Manhattan - Building the Skyline

February 21, 2022 by Jason Barr 2 Comments

Make More Manhattan: The Extended Version

Jason M. Barr February 21, 2022

Surely, in the light of history, it is more intelligent to hope rather than to fear, to try rather than not to try. For one thing we know beyond all doubt: Nothing has ever been achieved by the person who says, ‘It can’t be done.’ – Eleanor Roosevelt

Jason Breaks the Internet

On January 14, 2022, I, Jason M. Barr, broke the internet.

Narrator voice over: “He did not break the internet.”

Well, okay, maybe that’s true. But on that day, the New York Times published my guest opinion piece, “1,760 Acres. That’s How Much More of Manhattan We Need.” The internet commentariat went amok.

The piece offered a plan to expand the island of Manhattan 2.5 miles (4 km) into New York harbor to serve two purposes at once: protect Lower Manhattan from climate-change-induced storm surges and sea-level rise and to build much-needed housing. Since Manhattan land is the most expensive real estate on the planet, leveraging this value could assist the common good. The leases or sales from the new land would more than pay for the costs of creating it (see below), producing income for other programs and improvements.

And with such a large amount of new urban space, we could recreate from scratch a vibrant, diverse neighborhood for an additional 250,000 New Yorkers. The shorelines would be built with wetlands, beaches, and berms to absorb surges, and the rest of the built-up areas would be constructed at a higher elevation to keep it protected. In the process, lower Manhattan, the heart and lifeline of New York’s $1.7 trillion economy, would also be protected.

The Medium Was the Message

The plan became instant news, which produced a host of ironies that I will discuss throughout this post. But the biggest one was that if I had simply posted this idea on my Skynomics Blog, like this piece here, it would have caused barely a rumple in the space-time continuum. However, having the imprimatur of the New York Times, who accepted my proposal as worthy of being launched into the public forum, meant that the medium became the message. The act of printing the proposal became the news.

The week following its release, I was interviewed on local WPIX news, Cheddar, Voice of America, and a handful of other outlets. The proposal was covered by the Daily Mail, the New York Post, Curbed.com, and Dezeen. To one outlet, the plan was “buzzy,” to another it was “galaxy-brained,” while to yet another it was “pharaonic,” and to one, it was just plain “loco.” Alas, if the reactions taught me anything, it is that proposing big ideas in the 21^st century has become, let’s just say, impolite.

Since the Times is valuable real estate, I was required by editorial demands to keep my piece below 800 words. I now present more details along with some rebuttals to the “it-can’t-or-shouldn’t-be-done” constituency. So, dear reader, come with me on a journey about how it all unfolded and where we can go next.

New Mannahatta. A Plan to Expand Manhattan to Protect Lower Manhattan and Provide More Housing. Plan by Jason Barr.

Jason Interviews Jason

During the press interviews, the questions tended to be the same: How did I come up with this idea and what was the reaction?

How the Idea Sprang Into My Head?

The idea emerged in 2013 as I was researching my book, Building the Skyline: The Birth and Growth and Manhattan’s Skyscrapers. During that time, I came to see how from the Dutch colonial days to the present, Manhattan has been, in fits and starts, expanding its shoreline. When the Dutch settled along the island’s lower tip, they encountered lowlands like that from home. They built canals to drain the marshlands and erected retaining walls along the shorelines to fill in with new land to facilitate trade and commerce.

When the English took over in 1664, they continued making more land. In this case, they demarcated property lines extending out to the rivers where the riverbed was exposed during low tide. These “water lots” were auctioned off, and the buyers were responsible for filling them in and making them level with the street grade. The expanded shoreline was helpful for trade since ships could dock in wharves along the streets, even at low tide.

Manhattan’s expansion continued for decades so that by 1865, the lower tip of Manhattan was some 30% bigger than it had been before. It created valuable real estate and parks to help the city grow and remain vibrant. In the 1970s, the city’s last major landfill project, Battery Park City, was created from the excavated material from the World Trade Center site.

Superstorm Sandy

When I was writing my book, I was also researching the impact of Superstorm Sandy on New York real estate prices. When I viewed the surge map, I noticed that Battery Park City was largely spared from the flooding. About that time, Mayor Bloomberg also proposed in-fill and housing along the East River, which he called Seaport City, based on the Battery Park City model. It never got off the drawing board.

