In the fall of 2007, Steven Roth was ready to make his mark on Manhattan’s skyline: an imposing, 2.8 million-square-foot tower on the site of the Hotel Pennsylvania, across the street from Madison Square Garden. The Cesar Pelli-designed tower would be Merrill Lynch’s new global headquarters.
“The papers were done,” Roth reminisced in a 2021 shareholder letter.
But a tremor ahead of the 2008 crash sank the deal. On the day it was to vote on moving uptown, Merill’s board discovered it was sitting on a $7.9 billion loss thanks to a rotting pile of subprime mortgages. And just like that, Roth recalled, “the deal was swept away.”
Today, Roth still dreams about building on the Hotel Pennsylvania site, which fills most of West 32nd Street between Sixth and Seventh avenues and is tantalizingly close to the hip neighborhoods along the High Line and, to the east, Koreatown. Last year, he demolished the hotel designed by legendary architects McKim Mead & White. In its place, he has proposed to install tennis courts, which officials say are one of several short-term ideas for the site until the time is right to build again. Fashion shows are another possibility.
“The best use Roth can come up with for some of the most valuable, potentially productive land in the city is a tennis court,” snarked Lynn Ellsworth, co-founder of advocacy group New Yorkers for a Human-Scale City. “That’s an insult to all New Yorkers.”
“Give Roth credit, he’s trying to reimagine the Penn District,” said Alexander Goldfarb, an analyst at Piper Sandler. “It should work out. It just never has.”
“They’ve wanted to build a lot more new space in a very complex environment,” said Anthony Paolone, a real estate analyst with JPMorgan Chase. “They’ve been long in waiting.”
Roth, 82, has described his grand plans for the Penn Station neighborhood as his “promised land” and “moonshot.” By that, he means developing about 10 million square feet of new towers, creating the city’s next cluster of supertalls after Hudson Yards and Billionaires Row. Not only would that transform Manhattan’s skyline, but it also would put Roth on equal footing with Steve Ross, the developer of Hudson Yards, whose buildings rent for sometimes twice as much as Roth can command for his.
But after years of waiting for the right time to strike and hoping to land a sweeter incentive deal, Roth may have missed his moment. His moonshot remains stuck on the launching pad, a casualty of the rise of working from home and higher interest rates.
“You can’t build anything in [the Penn] District today because of the frozen capital markets. You cannot do it because the math doesn’t work,” Roth acknowledged on a February conference call. He vowed to press on, insisting, “The Penn District will be really important five years from now.”
Waiting game
Some big New York developers got into real estate by inheriting it from their parents. Brooklyn-born Roth got into the business because he wasn’t allowed to work at his father’s apparel manufacturer.
“They had an anti-nepotism clause,” he told Crain’s in a rare 2015 interview. He did not speak to Crain’s for this story after multiple requests were made through his press representative at public relations firm Rubenstein.
Roth started developing industrial buildings in New Jersey before moving on to shopping centers. Realizing the stock market was pricing real estate cheaply, in 1979 he won a proxy fight for control of Harrison, New Jersey-based retailer Two Guys, whose land he coveted. Victory gave him the retailer, its land, and a manufacturer of fans and air conditioners called Vornado. Roth took that name for his enterprise, and the company went public in 1993, around the time he was battling Donald Trump for control of department store chain Alexander’s. The weary flagship store at the corner of East 59th Street and Lexington Avenue offered intriguing redevelopment possibilities.
After Trump defaulted on personally guaranteed loans, Roth prevailed. Then he let the Alexander’s site lie dormant for years. He explained his thinking in a 2010 speech at Columbia University.
“My mother called me and said, ‘There are bums sleeping on the sidewalks of this now closed, decrepit building. They’re urinating in the corners. It’s terrible. You have to fix it.’ And what did I do? Nothing,” Roth recalled. “Why did I do nothing? Because I was thinking, in my own awkward way, that the more the building was a blight, the more the governments would want this to be redeveloped, the more help they would give when the time came. And they did.”
Thanks to government help, Roth was able to build taller than he otherwise could have when he developed the 1.1 million-square-foot, 57-story office and condominium tower at 731 Lexington Ave. The building serves as the headquarters for Bloomberg LP, former Mayor Michael Bloomberg’s media organization.
