432 Park Avenue - Building the Skyline

January 16, 2018 by Jason Barr 7 Comments

Manhattan Profits (Part III): Are Superslims Good or Bad for New York?

Jason M. Barr January 15, 2018

In the last decade, New York has seen the emergence of a new skyscraper type—supertall, superslim, ultra-luxury residential condominiums. As discussed in previous posts, the combined forces of new technology and economic demand have made them profitable projects. However, they have attracted their share of controversy, riling up feelings of anger and frustration in certain quarters.

Each of the many complaints, however, falls into one of three categories: (1) the buildings are the result of the machinations of corrupt plutocrats; (2) they erode the quality of city life; and (3) they damage housing affordability. Let’s discuss each in turn; and then focus on what’s to be done.

Rise of the Superslims: (From left to right) One57, 220 Central Park South, Central Park Tower, 432 Park Avenue.

The Machinations of the Plutocrats

These supertall residential buildings represent nothing if not catering to the needs and wants of the ultra-rich. Condo prices generally range from $4,000 to $8,000 per square foot, while apartment prices across Manhattan average about $1800 per square foot. Headlines abound about those who pay one hundred million dollars or more for their units.

Investigations by the New York Times revealed that many apartments remain empty throughout the year, as they are purchased by foreign buyers who are just as interested in having a pied-à-terre as they are in hiding their ill-gotten gains. Many buyers use shell corporations to camouflage their identities, as luxury real estate is part of the money laundering chain.

Given the high returns on constructing these buildings, New York developers, it is argued, curry favor with city officials to build them, either by making campaign contributions or by promising to provide some token amenity, like a plaza or subway renovation, in exchange for the extra density.

The idea is that these skyscrapers represent a means by where corrupt rich buyers incentivize developers to further engage in corrupt real estate development so that the wealthy can protect their stolen gains.

Quality of Life

Another set of criticisms focuses on how they effect the urban fabric. Since many of the units remain empty most of the year, the vibrancy of street life that makes Manhattan so dynamic and compelling is, seemingly, being eroded. Empty buildings mean empty streets.

Relatedly, by replacing charming low-rise buildings that more organically mesh with the street line with cold towers set back in plazas, these structures erode the soothing feel of the city street. Lower rise buildings, it is argued, promote a kind of cozy urbanism—a scale that is more natural to the human soul. Large towers suck up this warmth by being too intimidating and creating dead space.

Another group of critics, especially those in the architectural community, feels they are just plain ugly. Finally, there are those who complain that they are thrusting shadows on Central Park.

Affordable Housing

The third set of criticisms has to do with housing affordability. First, constructing so many very expensive buildings, the argument goes, puts upward pressure on the prices of more modest buildings, reducing affordability in these neighborhoods. This can be called the contagion theory of housing prices; the supertalls are the “viruses,” which then “infect” the rest of the market with higher prices, exacerbating gentrification.

The second argument is that older, lower-quality buildings are torn down, thus displacing the local residents, who are forced to seek higher cost housing elsewhere. More broadly, by pouring money into the luxury market, developers then ignore construction in lower income sectors, which are badly in need of investment.

What’s to be Done?

In my opinion, much of the controversy surrounding their construction is a red herring. These buildings have become symbols of many current problems; but they are just that—symbols—projections of a collective frustration with housing affordability and income inequality, which are the real problems. Focusing on the superslims provides a convenient scapegoat, but the structures themselves are symptoms not the causes.

On Corruption

The biggest problem is that these apartments can be used as “safety deposit boxes” to hide illegal wealth. New York and the United States should not be in the business of “subsidizing” international corruption. Fortunately, steps are being taken that, hopefully, will mitigate the problem. In early 2016, the U.S. Treasury Department announced it would require title insurance companies to identify the names of those behind shell companies who buy high-end residential real estate with cash in six major metropolitan areas (including New York).

During 2016, the Treasury found that about 30% of the transactions covered by the program involved a buyer that was also the subject of a previous suspicious activity report. Whether this spotlight on the dark money is enough remains to be seen. The rich are certainly wily about finding ways to hide their money, and Donald Trump seems determined to give Planet Earth on a silver platter to his fellow billionaires.