However, as I thought about it, New York also suffers from a housing shortage. Housing prices keep rising because the demand to live in New York outstrips its ability to supply new housing, especially for the middle- and lower-income groups. As I have documented in other posts, many parts of New York are essentially closed to building large amounts of much-needed housing. The new housing that is built tends to be in a handful of neighborhoods, primarily in gentrifying areas, where the demand keeps prices high. In essence, New York has painted itself into a housing corner.

With this in mind, I created a plan that goes big—that not only protects the city from flooding but can also make a dent in the housing market and help the city well into the 21^st century. My idea, in short, was to do a larger version of what New York has been doing for centuries. Going forward, we will spend billions on climate change mitigation; we must build more housing; and we must protect lower Manhattan. I asked myself: Is there a way to do these things more efficiently and get a return on the investment? My answer: build out Manhattan 1760 acres into the harbor.

What Surprised Me About the Reactions?

The reactions to my proposal were bifurcated: people either loved it or rejected it outright. (Also, I have not heard from the Adams administration, and I have no idea what the mayor or his aides think). I was pleasantly surprised by the number of people who appreciated its big-scale aspect. Like me, many others are frustrated by the pessimism pervading our beliefs regarding government and society to think creatively and boldly about solving the problems we face. I also learned that my plan put me in the company of those who view sea-level rise as one of our most significant national security problems.

Regarding the negativity, I know that social media trains people in Pavlovian fashion to respond in the opposite direction of a post. If Person A, Tweets “X,” then a thousand people respond with “Y.” Again, the medium is the message. Social media, which also includes online newspapers like the New York Times, amplifies our tendencies to be contradictory for the sake of being contradictory. That just comes with the territory.

Radical?

But arguably, my biggest surprise was to hear that my proposal was considered radical and even outlandish. Yes, it’s big and ballsy, but it’s an extension, literally and figuratively, of something that New York has been doing for 400 years. And just as importantly, it’s being done worldwide, right now, as you read this.

Other big cities have land shortages and coastal problems, and they are taking action. We, on the other hand, are mired in our perverse fantasies that “it can’t or shouldn’t be done.” Our lack of interest in keeping abreast of what’s going on globally helps feed our collective sense that inaction is the best way forward.

New York helped invent the megaproject in the 19^th and 20^th centuries—be it the Croton Aqueduct, the subway system, or the Manhattan skyline itself. The embracement of the megaproject made New York City the world’s greatest metropolis, and its lessons were deeply learned across the world, where today mega is ordinary, and where Asian countries are using mega to beat the West at its own game.

Land Reclamation and Shoreline Remediation Around the World

I will not fill this post with the excruciating details of how inaction on coastal flooding will continue to devastate the United States. Rather, I will give a couple of brief examples from around the world, where other countries are not only protecting their coastlines but enabling their cities to grow and thrive.

The Netherlands

The Dutch have made an art of reclamation and shoreline resiliency to protect their country against the sea and create new land for its residents. That my plan could cause such a stir in the U.S. was considered comical to the Dutch on Twitter.

In English, the word “Netherlands” literally means “lowlands” or “under-lands.” According to one study, 65% of the country would otherwise be underwater at high tide if not for the dikes, dunes, and pumps. Land reclamation in the 20^th century has added 637 square miles (1,650 km²; 165,000 hectares) to the country’s land area.

Today the Dutch are bravely dealing with climate change; they have strategies that include building beaches, shorelines, and canals to absorb floods. My plan not only allows for this but provides a way to pay for it. Sure, there are criticisms of past Dutch practices, but when a country is literally underwater, its projects are worth exploring for our own use or adaptation.

Hong Kong

Arguably, Hong Kong is the Asian master of land reclamation. When the British seized control of Hong Kong Island in 1841, they realized that there was relatively little land. Most of the city is rugged mountains with valuable strips along the coast. Officials auctioned off “water lots” to merchants early in its history, extending the island into Victoria Harbor. The practice has continued now for nearly two centuries. Today, about 6% of Hong Kong’s total area and 25% of developed land is reclaimed.

