Shake Shack (NYSE:SHAK) has dedicated most of its expansion efforts to growing outside of New York City, but it seems as if you can always go home again. The darling of "better burger" chains has inked a deal with Vornado Realty Trust (NYSE:VNO), entering into a 10-year lease for space in Penn Station.
Vornado Realty Trust is in the process of upgrading the quality of the iconic transportation hub's retail partners. It's been giving tired tenants their walking papers as their leases expire, refreshing the high-traffic area with more compelling retail partners. The New York Post article breaking the story earlier this week points out how it has brought in Magnolia Bakery, Pret A Manger, and Duane Reade as well as updated the street-level tenants including the celebrity chef-fronted Pennsy food court.
Vornado Realty Trust had been asking for rent of $500 per square foot for the 2,489-square foot space, but there is no official word on what Shake Shack will be paying. Don't be surprised if it's less. The whole Penn Plaza district is one that Vornado CEO Steven Roth called "near and dear to our heart" in his company's latest earnings call, but attracting more desirable tenants is also just good business. It attract customers, but -- just as importantly for a company like Vornado with so many office spaces to lease -- it also makes the area more desirable for businesses. Something as simple as a Shack Shack instead of a Mickey D's or a Magnolia instead of an Au Bon Pain can make a difference.
Shake Shack can afford to be picky. The concept is in high demand, and it can only open so many units a year.
"If you're a developer and you've got a mall that's being redone or you've got a site, you probably want a really good burger -- and you're probably talking to us," CEO Randy Garutti said at the ICR investor conference back in January. "We are in every one of those conversations right now."
As a New York staple, it's only fitting that Shake Shack wind up in Penn Station, but that probably means some sweet landlord concessions. With just 49 domestic locations when the year began, it will be Shake Shack squeezing the potential landlords and not the other way around. Shake Shack generates the highest average unit volume in the burger industry -- projected at $3.3 million per location this year -- and landlords know that magnetic tenants attract other retailers that benefit from the brand's association as well as customers. This is great deal for Shake Shack, but it's also a great catch for Vornado.
Rick Munarriz owns shares of Shake Shack. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.