On City Life

As for the supertalls ruining street life, I agree with Carol Willis, Director of the Skyscraper Museum, that there is little evidence of this in the neighborhoods where they are being built. Central Park South and 5^th Avenue near the Plaza Hotel bustle with locals and tourists alike.

On the other hand, if you walk east a few blocks and stroll up Park Avenue north of 59^th Street, there is no street life at all. Block after block are early 20^th century luxury apartment buildings and very few pedestrians, save dog walkers and doormen. Yet no one complains that Park Avenue is soulless.

The “soulless streets” claim seems to emerge from the fact that people prefer the old to the new. I don’t disagree, but architectural preference cannot be used to dictate what gets built and what does not. Today the Gilded Age and Roaring Twenties apartments for the ultra-wealthy, such as the Dakota, the Beresford, and the San Remo, are charming and venerable. The superslims are labeled cold and distant.

Park Avenue north of 59th Street, a charming upper class neighborhood with little or no street life.

Yet those venerable, old buildings were no less symbols of income inequality at the turn of the 20^th Century as 432 Park Avenue is today. But Manhattan is not Manhattan without them. In a century hence, when 200-story buildings are going up, people will look at One57 and 432 Park Avenue with wistful nostalgia.

Shadows

As for the shadows problem, I agree that fewer shadows are better than more shadows, but all societies must balance various trade-offs. Limiting building height, will reduce shadows, but introduce other unintended consequences, including making super expensive buildings flatter and wider and gobbling up more of the older buildings on a street.

The 1961 zoning codes were specifically designed to help mitigate the shadows “externality” by limiting floor area and by allowing the sale of air rights. These rules force buildings to be narrower as they get taller, and they limit the total amount of floor area on a block. Unfortunately, some shadows in Central Park South is necessary. It is part of urban life. Having said this, a tax on empty billionaire apartments is a reasonable way to penalize people for hogging the sunlight when they are hardly ever in the city.

The new crop of superslims. Many fear the shadows that will be placed on Central Park in the afternoons. From this graphic, though, it’s hard to know the true effect from all the buildings around the park. Source: Vanity Fair.

On Affordability

Do these houses contribute to an affordability problem? Only indirectly, but they are not the key culprits. The real problem, as, I have argued elsewhere, is that nearly 60% percent of housing in New York City is legally required to be one or two family homes. In other words, in many parts of the city, it is illegal to teardown a one-family house and replace it with, say, a five or ten-story apartment building.

The restriction of housing supply across the city puts tremendous pressures on housing prices. As long as the demand to live or invest in New York City exceeds the ability of the real estate community to supply housing, across the entire income spectrum, prices at all levels will increase. Only the rich can afford to pay those prices, while the middle and lower classes suffer disproportionately.

Zoning Map of New York City. This map shows the allowable building density based on the zoning codes. The gray areas are those parts of the city where it is illegal to build anything more than a one or two family home. New York City is primarily a low-rise place. Source: Jason M. Barr, as printed in *Crain’s New York Business*.

Gentrification is the result of upper income households using their higher income to box out lower income households in a city with a limited housing stock. It is easy for those evicted to blame their greedy landlords; it’s difficult to comprehend that tenants and landlords are tiny players in a market with nearly nine million people, and where everyday thousands of anonymous market transactions are taking place. All of us, seller and buyer alike, are embedded in this market system. Shouting at landlords and developers will not change the system.

A New Plan

The current zoning restrictions create a game of musical chairs, where the rich get “preferred access” to the chairs. The solution is that the city needs more “chairs.” Focusing on the superslims diverts attention away from that issue. The super-rich are not going to buy luxury condos in Elmhurst, Queens or Staten Island. How about more housing there, where it is needed? For this, we need a better, more enlightened housing policy from the city.

The claim that the new expensive condos create a price “contagion” is also a misleading diagnosis. Market prices move according to the laws of supply and demand. The superslims provide information about the demand by the wealthy and, as a result, condo prices are adjusted based on this demand. Sellers can raise prices all they want, but if there are no buyers, it is irrelevant.

Sadly, today, good economics make lousy politics. Change always has winners and losers, but without campaign finance reform, policymakers will have little incentive to think about the greater interests of the city, over doing what it takes to raise campaign cash. Vested interests and NIMBYism run deep in New York and it’s very hard to think large scale. The city desperately needs a new urban plan to reduce housing costs, improve transportation, and prepare for the effects of climate change. These kinds of plans can help erode inequality.