Two recent examples are informative. First was the creation of its airport. The old Hong Kong airport in Kowloon, Kai Tak, was built in 1925. Over the decades, the land around it was built up and made landing airplanes like threading a needle. It required the pilots to make a low-altitude turning maneuver before a rapid descent that “was so close to these buildings that passengers could spot television sets in the apartments.”

The New Airport

As this became unacceptable, Hong Kong built a new state-of-the-art airport. The end product, opened in 1998, was Hong Kong International, built on a large artificial island formed by flattening and leveling Chek Lap Kok and Lam Chau islands and reclaiming 3.62 miles² (9.38 km²) of the new land. This project added nearly 1% to Hong Kong’s total surface. In addition, the old Kowloon land is now being redeveloped, which, when completed, will have 30,000 new homes, including 13,000 public housing units.

Lantau

My plan calls for a new 1760 acres. A new reclamation project under construction in Hong Kong entails 1700 hectares (1 hectare = 2.47 acres). So, my proposal is positively shrimpy compared to what’s happening in Hong Kong. The tremendous housing shortage has motivated the government to pursue it.

More Details about My Plan

Returning to New York, the city will be on the hook for billions of dollars for climate change mitigation, including seawalls, berms, and shoreline expansion. Additionally, as climate change damage continues to mount, the cost to homeowners will increase and will make the housing affordability problem that much worse.

The “opportunity cost” of doing half-baked measures will, in the end, be much more expensive than embracing large-scale efforts (I will leave an analysis of these opportunity costs for a future post). And it will be the poor and marginalized who will bear the greatest burden.

So why not try to be more economical and socially helpful simultaneously? If judicially executed, the plan could not only pay for itself but also provide money to help the city in other areas of climate change mitigation and for environmental improvements. Once built out, the land would then be on the real estate tax rolls, increasing the city’s revenues.

New Mannahatta

I called the land New Mannahatta to reference Manhattan’s historical name from the Native American Lenape people. We could use the parks and shorelines to install native plants and trees to encourage the return of native birds, butterflies, and other species. Central Park today is one of the largest human-made flyways on the Northeast coast, so why not add to that? We could engage in historic preservation by referencing the historical landscape, like how we have historically preserved about a quarter of Manhattan’s real estate.

I used the Upper West Side of Manhattan (Community District 107) as a model. The reason is that it’s a highly diverse neighborhood with many types of buildings that range from old-style tenements to brownstones to high-rise apartments and skyscrapers. It has a population of 180,000 and 129,000 housing units, and I estimate it contributes $1.4 billion in real estate tax revenue each year. Though it abuts Central Park, it has an array of parks within its borders, from the 134-acre Riverside Park to several neighborhood and vest-pocket parks. The hope is that we can use this opportunity to think about adding to Manhattan’s biodiversity.

The Economics of Plan

There is an economic logic to the plan when you crunch the numbers (more details are here). First is the cost of creating the new land. The fill would likely come from dredging. I also believe that creative recycling of other inert or excavated materials from real estate construction sites in the region can be added to the mix. Battery Park City was created from landfill from the excavation of the World Trade Center site, which was comprised of 18^th– and 19th-century landfill when Manhattan’s western shoreline was expanded outward. In this sense, Battery Park City was created using recycled landfill.

The Cost

The fastest way to get a ballpark cost is to compare New Mannahatta to the Lantau plan in Hong Kong. The total cost of the 1700 hectares is expected to be about $81.1 billion (and which is cheaper than New York’s $119 billion proposed seawall), for about $19.3 million per acre. For my plan of 1760 acres, the total cost would be about $34 billion.

The Cost of Fill

Every year, the United States produces between 200 – 300 million cubic yards (153 – 229 million m³) of material from port dredging. In fact, between 2014 and 2018, ten U.S. ports alone generated over 300 million cubic yards (229 million m³) of dredged material to keep their ports functional.

Locally, in 2016 the Port Authority of New York and New Jersey (PANYNJ) completed a harbor deepening project (along with shoreline and wetland remediation). The shipping channels needed to be deepened to accommodate the larger, more efficient container ships. The PA removed 52 million cubic yards (32 million m³) of sediment, rock, and other material from the seafloor for $2.1 billion, for a cost of $40.38 per cubic yard (which by the way is incredibly high compared to the national average of $12, but it also includes disposal costs and shoreline remediation).[1]

I assume that New Mannahatta would need about 170 million cubic yards (130 million m³) of fill (roughly the average annual fill output from U.S. port dredging). Using the PANYNJ’s figure means the fill cost would be $7 billion. The rest would be used for infrastructure, creating the sheet pilings, and building new wetlands and beaches.