Its height was enhanced by 73,000 square feet of air rights granted under city zoning regulations and about 200,000 square feet of air rights acquired from other buildings, according to Alexander’s 2003 annual report. Roth also benefited from a zoning bonus under the city’s inclusionary housing program by developing 41 affordable housing units, amounting to 41,000 square feet, off site. This raised the building’s floor-area ratio from 10 to 12, the Urban Land Institute said in a case study, netting the developer an additional 169,000 square feet. Finally, Roth received a partial real estate tax exemption under New York’s 421-a program for providing multifamily housing units and supporting off-site affordable housing.
The benefits of waiting for government assistance were something Roth wouldn’t forget as he turned his eyes to the Penn Station area. The neighborhood hadn’t seen much development since garment manufacturers relocated there from the Lower East Side in the 1920s. But the area, with its aging industrial buildings, past-their-prime hotels and dowdy department stores, looked promising after Times Square was cleaned up in the 1990s.
In 1997 Roth placed his big bet on the neighborhood, paying $650 million for 4 million square feet of Manhattan properties, including 2 Penn Plaza and 11 Penn Plaza, from Bernard Mendik, a former Real Estate Board of New York chairman once married to the sister of developer Larry Silverstein. Then Roth spent an additional $1.7 billion to acquire 1 Penn Plaza and other properties, eventually buying most of the buildings on both sides of Seventh Avenue between West 31st and West 34th streets. As part of that shopping spree, he teamed up with two parties to pay $159 million for the 1,700-room Hotel Pennsylvania, whose phone number, PA6-5000, was the name of a hit tune for Glenn Miller and His Orchestra.
“Vornado has been buying properties around Madison Square Garden with plans to turn the district into an urban retail and entertainment locale similar to Times Square,” Bloomberg News reported in 1999.
VornadoLand
In spite of Roth’s inability to deliver on his biggest plans, he’s built a thriving enterprise. Vornado has more than 20 million square feet of commercial space across Manhattan and 2 million square feet of retail space, much of it along Fifth Avenue, in Times Square and in the Plaza District. The firm developed the supertall Billionaires Row tower at 220 Central Park South and reaped $3 billion in proceeds from selling the apartments. Forbes estimated Roth’s net worth to be $1.1 billion in 2019. His wife, Daryl, a leading Broadway producer, was appointed trustee to the John F. Kennedy Center for the Performing Arts by Donald Trump when he was president. Their son, Jordan, is president of Jujamcyn Theaters.
Roth has also had success renovating older buildings near Penn Station, including the Farley Building, where Meta Platforms agreed in 2020 to lease 700,000 square feet. He also recently upgraded 1 and 2 Penn Plaza, rebranding them Penn1 and Penn2, and installed the latest amenities, including plush common-area seating and a lively bar scene.
“They really fancied up those places,” said Anne McDermott, a former tech sales executive who worked inside one of the two buildings on three occasions over the past 40 years.
Big as Roth’s empire is, it would have been even bigger if Merrill Lynch hadn’t backed out of the supertall tower on the Hotel Penn site in 2007. After that fiasco, he decided to build there anyway, and in 2010, the City Planning Commission granted Vornado a special permit to develop a 2.1 million-square-foot tower reaching 68 stories high, or 1,216 feet — about as tall as the Empire State Building, excluding the spire. In return, Vornado agreed to widen the northbound platforms at the Penn Station subway station underneath Seventh Avenue and reopen a passageway underneath West 33rd Street, closed since 1986, connecting the Seventh Avenue subway to the Sixth Avenue lines and the PATH.
But after all the groundwork was painstakingly laid, Roth waited.
“One of the great mysteries is why Roth didn’t build after he got the permit,” said George Janes, an urban planner who opposes Vornado’s plans for the area. “He wouldn’t be talking about tennis courts now if he’d done that.”
An adviser to Roth said nothing was built because an anchor tenant couldn’t be found after Merrill Lynch was swallowed up by Bank of America, which was building a new headquarters overlooking Bryant Park. Goldman Sachs Group was developing a headquarters downtown, and others were still tallying up the cost of the 2008 crash. In 2013, JPMorgan paid $13 billion to settle Justice Department claims into sales of troubled mortgages, and in 2014 it paid $2.6 billion to settle allegations of turning a blind eye to Bernie Madoff’s Ponzi scheme.