Why We Should Celebrate the Superslims

Rather than focusing on the towers as symbols of economic woes, we may want to consider their positive aspects. Manhattan is a global city, in part, because of the wonder of its skyline. Adding towers to midtown and downtown serve to enhance that skyline and allows the city to continue to grow and retain its iconic reputation.

The superslim towers represent novel creations, and decades from now we may look back and appreciate them in the way we appreciate the Chrysler or Empire State Buildings (though we may find this hard to believe today).

New York’s growth and success is due to its creativity and problem solving. So let us not blame these skyscrapers for the high cost of housing or rising income inequality, but rather let us begin by tackling the real underlying economic and political problems of the city.

November 26, 2017 by Jason Barr 7 Comments

Manhattan Profits (Part II): Return on Investment for a Superslim Skyscraper

By Jason M. Barr November 26, 2017

The Manhattan skyline was created by developers seeking their fortunes. Skyscraper heights, frequencies, types, and locations are based on the profits they generate. In the first half of the 20^th century, for example, office buildings, such as the Woolworth (1913; 792 feet/241 meters) and Empire State (1931; 1250 feet/381 meters) reigned supreme.

Today, the princes of height are the superslim luxury residential towers, such as 432 Park Avenue (2015; 1396 feet/426 meters); 225 West 57^th Street/Central Park Tower (under construction; 1550 feet/474 meters); and 111 West 57^th Street/Steinway Tower (under construction; 1428 feet/535 meters).

In an earlier post, I discuss the reasons for their rise. Structural and engineering innovations, and a high demand from wealthy buyers, have created this new market. The relatively generous zoning regulations in central and lower Manhattan (and downtown Brooklyn) make this building type possible there and virtually impossible elsewhere.

Playing Developer

These towers, like all supertalls before them, are controversial (and which will be the subject of a future post). To understand a bit more about them, however, it might be of interest to play developer, and estimate the profits to constructing one. To do this I have created plans for a hypothetical 80-story superslim condo—the Barr Tower—on 57^th Street. I have used three buildings, 432 Park Avenue, One57, and 220 Central Park South, as models.

For the interested reader, I have put together a document with my calculations and sources. My analysis is based on publicly available information (and a conversation with an industry professional). I believe it is reasonable from the data I have collected, but, not being a real estate insider, my analysis remains speculative, as it were.

Even a cursory investigation of Manhattan’s real estate market will show that there really is no typical or average project. Development is incredibly complex and includes a series of detailed and arcane steps; from the long drawn-out process of acquiring lots and air rights; to navigating the byzantine zoning and building codes; to amassing financing, and so on. It’s a game only for the hardy.

Having said that, if we want to understand the rise of the superslims, as a particular type, we need to make some simplifications. Here are my assumptions. First, the building is constructed under the current zoning regulations, and does not need any special permits from the city. That is, it is built “as of right.” Second, all the condo units have been sold by the time the building opens (this is the best case scenario).

Third, the building is fully residential, with no retail, offices, hotel, or parking. The assumption of a “pure” condo is a bit unrealistic, as most projects have some additional usages, but it complicates the analysis, and likely does not alter the conclusions by very much. Next, I use current market prices that seem typical for this high-end market as of mid-2017. Finally, I assume the building takes five years from initiating land purchases to the day the last condo contract is signed.

How to Build a Manhattan Superslim Skyscraper

Step 1: Acquire the land. The value of prime lots for development, along or near “Billionaires Row,” tends to fetch around $1,500 per square foot of allowable buildable space (which is set by the zoning rules), and which translates to about $18,000 per square foot of lot. I assume a relatively large lot of 30,000 square feet (2,787 meters). Cost of land: $540 million.

Step 2: Buy the air rights. In New York City, owners of lots that are less dense than the law allows can sell their unused floor area to a developer with an adjacent lot, who can then build taller as a result. Superslims would not be possible without the air rights market, as they allow developers to add more height than the zoning codes would otherwise permit. They usually sell at about half the cost of land per square foot. Cost of air rights: $97.5 million.

Step 3: Pay the soft costs: We need to hire an architect (better if it’s a “starchitect”), consult with engineers, hire a contractor, file plans, secure financing (and start paying interest), pay real estate taxes, etc., etc. In short, we must pay a series of expenses not directly related the construction of the structure itself. Soft costs: $264.1 million.

