By 2027, the skyline around Penn Station is expected to look substantially different, courtesy of 10 mostly office-geared towers that are already starting to materialize around an expected revitalized transit hub. The project represents the central fixture of New York State Governor Kathy Hochul’s real estate development plans and marks one of the more ambitious stakes on the asset class, despite headwinds brought on by the ongoing covid-19 pandemic.

Key to its completion, notably, is funding. There is a lack of clarity around the current construction already under way as well as the area’s future plans. What is known is that Vornado Realty Trust – a New York City-based real estate investment trust that owns the majority of the Penn Station development sites – and other project developers would forgo paying property taxes and instead supply a to-be-determined total for the construction itself.

Even with this lack of clarity, the project has drawn logical comparisons to the neighboring Hudson Yards development. Hudson Yards tapped into a similarly structured deal in which developers financed the construction and have avoided what could have been heftier property taxes upon completion.

Funding shortfall

According to analysis from the New York-based advocacy group Reinvent Albany, Penn Station’s tax breaks could reach $1.2 billion, say authors Bridget Fisher and Flávia Leite, who ran similar analysis on Hudson Yards’ tax increment financing. But there is a significant financing shortfall, the report states.

“At best, [payments in lieu of taxes] paid by Vornado will finance less than 55 percent of the state’s share of funding for Penn Station upgrades,” write Fisher and Leite in the July report. According to the duo, the project will need $3.4 billion to $5.9 billion of funding from other sources to reach completion.

But there is capital available for well-located projects. As of September this year, three major commercial real estate debt packages have been put together to upgrade assets at One, 3 and 5 Times Square, without any government help.

Among the financier cohort is JPMorgan Chase, which took the reins on an $840 million refinancing wave for the tourist-frequented hub. In tandem with Bank of America and M&T Bank, JPMorgan is providing $415 million to the New York-based Rudin Family to revitalize 3 Times Square. JPMorgan is also supplying $425 million in debt to refinance Jamestown’s loans on One Times Square.

Morgan Stanley, AIG and Apollo Global Management combined forces to originate $1.3 billion in financing for RXR Realty’s revamp of 5 Times Square, rounding out the $2.1 billion of total debt funneling into the area’s office reworks over the next few years.
Thomas Traynor, vice-chairman in debt and structured finance and co-head of US large loans at CBRE, says location will be crucial to the future of any given office portfolio.

“Class A next to Grand Central or Penn Station, for instance, is going to be in much more demand with a lot of amenities around it and transit around in my opinion and that’s going to differentiate it even within Class A,” Traynor says.

Although bringing in a consortium of banks, insurance companies and alternative lenders adds complexity to any coinciding capital stack, betting on the area and its surrounding Class A and even Class B office fixtures may be more favorable than trying to grab more New York City presence in an alternative office sector not undergoing coinciding infrastructure upgrades.

Vornado declined to comment at the time of publication.