The Benefits

An estimated $34 billion might sound like a lot, but, literally and figuratively, it’s dirt cheap. The average real estate sale price of the Upper West Side in 2019 was $1,500 per square foot. Using a very conservative construction cost of $500 per square foot means a $1,000 “profit” per square foot that goes to the city for selling the real estate rights to developers.

Using the Upper West Side as a model, New Mannahatta, when fully built out, would have 240 million square feet of space, which could produce to the city a net revenue of $240 billion!!! Nearly an order of magnitude greater than the cost.

Let me repeat: the market value of the land would be worth $240 billion. The cost of producing it would be only $34 billion! That’s over $200 billion that could be used to make the Hudson River as clean and pure as it was in September 1609, when Henry Hudson first arrived. Even if the “profit” was “only” $500 per square foot, the net revenue to the city for building New Mannahatta would be $120 billion, still four times the costs.

Simply put, New Mannahatta makes sense because Manhattan sales prices are so much higher than the construction costs. New York has a chance to exploit and leverage this value for the greater good.

The Planning of New Mannahatta

For the sake of brevity, I will leave a more detailed treatment of an urban plan for the future, but a basic version was produced for the Times piece (my version given above). I kept the Grid Plan because I like it. It’s not great for some things, but it’s part of Manhattan’s DNA, so I think we should we keep it.

We could make blocks shorter and even add alleyways to keep trucks off the street. I added some bisectional roads à la Broadway, with one to be called New Mannahatta Boulevard. I added six internal parks, beaches and wetlands, and bike paths along the shorelines. Then there’s Governor’s Island (also a product of landfill) that would become the equivalent of Central Park. I included extensions of subway lines and places for ferries. The plan could even ban cars (but allow taxis and delivery trucks). Discussions of zoning and land use locations will be deferred for the future.

The Tiresome Tropes of the Hyper-cynical. Everybody has an excuse nowadays for why we are not allowed to think big and creatively in the 21^st century. Source: Comments about my plan on the *New York Times*.

Addressing the Comments

Let me now turn to the laundry list of criticisms. They mostly fall under five major areas, which I summarize as: (1) it’s bad for the environment, (2) government can’t be trusted, (3) whataboutism, (4) it’s a giveaway to greedy developers, (5) there are cheaper alternatives, and (6) we should just abandon lower Manhattan to the sea. Let me address these in turn.

On the Environmental Concerns

Obviously, such a project will have environmental concerns. However, the key issue facing us is: how do we protect our society and the planet in the most efficient manner while minimizing the negative side effects?

Whether New Mannahatta gets built or not (which it most likely won’t), harbor dredging will continue apace, sea-level rise will continue apace, New York City flooding (and the sewage runoff into the Hudson it creates) will continue apace, housing affordability will continue to get worse, and so on. All the while, the cost of inaction will continue to escalate.

Nonetheless, to some ecologists and environmentalists, touching the water-based ecosystems, in and of itself, is taboo, regardless of the costs that leaving them alone may impose. True, much has been done since New York lost its manufacturing base to restore what were horribly polluted and degraded waterways and ecosystems. This is to be celebrated.

But if a person’s worldview is that you can’t touch the harbor because any economic activity that impacts it is “bad,” then there’s not much discussion we can have on this issue. However, we need to be clear that this is just another form of NIMBYism, which perpetuates and exacerbates our problems. And it drives policy makers to take short cuts that could wind up causing more environmental damages in the long run.

Regardless of the you-can’t-touch-the-estuary sentiment, seawalls will be built, shorelines will be extended, and harbors will be dredged (not to mention that rising ocean temperatures will likely cause environmental and ecosystem damage orders of magnitude greater than a well thought-out reclamation project). So, no matter how bad my plan seems to environmentalists, the question becomes: which is worse, the ad hoc approaches going on now (not to mention the damage caused by doing nothing) or a plan like mine? The answer is worthy of debate and discussion.