Step 4: Build the Structure. We need to hire a major General Contractor, who will deliver the building for a fixed cost plus management fee. Cost of structure: $700 million.

Step 5: Pose for pictures while cutting a ribbon. Total cost to build a superslim: $1.60 billion.

Now that we have our skyscraper, we cross our fingers and hope it will pay. With any luck, we will get back our investment and then some. To seek out an expected revenue stream, I have consulted offering plans submitted to the New York State Attorney General.

These legal documents spell out the details of the building and the expected market price for each unit. Table 1 gives four examples. The average across these four buildings is $6,800 per square foot. But recently prices have dropped somewhat given a surge in luxury units coming onto the market. Based on my conversations with an industry insider, I assume a conservative average of $6,000 per square foot, minus 6% for marketing and closing costs. Total Revenue: $2.76 billion.

Table 1: Estimated Revenues for 4 Manhattan Skyscraper Projects.
Address	Year Completed	Floors	Projected Revenue from Condos ($billion)	Avg. Projected Condo Price per ft²/m²
One57	2014	75	2.0	$4,878 /$52,506
432 Park Avenue	2015	85	2.9	$6,894 / $74,206
220 Central Park South	2018 (est.)	66	3.4	$8,318 / $89,535
Central Park Tower	2020 (est.)	95	4.0	$7,106 / $76,488

Return on Investment

In short, for the cost of $1.60 billion, you can expect to get $2.76 billion back, for a profit of $1.16 billion, a total return on investment of 73%. But, also consider that it took five years from start to finish; an average annual return of 10.9%.

Truthfully, however, this understates the return to investors. Most projects are financed with both equity and loans. If we assume that about 30% of the project came from equity, then the return on this investment would be 130% over five years, or about a 16.6% average annual return.

Without collecting data on many such projects, there is no way to know the variation in returns. That so many supeslims are being built suggests that the first crop were profitable and that developers remain bullish. But an average annual return on investment of 10.9% does not strike me as particularly high, given the risks. My estimates of the growth in land values, for example, in Manhattan in the last decade has been close to 16%. In the last five years, the average annual growth rate in the Dow Jones Industrial average has also been around 11%.

New York City is a great city because of its skyscrapers. But it does suffer from a housing affordability problem for lower income residents. In future posts, I will investigate the return on investment for housing outside the city center and what might be done to alleviate the crisis.

November 19, 2017 by Jason Barr 7 Comments

Manhattan Profits (Part I): The Economics of the Superslim Skyscraper

By Jason M. Barr November 19, 2017

In the last decade, New York has seen a resurgence of skyscrapers. In particular, has been the rise of the superslim—a super-tall, ultra-thin luxury apartment building.

The definition of a superslim comes from the ratio of the building’s ground floor width to its height. The Empire State Building, for example, is relatively chunky, with a base-to-height ratio of 1:3. On the other hand, 432 Park Avenue has a slenderness ratio of 1:15; 53 West 53^rd Street (the MoMA Tower) is 1:12; and 111 West 57^th Street (the Steinway Tower), when completed, is to have a record-breaking ratio of 1:24. 1:10 is the benchmark for a slim tower.

Why are so many being built? Simply put: profits. Whether these structures are good or bad for society at large is a controversial subject (and will be discussed in a future post). But, fundamentally, the reason for this new breed of skyscraper is the confluence of three factors.

First is demand. New York, as an economic and cultural center, draws a strong international interest. The immense wealth that has accumulated to Earth’s one-percenters has fueled investments in New York City real estate. As long as developers do not ask too many questions, the number of apartment buyers is abundant.

Second, this vast wealth has motivated developers to satisfy the particular tastes of these investors, who seek luxury and exclusivity. This has driven technological innovations that allow for the superslims.

Third, I would argue that the sine qua non of the supertall lies with the (apparently innate) desire for humans to pay more to be on higher floors. Simply put, if people did not like to live, work, or play up in the air, then the skyscraper would not exist (or at least as we know it).

The economic theory of skyscrapers says that the profit-maximizing developer would keep adding floors until the cost of providing the last floor is just equal to the additional revenue brought in by that floor. The problem is that producing each additional floor costs more than the last one, due to the need for a stronger structure, and additional plant and equipment.

