With the plans for a grand redo of Pennsylvania Station looking all but dead following Madison Square Garden’s announcement that it will renovate its existing arena rather than move to a new site, one of the developers central to the project has indicated his approval for a scaled-back version if the larger plan indeed fails.
“I am hopeful a scaled-back version and perhaps even a doubly scaled-back version will happen,” Vornado Realty Trust CEO Steve Roth wrote in a letter to investors that appeared in SEC filings yesterday. “In my view, there has been too much public endorsement of the idea of this project for nothing to happen.”
The large-scale project included an estimated $14 billion of investment for a remade Penn Station; a new Madison Square Garden in the rear of the neighboring Farley Post Office; and millions of square feet of surrounding office development. The Garden move was critical to that plan, both to allow for a redo of the rail station and to unlock valuable development rights.
Mr. Roth’s Vornado, designated the co-developer for a smaller-scale version by the Pataki administration, was to be a major beneficiary of the large plan, as the company owns a substantial amount—7.5 million square feet—of office space in the area around Penn Station.
The smaller version, which centers around the creation of a new train hall in the Farley building, received many needed approvals and has the required funding already set aside, based on costs in 2006.
A larger excerpt from Mr. Roth’s letter:
Moynihan Station/Farley Building/Madison Square Garden(4)
Just days ago, on March 27, 2008, Madison Square Garden officials announced they would renovate their existing arena in place, thereby killing this project. Time will tell.
A little history here. In July 2005, we and our development partner, the Related Companies, were designated developer to convert the Farley Post Office Building, which occupies the super block between 31st and 33rd Streets from 8th to 9th Avenues, to the Moynihan Train Station. This project was then expanded to incorporate the adjacent super block to the east, with Madison Square Garden to relocate to the 9th Avenue side of Farley (to be developed and owned by MSG), permitting us to develop on the old Madison Square Garden site a “new” soaring Penn Station with retail and 5.5 million square feet of mixed-use new-builds. Vornado assets totaling 7.5 million square feet surround the project – One Penn Plaza, Two Penn Plaza, Eleven Penn Plaza, Hotel Pennsylvania and various retail properties.
This process has frustrated all parties – the developers, MSG, government officials, et.al. It has been three years so far, a long, complicated road. The project requires public sector expenditures which, in the end, may not all be there. It is a grand project both in scale and complexity. But in the end, it is surely worth the effort. Some further thoughts:
- I’m hopeful that something good will happen here. Plan A (described above) should happen. Even if Plan A proves to be too costly, too complex, or too whatever, I am hopeful a scaled-back version and perhaps even a doubly scaled-back version will happen. In my view, there has been too much public endorsement of the idea of this project for nothing to happen.
- For Vornado this has always been a ten-year payback deal, four years to move MSG, five or six years to create the train station with related retail and surrounding new-builds. I don’t believe there is now, or ever really has been, a dollar in our share price for the present value of this development. I’m a real estate guy, not a securities expert, but it’s my observation that stocks never reward a ten-year payback. (5)
- Other than from 30,000 feet, it is impossible to precisely budget a project of this scale, that far out. Rents, construction costs, availability and cost of capital, and tenant demand are all too uncertain that far out. But that is the nature of the development business and we are lifelong developers with a proud track record. While we may make little or no money on this development in the first renting, our goal always was to continue neighborhood change and to improve our adjacencies here. For Vornado, that has always been the main event.
- Much has already happened to increase the value of our Penn Station assets. The Penn Plaza District and the West Side of New York have been discovered and are the beneficiaries of an enormous amount of recent and current activity. A huge swath has already been rezoned as the future growth corridor of Manhattan. Tishman Speyer has won the bidding to develop the Hudson Rail Yards into a 12 million square foot, 20-year, Canary Wharf-type project. Brookfield has announced 5 million square feet. Our Hotel Pennsylvania site is active (more about that later). Vornado was the pioneer here, and owns the best and the lion’s share of the real estate surrounding Pennsylvania Station – the gateway to the new West Side.
The Hotel Pennsylvania, Seventh Avenue at 33rd Street, generated a best ever $37.9 million of EBITDA in 2007, $10.4 million more than in 2006, a 37.8% increase. This property continues to trend higher in 2008. David Greenbaum oversees this asset which is very capably managed by Fred Grapstein.
In 2007, Merrill Lynch ran a process for the location of a new headquarters facility for the new century. Our hat in the ring was the Hotel Pennsylvania. After an extensive search, Merrill Lynch selected the Hotel Pennsylvania site with its 80,000 square foot footprint for trading floors and an over two million square foot total building envelope. The credit crisis and Merrill’s management changes disrupted this deal, but the fact remains that our site was the last man standing in a rigorous citywide search.