Developer Delays Penn Station Project, Citing Economic Conditions

Vornado Realty Trust, the developer hoping to remake the skyline around Pennsylvania Station with a bundle of new office towers, has put the brakes on the massive redevelopment plan for now amid high interest rates and a real estate market that is struggling to recover from the pandemic.

Steven Roth, the firm’s chief executive, voiced strong reservations about the short-term future of Penn Station development and other projects during a call with analysts on Tuesday, calling the prospect of new construction “almost impossible” because of tight lending.

Plans for the Penn site, a roughly 18 million-square-foot project that could include 10 new skyscrapers of mostly office space around the transit hub, could be delayed for at least two to three years, Michael Franco, the firm’s president and chief financial officer, said on the call. Vornado is the largest landowner in the area.

Empire State Development, the agency that is steering the project, said in a statement that it is sticking with the plan, which, in addition to the office component, could also bring 1,800 new apartments, a portion of which would be rented below market rate.

“Quarterly conditions may fluctuate, but Governor Hochul’s commitment to revitalizing Penn Station and the area surrounding it will not,” the statement said.

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Mr. Roth first cast doubts on the plans in November, when he cited challenges in the new-development market without directly referring to the future of the project. In January, the company announced a nearly 30 percent cut in its quarterly dividend and was removed from the S&P 500.

“I’d say it’s dead for now,” John P. Kim, a managing director at BMO Capital Markets, said about the plan, which is also slated to include some retail and hotel space.

The latest back pedaling could create an opening for critics of the redevelopment, who are hoping the state will be receptive to plans that put more focus on the much maligned Penn Station transit hub beneath Madison Square Garden.

“The improvement of Penn Station should not be beholden to a business cycle,” said Alexandros Washburn, the former chief urban designer at the Department of City Planning and director of the Grand Penn Community Alliance, a group that supports a full overhaul of the train station.

In one vision, Madison Square Garden would be demolished and rebuilt on a site in Hudson Yards, on the Far West Side of Manhattan. In its place, a new Penn Station would be built below a sprawling green space — similar in scale to Bryant Park — on the remains of the venue. The plan would address commuters’ concerns about congestion and train capacity, which Vornado’s project does not, Mr. Washburn said.

A spokesman for Vornado did not address whether the company would rethink the mix in the broader Penn site, but said that work continues at Penn 1 and Penn 2, two office towers in the district that are in the process of being upgraded.

The company said it is still committed in the long run to the project. “We fully support the state’s general project plan for the Penn District, are making very significant investments in our existing buildings and are leading public private partnerships to enhance this vital transit hub,” the company said in a statement.

Like its competitors, Vornado is facing challenges because of rising interest rates and an office market that remains staggered by the growth of remote work.

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In the first week of February, office occupancy was under 49 percent of prepandemic levels, according to Kastle Systems, a security-card company that tracks office building activity.

Mr. Roth has already conceded the five-day workweek. “I think you can assume that Friday is dead forever,” he said on the earnings call. “Monday is touch and go.”

Victor Canalog, the head of commercial real estate economics at Moody’s Analytics, said he was not surprised by Vornado’s decision.

“Is the best use of this space still office space, or do they need to pivot to some mixed-use component?” Mr. Canalog asked, noting that few lenders are willing to finance projects that do not have office tenant commitments.

Other critics of the Vornado plan are seizing on the hesitation and warning that the state should pivot to new plans, or risk losing out on federal infrastructure funding for the site.

The current plan endorsed by the state to improve the train station is expected to cost $7 billion, about half of which New York hopes will come from federal funding. The plan could also provide an estimated $1.2 billion in tax breaks to developers.

“We need to retire this plan,” said Layla Law-Gisiko, the chair of land use, housing and zoning for Community Board 5 in Manhattan. “The market is simply not conducive to it.”

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