And, before creating the new land, careful scientific modeling can be used to reduce unintended consequences and produce strategies to help the estuary ecosystems. For example, the sheet pile walls for the fill can include curves, shelves, and other habitat features helpful for marine life, in addition to the new wetland habitats that would be produced.

Galaxy-Brained?

Willy Blackmore at Curbed.com called my idea “galaxy-brained.” Why? Because Robert Moses drained marshlands in Queens that flood to this day. I’m not proposing we drain anything; I’m proposing the opposite—that we create new wetlands that leisurely extend far out into the sea.

Blackmore is under the false impression that my proposal would somehow create a new floodplain. That’s absurd. The whole point is to create something that protects the current floodplain that is Lower Manhattan, which Superstorm Sandy swamped. Due to luck and high elevation, Battery Park City (BPC) was largely spared after Sandy. It motivated former Mayor Bloomberg to generate a proposal to recreate BPC on the East River. Mayor de Blasio’s plan was to extend parks into the East River as protection. My plan is similar but adds a new housing component.

After reading Blackmore’s post, one comes away with the impression that he needs to take the stand that “it can’t be done” because he, like many, is too cynical about government to solve our problems. His logic: Since Robert Moses wasn’t an environmentalist, it naturally follows that we should not consider my plan. Robert Moses was in power sixty years ago. I think we’ve learned a few things about shoreline remediation since then. Just ask the Dutch.

On “It’s A Giveaway to Greedy Developers”

Today, the average New Yorker blames gentrification and luxury condo construction on the greedy plutocrats who are taking over “their” city. To be sure, gentrification and condos for billionaires are important issues that warrant serious policy discussions.

But in my plan, the land is created by the city itself (or its designated authority). I will hold off on a more detailed discussion but, suffice it to say, the authority would have significant control over what gets built and for whom. Perhaps the easiest way to do this is to sell off long-term ground leases to developers with specific rules on how the units must be allocated to various income groups. In short, my plan allows for a variety of real estate types for all income levels.

On Whataboutism

A whole slew of commenters reproduced the tiresome trope of “whataboutism.” This logical fallacy says: we can’t do your plan because what about some other unsolved problem in the city completely unrelated to my plan? Sure, it’s easy to focus on the failures of the various government agencies. But nearly none of these directly address my plan on the merits or demerits.

One of the reasons I’ve offered this concept is because it would be absent many of the roadblocks that gum up the works (but, of course, there are a host of others). There would be virtually no residential displacement or disruption, and the new construction would take place far away from most people’s daily lives.

On We Can’t Trust Government

As for the “we can’t trust government” complaint, I think it’s sad that we’ve become so cynical. True, leaders are not angels, and they have made many mistakes in the past. But New York has become New York because of the “partnership” between the people and its government. The government constructed the subway system, the water system, and virtually all the infrastructure we have today.

That Robert Moses did things his way was arguably problematic. But we have turned Robert Moses into the Boogeyman of Bad Government. Highways, bridges, and tunnels would have been built nearly the same without Robert Moses. Did this one man destroy neighborhoods more than the thousands of other planners who ran their highways through Boston, Buffalo, or St. Louis? Debatable.

But here we are two-thirds of a century later since the Cross Bronx Expressway was plowed through the South Bronx, and we are using Robert Moses as a shield for NIMBYism. It’s time to say: “Yes, he made mistakes, but we can and have learned from them.” The truth is that only government can initiate some kinds of projects, and we need it now to help keep the city remain successful and affordable in the 21^st century.

On There are Cheaper Options

Are there cheaper options? My answer is: indeterminate. In 2012, when Superstorm Sandy hit, the city got a loud wake-up call about climate change. When Irma recently hit, it showed the city had hit the snooze button and went back to bed. How many wake-up calls do we need before we take climate change seriously? The cost of inaction continues to mount. Half-baked measures plus the opportunity cost of these half-baked measures will likely be more expensive than creative proposals like mine.

Another frequent response was that New York should build more housing throughout the five boroughs. I couldn’t agree more. YIMBYism all the way! But the political hurdles to large-scale housing construction remain as strong as ever. Recently, Governor Hochul proposed legalizing accessory dwelling units (ADUs), and the NIMBYists fought back. Her plan has now been shelved.

