Just as the markets were starting to unwind in October 2007, real estate titan Steve Roth thought he’d hooked a giant fish. Merrill Lynch had been through a tortuous, hard-fought search for a firm to build its new world headquarters, and after pitting Mr. Roth and his Vornado Realty Trust against developer Larry Silverstein and landlord Brookfield Properties, the investment bank’s CEO, Stan O’Neal, gave Mr. Roth the nod. Merrill Lynch wanted a new, Vornado-built headquarters across from Penn Station, on the site of the Vornado-owned Hotel Pennsylvania.
But just days later, preoccupied with $7.9 billion in write-downs, Merrill’s board held off on voting on the headquarters plan, instead ousting Mr. O’Neal. The proposed $3 billion tower plan followed him out the door.
Now Mr. Roth, the hard-charging billionaire chairman of Vornado, is doing what can best be described as readying himself for the next Merrill.
On Feb. 8, Vornado began the city’s land-use review process, the seven-month cavalcade of criticisms, recommendations and demands from residents and officials, which is the most significant public approval needed to demolish the hotel and build a new tower in its place. The reason for the review’s start, according to statements Vornado representatives have made to government officials and others, is not because demolition of the Hotel Pennsylvania is imminent. Rather, the firm wants to be ready to pull the trigger should it ever find another tenant, saving itself the uncertainty and time requirements that come with public approval.
The Pelli Clarke Pelli-designed tower Vornado is proposing to build would be a giant arched obelisk, one that, at 1,216 feet, would soar to a few hairs short of the Empire State Building’s peak and would eclipse all but the under-construction 1 World Trade Center to become the city’s third tallest building. Vornado has been mostly silent on the topic publicly, but based on plans filed with the Department of City Planning, the firm has two similar designs it is putting through public review: One is for a single office tenant with a podium of large trading floors; the other, a slightly smaller tower, allows for more retail.
To win this shot of added density on the site, Vornado is offering an inducement of transit improvements, including the reopening of the “Gimbels Passageway,” an underground walkway linking Penn Station and Herald Square, which has been closed for nearly three decades.
“It’s going to be a tough one,” Kevin Finnegan, Community Board 5′s land-use chairman, said of the tower proposal. “It’s really big. It’s humongous,” he added. “At the same time, it is an ideal place for a large building because of its access to transit, and there are significant and important improvements to the transit infrastructure.”
THE EFFORT TO PREPARE the Hotel Pennsylvania for an office tower is part of a far larger scheme of Mr. Roth’s. In the mid-1990s, he bought up much of the neighborhood surrounding Penn Station in a bet that an expanding midtown Manhattan would next sprout office towers in the long-grungy, transit-rich district. At the same time, he pursued a redevelopment and expansion of Penn Station that stood to open up millions of square feet of new development.
But despite his anxious and bullish stance, Mr. Roth has earned a reputation for being one of the more patient developers in the city. For about a decade, he sat on the vacant site of Alexander’s department store on 59th Street and Lexington Avenue before he ultimately signed the expanding Bloomberg LP and built its new headquarters.
He’s now waited an entire real estate cycle with no major steps toward the transformative goals for the “Penn Plaza” area (though rents did rise), apparently content to keep sitting on his 7 million square feet of property until the time is right.
To that end, the 1919-built Hotel Pennsylvania holds little nostalgic value in Vornado’s heart. Talking to Vornado investors in 2008, Mr. Roth referred to it as “a placeholder, sort of like a parking lot,” until a tenant can once again be wooed to the area. Then again, the firm has vacillated at times, saying it might renovate the hotel to draw a higher-end clientele.
At the market’s peak, the Pennsylvania, with its dimly lit lobby and dingy rooms, was a cash cow, as demand for hotel rooms skyrocketed while the supply stayed mostly constant. In 2007, Vornado reported $38 million in earnings on the hotel; in 2008 it grew to $42 million. (Vornado and other partners paid just $159 million for it in 1997.)
But this year, with tourism down and smaller, limited-service hotels opening their doors, its numbers have tanked. Through September, at the latest filing, Vornado reported $7.8 million in earnings from the hotel, down $21 million through the same period the year before.
As of yet, it’s unclear just how high the hurdle will be for Vornado to win public approval of its tower. Local residents are sure to have concerns with the density—its proposed size is larger than the Empire State Building—and there is a set of preservationists who have been trying to landmark the McKim, Mead & White-designed Hotel Pennsylvania, to no avail thus far.
On the other hand, Vornado is permitted to build a rather tall building without any approvals at all, and it is entitled to a “transit bonus” of density, provided that the transit agencies and community are content with the improvements being offered.
And then there are the union workers in the hotel, who have not yet made much noise about the proposed tower (though they did join in a push to landmark the hotel in late 2007). A new office tower would, after all, mean the demolition of the 1,700-room hotel and the jobs inside, but given the economy and the dearth of would-be tenants lining up to occupy the tower, it’s not as though a wrecking ball is imminent.
Whatever resistance there is will become clearer in the coming weeks. The plan goes before the community board, which may give a nonbinding recommendation on the tower. Ultimately, any changes would likely come as a result of pressure from the City Planning Commission or from Council Speaker Christine Quinn, the local representative for the tower. Both must vote in favor of the project if it is to proceed.
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