“It just wasn’t the time for banks to be looking for new space,” Piper Sandler’s Goldfarb said.
The ground quickly shifted, however.
In 2015 private equity giant KKR agreed to lease space at Hudson Yards, whose enormous glass towers were rising up two blocks west of Penn Station, the fruit of a deal made by CEO Steve Ross of The Related Cos. after Mayor Bloomberg’s plan to build an Olympic stadium on the site came to naught. In 2017 BlackRock, the world’s largest asset manager, also agreed to move to Hudson Yards. Meanwhile, Ernst & Young and law firm Skadden Arps Slate Meagher & Flom agreed to relocate to Manhattan West, a set of new office towers developed by Brookfield Properties next to Hudson Yards. Big tenants were paying $150 per square foot or even more for shiny new space — about 50% above what Roth could charge at his centrally located but older buildings, such as 280 Park Ave. or 1290 Sixth Ave.
“It wasn’t location that sold Hudson Yards,” Goldfarb said. “It was the high ceilings, the big windows and the office thermostats that actually worked.”
As threats from the west encroached on Roth’s Midtown empire, another competitor rose in the east with the 2021 opening of SL Green’s 73-story tower at 1 Vanderbilt Ave. Evercore ISI analysts say the building next to Grand Central Terminal could be worth $4.5 billion by itself, not so far below the $6 billion market value for all of Vornado. Figures like that persuaded Roth to finally redevelop all the property he owned around Penn Station.
“Penn District’s time has come, the district being validated by the neighboring Hudson Yards and Manhattan West,” Roth said in his 2019 letter to shareholders. “Our grand plan includes developing three to five new [buildings] in the Penn District. Imagine the NEW New York along the 34th Street corridor from VornadoLand (Macy’s, Penn Station, MSG) to Moynihan to Manhattan West and to Hudson Yards.”
Investors liked the sound of that, and the stock that Roth sometimes called “stupid, stupid cheap” paid out $500 million in dividends in 2019. It headed into the new year trading at $67 a share, for a $13 billion market capitalization.
Behind the scenes, officials in the administration of former Gov. Andrew Cuomo were working to ensure Roth’s promised land was one of milk and honey.
Fixing a hellhole
One evening in January 2018, Vornado Senior Development Executive Marc Ricks had important business to discuss with Cuomo’s economic development chief Howard Zemsky, MTA head Pat Foye and Rick Cotton of the Port Authority.
“Gentlemen,” began his email, released after neighborhood groups filed a Freedom of Information Law request. “I understand the Governor has directed us to sit with you as soon as possible to advance discussions at Penn Station.”
Linking his building plans to the wellbeing of Penn Station marked a change in direction for Roth. But with his dreams for transforming the neighborhood reaching their 20th anniversary, he had to amp up his game. He found a partner in Cuomo.
After carving out Moynihan Station from the old Farley Post Office, rebuilding LaGuardia Airport and naming the replacement of the Tappan Zee bridge for his father, Cuomo was ready to tackle the hardest job of all: renovating Penn Station, the underground rail hub that serves 600,000 commuters a day.
In 2017 Cuomo created a task force that included Roth to come up with solutions. Three years later, the governor unveiled an ambitious plan that called for fixing up Penn Station while transforming the Penn District. Vornado and others would develop up to 10 supertall towers totaling 18 million square feet around that station — a project on par with Hudson Yards. Tax revenue from higher rents and more commercial activity would help cover the estimated $7.5 billion cost of rebuilding Penn Station, the state said.
Cuomo insisted partnering with the private sector was the only way to get the massive public work done.
“There is no alternative, because paralysis is a death sentence,” he said in January 2020. “If we do nothing, the world will pass us by.”
It looked as if waiting would pay off for Roth once again, as when he held off developing Bloomberg LP’s headquarters on East 59th Street. He could now build up to five times more than the city had permitted in 2010 and, in shades of the Alexander’s saga, state officials said redevelopment was necessary because the streets around Penn Station were “blighted.”
