Developer Vornado Realty Trust is holding off on plans to build office towers around New York City’s Pennsylvania Station amid elevated construction financing costs and a slower-than-expected return of Manhattan office workers after COVID-19.

Michael Franco, Vornado president and chief financial officer, told investors on a Feb. 14 call that it would likely be two or three years before markets “settle down” and the company moves ahead with project starts to build three office towers and renovate others in the area around the rail hub it has designated Penn District.

“I think the good news is, we don't have to do it today, because it would be very, very difficult" and very expensive to line up construction financing, Franco said.

Several of Vornado’s Penn District properties, including 1 Penn, 2 Penn, the Farley Building, 11 Penn, the former Hotel Pennsylvania and the Manhattan Mall, overlap with New York state’s planned Pennsylvania Station civil and land use project.

The state plan, announced by Gov. Kathy Hochul in 2021 as a scaled-back version of an earlier proposed plan, calls for a $6.7-billion reconstruction and possible expansion of Penn Station plus redevelopment of the immediate surrounding area with construction of up to 10 new buildings totaling 18.3 million sq ft. The plan would rely on payments in lieu of taxes from the commercial properties to help fund the station work. 

Last September, New York’s Metropolitan Transportation Authority awarded a contract worth up to $57.9 million to a joint venture of FXCollaborative Architects LLP and WSP USA Inc. with John McAslan + Partners for the station’s redesign. FXCollaborative and WSP also worked on the Penn Station master plan. 

Meanwhile, Vornado is nearing completion of its first three Penn district renovation projects, CEO Steven Roth told investors. The Skanska-led transformation of the Farley Building, which contains Moynihan Train Hall, is finished. Turner Construction Co.-led renovations on Vornado’s 55-story 1 Penn property are almost done. Work on the 31-story 2 Penn, with both Turner and Skanska, is expected to be done late this year, Roth said. As of Dec. 31, Vornado had spent $1.9 billion on the three projects, and estimated it would cost about $497.8 million more to complete them. 

Beyond the elevated costs of construction financing at the moment, Roth addressed the slow return of workers to Manhattan offices. The latest survey from the Partnership for New York City, which counts more than 140 major Manhattan office employers, showed 52% of workers at their workplaces on an average weekday in January. Roth said he believes the figure is close to 60% mid-week, but Mondays remain “touch and go” and “Friday is dead forever.” Roth also said he expects lower leasing volumes in general this year as the Federal Reserve appears set to continue raising interest rates.

“We expect 2023 will be challenging as businesses and consumers continue to feel the effect of the Fed’s aggressive rate increases and generally tighten their belts and act with caution,” Roth said.