Figure 1 gives examples of construction costs for Manhattan. The figure shows the inflation-adjusted cost per square foot of building area versus the building height for 28 projects built between 2001 and the present. In short, the graph shows that costs increase from about $400 per square foot ($4,306 per square meter), on average, for a 20-story structure to about $800 per square foot ($8,611 per square meter) for an 80-story building.

Figure 1: Manhattan skyscraper construction costs ($ per square foot of building area, adjusted for inflation) versus building height (total number of floors). Source: Construction costs from Emporis.com. Building height: New York City. Inflation level: Turner Construction Cost Index. Note: Total construction costs were adjusted for inflation by dividing by the Turner Cost Index. Average costs were taken by dividing inflation-adjusted building costs by gross building area. Prices are as of 2016. Trend line in red.

But what motivates developers to pay the additional costs is, in large part, the height premium. The higher the floor, the greater the price buyers are willing to pay. The height premium is like a ripe apple dangling from a tree. How to get to the apple? Build a taller ladder. The sweeter the apple the more incentive to get a taller ladder.

Figure 2 presents the example of 217 West 57^th Street (Central Park Tower), currently under construction, and which is expected to have 95 stories. The graph shows the expected income per square foot for each unit versus the relative height of the unit. More specifically, after controlling for the size and features of the each unit, the height premium rises, on average, about $34 per square foot ($366 per square meter) for each floor up.

Figure 2: Condo unit asking price ($ per square foot) versus relative floor height for 217 West 57th Street (Central Park Tower). Source: TheRealDeal.com. Note: The underlying data is the expected selling price divided by the square feet of each unit. The offering plan lists the apartment number; I assumed the relative floor was based on the first two or three digits of the unit number. Note that the building is expected to have 95 floors, thus listed floor numbers in the offering plan do not directly correspond to the actual floor level (i.e., developers tend to “add” floors as a marketing tool). Trend line in black.

In truth, there is very little research on why this height premium exists or what determines its magnitude (I’ll blog more about it in the future), but it’s safe to assume two basic elements are at work. First are the views; the higher up you go, the better the vistas. However, if this was the only factor, we would see the height premium flatten at some point, as views on the 60^th floor are nearly the same as those on the 80^th floor. So the rest is likely attributable to buyers’ desire to be, literally, placed in a more favorable position in the social hierarchy.

How Can I Help You?

So let’s say you’ve decided to park some of your vast riches in a Manhattan condo, what are the amenities you might look for?

Privacy: Ultra-thin buildings, by their very nature, only allow for a limited number of units per floor. No need to worry about bumping into pesky neighbors. No longer is the penthouse reserved only for the top floor.

Ceiling Height and Open Floor Plans. Large ceilings and rooms with no columns provide a feeling of spaciousness. A unit in a superslim provides this in spades. The reason 432 Park Avenue, for example, is able to rise so tall is because New York’s zoning rules only regulate the amount of floor area; they are silent on the height of the walls. Today’s superslims have ceilings that are some 25% higher than has been traditional, rising to 15.5 feet (4.7 meters) rather than 12.5 feet (3.8 meters). Further 432 Park Avenue was designed with no interior columns, giving each unit a large loft-like feel. Higher ceilings also means larger windows (imagine owning your viewing deck?).

Manufacturing Luxury

How is this all possible?

The Core: The building’s core, which contains the elevator shafts and stairwells, takes up a significant amount of space that would otherwise generate income. New stairwell technology reduces space usage by 10%. Plus given the super-thin nature of the structure with its low overall occupancy, fewer elevator banks are needed, adding additional living area.

Wind bracing: Superslims are super-light and subject to strong wind forces. No one wants to live in an apartment that feels like a boat in the Bering Sea. Technological improvements include large tuned mass dampers on the upper floors that act as pendulums when the building sways, providing counter forces that slow the movement. At 432 Park Avenue, there are no glass windows on the mechanical floors, allowing wind to pass through the building at regular intervals, making the structure more aerodynamic.

Rearranging Plant and Equipment: By placing the plant and mechanical equipment in the lower floors, every unit is guaranteed to have a good view.

In the next post, we will play the role of a New York developer and estimate the costs, revenues, and profits for a hypothetical super-tall superslim construction project.