Were Vornado to redevelop all the proposed sites around Penn Station, it would stand to get a $1.2 billion tax break from the state, according to fiscal watchdog Reinvent Albany. Yet the expected revenue would be $4 billion short of the amount needed to rebuild the train station, the watchdog group found. That analysis helped marshal opposition from civic leaders and members of Congress. Former MTA chief Dick Ravitch said he was “genuinely outraged” by the state’s plan to “recklessly” proceed with a “gift” of 18 million square feet to developers. Building a dignified Penn Station is a worthy cause, he said, but the state “altogether failed to explain why that requires a real estate giveaway on this scale.”
While political pressure mounted, the office market cratered as interest rates started to rise in the spring of 2022 and work-from-home habits hardened. On Nov. 1, 2022, Roth hit the pause button for rebuilding the Penn District.
“The headwinds in the current environment are not at all conducive to ground-up development,” he said on an earnings call.
Decoupling
Nine months after Roth called off his moonshot, Gov. Kathy Hochul, who has described Penn Station as a “hellhole,” said in June 2023 that the state and Vornado were “decoupling” and she would find other ways to pay for the transit hub’s renovation. One possibility would be issuing municipal bonds to supplement the $1 billion already allocated by the state Legislature.
Yet hope is far from lost for Roth’s dream. The state’s plan with Vornado has no expiration date, and decoupled couples recouple sometimes. Roth donated nearly $70,000 to Hochul in 2021.
“I inadvertently created a whirlwind when I made what I thought was an obvious comment … [that] was interpreted as our abandoning the grand plan,” Roth said in last year’s letter to investors. “Nothing could be further from the truth. A pause necessitated by economic conditions is not abandoning.”
The ground could shift again quickly, as it did in 2015, when big companies started leasing space in Hudson Yards. But persuading banks to write loans for office towers is a lot harder now, even for a successful developer with more than 50 years of experience. Manhattan’s return-to-office rate was 58% last September, the Partnership for New York City said, and “the expectation is that this will only grow to 59% on a long-term basis.”
Vornado has hunkered down. Its stock has fallen to $28 a share, and the company cut its dividend by two-thirds last year to conserve the cash it will need to make larger down payments on mortgages that will have to be refinanced soon at higher rates. The Bloomberg building’s $500 million loan is due in June, and Vornado’s 50% share of 280 Park’s $1.2 billion mortgage matures in September.
Even if conditions improve, it’s not clear whether Roth’s grand plans for the Penn District are still viable. Soon after taking office, Hochul shrank the scope of the project by 1.4 million square feet, according to a 2021 presentation, the equivalent of a supertall tower. Her revised plan also includes construction of up to 1,800 housing units. A spokesman said the governor changed the building plan “in response to community feedback.”
Further revisions may be coming in light of how embedded work from home has become. Perhaps a cluster of supertall office towers isn’t in the Penn District’s future, after all.
“It’s not clear what the best use of the neighborhood’s space would be,” said Elizabeth Goldstein, president of the Municipal Art Society.
Ellsworth, of New Yorkers for a Human-Scale City, fears it won’t be long before Roth starts building unless high interest rates continue to choke development.
“These ideas come back in slightly different forms under different names,” she said. “They’re like a vampire you can’t kill completely.”
That said, Federal Reserve officials believe inflation still is too high to start lowering interest rates and the market, which entered the year anticipating six rate cuts, now reckons one or two are more realistic. In his latest shareholder letter, released Wednesday, Roth predicted “frozen capital markets and sky-high interest rates have and will continue to shut down new builds.”
If development does move forward, the neighborhood may push back. One place targeted for demolition under the state proposal, the Church of St. John the Baptist, recently had the altar’s marble repaired and holes in the white walls patched up. It isn’t clear if the state and Archdiocese of New York agreed to eliminate the church, but the renovation work could be a sign the single-spire brownstone on West 30th Street will be around a while longer. Neither the archdiocese nor church leadership returned messages, but church member John Albanese said he has faith the building will outlast any developers’ grand plans.
“Moses didn’t get to the promised land,” Albanese said.
Nick Garber contributed to this article.
Aaron Elstein , 2024-04-11 11:48:06
Source link
