so obviously, in order to do the latter, you do have -- you got to do 1 of 2 things, right? You have to grow your earnings, which we're in the process of doing principally through PENN. And then secondarily, you can monetize assets and use that to pay down debt, right? So the answer is we're doing all of the above and certainly, we're looking at the capital markets as well. And we have a couple of bond issuances maturing in the next 21 months and rolling those over in the bottom, certainly a possibility.

Okay. And just to clarify, you said you're ruling out equity.

Yes. I don't see us issuing straight equity anytime soon, given our view of value relative to where the stock is trading.

Got it. I have some rapid fire question for the team. But I am curious just to get your thoughts on just opportunities to diversify your income through investments. What are you looking at today? And what could you do?

So I don't know whether your comment is diversifying in terms of leveraging our capital or getting into other asset classes, all the above. Now remember, we are in the residential business a little bit already with couple of holdings we have. I think that -- look, we are a New York company. I think our focus is going to remain in New York and there's a new investment, although we would look at San Francisco, from a leveraging or from a diversifying our income stream standpoint, I think that we are actively looking at opportunities. We think there will be opportunities that are interesting as lenders finally come to grips with certain assets and decide to sell those, right, which we've been talking to for a while is maybe they're on stage 4 or 5 of grief in some cases, but they're getting there, maybe year-end as a precipitating factor. So we are looking at opportunities. And I think between some external things and then even from our own development opportunities, I think we will look in many cases, maybe in most cases, to partner with third-party capital, right, leverage our capital. And so inherently, when you do that, whatever fee streams we're generating are -- they help drive better yields to the bottom line [indiscernible] on the 350 part, for example, we have a built-in partner for 64% of the deal, right? So our equity return should be pretty compelling when you added the development fees in the leasing and management fees and whatnot on top of what we think the asset will produce. So I think on the development side, we will seek to partner in those cases. And on the new business side, we want to be active. We think there's going to be interesting opportunities. And we're also realistic that our balance sheet is not -- while we have a lot of liquidity, we also have -- commitments were made in Penn, right? We don't want to leverage up the balance sheet. And so in a lot of cases, we'll look to partner on those situations as well. So I think that's a way to sort of leverage our capital is diversify our income stream is sort of an adjunct to that. We do have other businesses that we run in-house, signage, parking, et cetera, and we charge the team with growing those business separately and there's opportunities to do that. We do it -- our guys on the cleaning side, I think have done a masterful job. We probably clean, I don't know, Tom, could be 20 million feet of third parties. So try to grow this business as well.

Well, thank you, Michael. That actually leads me to my first rapid fire question whether or not you expect real estate transactions to increase once the Fed starts to cut? And if so, what -- when fourth quarter of this year or first half of next year or second half?

In terms of transaction activity? Transaction activity is definitely going up. I think it will be quite stronger next year? Could it become stronger this year? I mean you think about it with September. It was not in the works, probably doesn't close this year, right? So [indiscernible] gets reported. I don't know that you'll see a huge step up fourth quarter. I think you will see more brought to market in the fourth quarter. But I think '25, you'll see a significant increase driven by -- I just think stability in the financing markets, right? I think sort of the all clear sign has been given that you can generally get a lot of assets sold. I think you're going to see lenders take their lumps in a lot of cases. And so it will be time to transact in many cases.

Do you expect that to be earlier half of '25 or [indiscernible]?

I'm not smart enough to know that.

Okay. We'll put [indiscernible]. How would you characterize demand for space today improving, steady or weakening?

I didn't hear the question.

How would you characterize demand for space today, improving, steady or weakening.

Improving.

All right. And lastly, just around AI spending initiatives for next year. Do you expect to ramp that up, hold flat or?

For Vornado?

For Vornado.

Well, I can't get -- it's got to be better than 0 today, right? So probably higher.

We're trying -- we're trying.

We have to ask Tom a few months ago with [indiscernible] how we leverage AI? And I think we've concluded that -- we had utilized a lot of software, et cetera. And -- but we will incorporate AI into our business, but those companies that all they do is have people to focus on that. And so we're going to leverage what their dealing as opposed to trying to do something in-house, which is probably not going to be a game changer.

Thank you. Thank you, everyone.

Thank you.