Despite near record-high office vacancies, Gov. Kathy Hochul has backed a real estate project at the New York transit hub that would be one of the largest in American history.
The rapid shift to remote work during the pandemic has battered the commercial real estate industry, a cornerstone of the New York City economy.Credit…
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Matthew Haag and
In a bid to reshape Midtown Manhattan, Gov. Kathy Hochul and New York State officials are pushing ahead with one of the largest real estate development projects in American history: 10 towers of mostly offices around Penn Station, the busiest transit center in the country.
The buildings would help pay for the renovation of the dreary underground station, the reason officials have said they are seeking the additions to the skyline. But the plan is moving forward amid severe uncertainty gripping the office market: Many companies are trying to reduce their real estate footprint as workers continue to clock in from home.
A clue to whether the project succeeds may lie two blocks to the west, in the Hudson Yards neighborhood. Development there has not met expectations three years after a slate of new construction — including office towers, retail and residences — opened with grand ambitions. Major office tenants there are downsizing amid the stubborn popularity of remote work, and a quarter of the ultraluxury condos remain unsold.
The New York City economy has changed drastically since government officials and developers first touted plans for the Hudson Yards area over a decade ago, and it has been transformed even more during the pandemic. Major corporations that moved to the neighborhood, including WarnerMedia, JPMorgan Chase and IHS Markit, are now trying to unload floors of unused office space.
Still, with the Penn Station project, Ms. Hochul is doubling down on a legacy-defining bet that white-collar workers will eventually return to Midtown, and that firms will be hungry as ever for office space.
Ms. Hochul has argued for the state’s powerful role in the project, in which it has overstepped New York City’s zoning rules to allow the developers of the sites — most of which are owned by one company, Vornado Realty Trust — to build taller and larger than they otherwise could have. Mayor Eric Adams announced his support for the project after the state clarified that the city would not lose property tax revenue on it. It won’t gain much, either.
Boosters of the Penn Station plan often frame the fixes at the station, which are estimated to cost $7 billion and be completed by 2027, as the project’s centerpiece. The plan would add taller ceilings and new entrances to the station but no additional tracks or platforms. But the plan’s most significant impact would be the new buildings, which are expected to take two decades to complete and require the demolition of numerous properties on several blocks, including a 150-year-old Roman Catholic church.
For its supporters, the Penn Station project is an emphatic endorsement of New York City’s future and an overdue jolt to a drab area of Manhattan. They say that the universally disliked station desperately needs to be revamped and that it makes sense to build towers around it.
“We need a Penn Station that has more capacity, that’s more unified and that is safer and able to serve the region like Grand Central,” said Brian Fritsch, the communications director at Regional Plan Association, a research and advocacy group.
But critics warn that the development could become another Hudson Yards, a luxury neighborhood aided by tax breaks that largely benefited a single developer and unwisely depended on offices full of workers and an endless supply of wealthy buyers for high-rise condos. New York may never be the same city it was before the pandemic, those critics caution.
Nearly 37 percent of all office space in the Hudson Yards neighborhood is available for lease, the highest rate in Midtown, according to the real estate firm Avison Young, a figure recently driven up by the opening of new commercial buildings and companies trying to find other tenants to take over their floors. More than half of all office construction in Manhattan, about seven million square feet, is under development there.
“Tenants move from building to building, and if there is insufficient growth due to the remote-work phenomenon, which is here to stay, there will be landlords who are left with empty offices,” said Ruth Colp-Haber, a commercial real estate broker.
By 2044, when the last of the Penn Station redevelopment towers are slated to be finished, the project and Hudson Yards will very nearly form a contiguous corridor of gleaming glass and steel towers. Between 30th and 34th Streets, clusters of some of the tallest buildings in North America will stretch from Sixth Avenue near the Empire State Building to the eastern edge of the undeveloped train yards that border the West Side Highway. Together the two areas would represent over 30 million square feet of buildings, with the vast majority designed for office tenants.
Manhattan had 463.8 million square feet of office inventory as of the middle of last year, accounting for nearly 11 percent of all office space in the nation, according to the New York State comptroller.
The first part of the Hudson Yards project, led by the billionaire Stephen Ross at Related Companies, one of the largest real estate firms in the world, opened in spring 2019 to huge fanfare. Many companies had vied for the development rights, but Related came out on top, agreeing to pay $1 billion to the owner of the yards, the Metropolitan Transportation Authority.
The Hudson Yards development opened with a seven-floor mall filled with high-end retailers like Fendi and Dior; four office towers, including the fourth-tallest office building in North America; and two residential buildings, whose condominiums sell for about $5 million apiece.
The economic turmoil stirred by the pandemic has dashed Hudson Yards’ plans. Three years later, the marquee retailer at the mall, Neiman Marcus, has left its three-story store. The parent company of Facebook, which before the pandemic signed an office lease for 1.5 million square feet in Hudson Yards, recently said it would pause its expansion there. Subway ridership at the local station was down roughly 40 percent during the first two weeks of this month compared with the same period in 2019, reflecting the commuters and consumers who have yet to return.
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Underscoring the shifting ambitions of Hudson Yards, Related has tried to renegotiate its existing agreement with the M.T.A. for several years, according to two people familiar with the efforts. The developer had pledged to build six residential buildings, parks and a school atop the other half of the project, the Western Rail Yards, by 2025, but it has recently explored other options, including trying to lure Madison Square Garden to the area and obtaining a casino license from the state.
“To be completely clear, we are going to build a transformative development on the Western Rail Yards that brings jobs and inclusive growth to New York City,” said Jon Weinstein, a spokesman at Related.
Mr. Weinstein said that Related’s Hudson Yards office properties had attracted major corporations paying top rent, making them “perhaps the single most successful office development in the city’s history.” The buildings have benefited from a pandemic trend of companies upgrading to high-quality facilities, he said.
Mr. Weinstein said that at the company’s office buildings that opened before the pandemic at Hudson Yards, 95 percent of the space has been leased. But that does not take into account space that its current tenants are trying to offload or available floors at its newest building, 50 Hudson Yards, or other developers’ buildings.
For many developers, the full impact of the pandemic-induced shift in office use and remote work will not be felt for several years, when large shares of leases are set to lapse. More than 70 percent of office leases in New York City signed before the pandemic have yet to come up for renewal, according to a study by New York University and Columbia University, suggesting that vacancy rates could continue to climb while rents drop.
Financial analysts have warned that a permanent change in office-building use could profoundly affect cities like New York, leading to a decline in the value of those properties and the property taxes collected. According to the security company Kastle Systems, which tracks employee card swipes in office buildings, just 37 percent of workers in the city went into the office during the third week of August.
Yet the Penn Station development would be even bigger than the build out of Hudson Yards and include a similar mix of retail, residential and hotel space — as well as lots of offices. At 33 acres, it would surpass the size of Rockefeller Center, the last comparable development in Midtown, completed 80 years ago.
The scope of the project and its financing model have attracted fierce opposition from the start. After the 10 towers are built, Vornado and the other developers would not have to pay property taxes but would contribute a yet-to-be-determined amount toward repaying the costs to upgrade Penn Station and make other improvements. The developers would pay for the construction of the buildings. A similar deal is used at Hudson Yards, where developers’ payments are far less than they would have paid in property taxes, saving them millions of dollars annually.
The property-tax breaks for all the Penn Station buildings could total $1.2 billion, according to an analysis that also warned that the entire financing could fall short by billions of dollars, leaving the state and taxpayers scrambling to make up the difference.
Among the detractors is Richard Ravitch, the former New York State lieutenant governor who was the M.T.A. chairman in the early 1980s.
Mr. Ravitch said the state would be foolish to greenlight the construction of even more offices at a time of near record-high office vacancy. Nearly 19 percent is available for rent across Manhattan.
“Given what has happened to the commercial market, it’s not going to be a source of revenue for a long time until the market turns around,” Mr. Ravitch said. “Where we get the money for Penn Station should be a separate question.”
The broad parameters of the project were introduced before the pandemic by former Gov. Andrew M. Cuomo, who began leaving his mark on this area of Manhattan with the renovation of the Moynihan Train Hall and believed that grand public projects would define his political legacy. After Mr. Cuomo resigned in 2021 amid sexual harassment allegations, his successor, Governor Hochul, pushed forward with the project while making modest changes, such as adding an outdoor plaza.
“Encouraging transit-oriented development in one of New York City’s prime business districts while finally delivering a new, world-class Penn Station that New Yorkers deserve is not only smart strategy — it makes sense,” Matthew Gorton, a spokesman for Empire State Development, the agency overseeing the project, said on behalf of the governor’s office. “Time and again, history has proved betting against New York is a losing proposition.”
The new towers would encompass roughly 18 million square feet of new space surrounding Madison Square Garden, which sits above Penn Station. About three-quarters of the additional space would be devoted to offices, while the rest would provide ground-level storefronts, up to 1,800 residential units and a 472-room hotel. The towers would include new entrances to the transit station.
The final dimensions of the buildings have not been determined, but the state said it would not impose a maximum height except on one site.
Despite the magnitude of the project, key details about the complex financial arrangement that underpins it, as well as its potential impact when fully built, are missing. State officials have said that information about how much each building will pay in lieu of taxes will not be known until later, and it is not clear exactly how long it will take for those payments to pay off portions of the cost to renovate Penn Station and all the cost for the public improvements, such as a plaza and new bicycle lanes. Yet, the proposed development has sailed along, receiving unanimous approval in July from the board of Empire State Development.
Five of the eight properties to be redeveloped are owned by Vornado, a publicly traded real estate investment trust that has spent two decades buying up land around Penn Station. Its chief executive, Steven Roth, has reveled in his company’s plans and his desire to charge top office rents, exceeding $100 per square foot like some in Hudson Yards; the average asking rent in Manhattan is about $72. Mr. Roth supported the campaigns of Mr. Cuomo and Ms. Hochul, and gave $69,700, the legal limit, for the governor’s re-election effort.
On an earnings call in August, Mr. Roth described the Penn Station development as “the big kahuna,” adding, “I don’t know any other company, a public company, that has a development of this magnitude and this unique prospects out there.”
Dana Rubinstein contributed reporting.
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