Plus, just loosening the zoning and new construction rules may not fix the problem without policies related to reducing high construction and land acquisition costs and eliminating other hurdles preventing wide-scale housing construction (not to mention policies for improvements in the transportation infrastructure). I’m not holding my breath.

The point of my proposal is not that there are cheaper options (though this is debatable), it is that we should think creatively, efficiently, and holistically about solving our problems.

On Managed Retreat

One common trope is we should plan for the managed abandonment of lower Manhattan. I’ll just say that if you abandon lower Manhattan to the sea, you will put a stake in the heart of Gotham. Like it or not, Wall Street is the engine of an economy with 20 million people. If you force businesses to leave, it will start to tear apart the fabric of our society, and New York will slowly wither away (see: Detroit or Escape from New York).

What’s to Be Done?

To be honest, I don’t know if my proposal helps or harms the public discourse. We are so accustomed to automatically rejecting big ideas that my plan seems to have abetted the polarization. I’m not saying that my idea is the end all be all. But I do want it to help advance discussions about the best way forward for New York and our society more broadly.

To the knee-jerk naysayers, when a new idea is proposed in good faith, I ask that you don’t automatically reject it. Rather, think about ways to engage in meaningful dialogue that helps lead to solutions to our most pressing problems. Just because something “feels” like a bad idea, does not make it so. Perhaps you will keep this in mind the next time you post a critical comment on Twitter or the New York Times.

Sure, we may not get everything we want from new policies, but with reasoned discussion and debate, we can take control of our future and not succumb to self-defeating cynicism or become victims of our quest to preserve our own self-interest at the expense of the greater good.

—

[1] In addition, the century-old Jones Act prohibits U.S. ports from hiring international dredging companies. Today, the Dutch and Belgium have the world’s largest dredging machines which can (safely) dredge for pennies on the dollar as compared to U.S. companies. As a result, Americans pay a hidden tax on imported products because the cost of maintaining our ports is that much higher.

September 27, 2021 by Jason Barr 7 Comments

Housing Gotham (Part I): The 21st Century So Far

Jason M. Barr (@JasonBarrRU) and Sean Franklin September 27, 2021

The 1970s was New York’s darkest decade. The government nearly went bankrupt. A recession that began in 1969 triggered the loss of hundreds of thousands of manufacturing jobs. Between 1970 and 1980, Gotham’s population shrank by more than 800,000 people, while arsonists burned down entire neighborhoods.

In those years, only a true visionary could have foreseen the city’s rebound. Yet starting in the early 1990s, New York began a dramatic resurgence. New service-based industries grew in place of the old factory jobs. Crime rates fell, and the decay and despair that had marked the previous years were replaced with reinvestment and optimism.

Economic growth and a sense of security drew people back so that by 2000 the population had recovered to its earlier peak. To this day, the population continues to increase to new highs. But the laws of supply and demand, being what they are, suggest that, while the city can hold more people, it cannot build fast enough to keep up with demand. The result has been more homelessness, increasing affordability problems, and greater income inequality.

Despite these issues, the questions remain: How has New York’s housing stock changed over the 21^st century? Has it grown or shrank? If so, where and why? Which neighborhoods are punching at their weight, and which ones are not doing their part in the great housing game? To this end, we looked at changes across the Big Apple over the roughly two-decade period from 2002 to 2020 (pre-pandemic) to better understand how and where New York is housing its people.

The answers might surprise you.

Counting Houses

One of the benefits of being interested in New York City’s housing market is that city agencies have been on the vanguard of providing large data sets to the public. One is particularly relevant—the Primary Land Use Tax Output (PLUTO) file—which is online going back to 2002. The PLUTO file includes information about every tax lot in New York City and tells, among other things for each one, the building type, how many housing units it contains, the building height, and so on. The file allows for a very detailed look at the changes in Gotham’s housing supply.

Housing unit additions can appear in three ways: First is through new construction. The second is from the splitting up of extant units within a building. For example, a one-family house can be subdivided into a two-family house. Lastly is through building conversions, where, for example an old office or loft building is refitted for residential use. The critical point is that we cannot solely rely on new construction measures if we truly want to understand the changes in housing supply. A flexible housing market will depend on all three.

For that matter, there are forces that can shrink supply: Buildings can be demolished, residential units in the same building can be combined, or buildings can be converted to other uses. Thus, the net housing changes across the city depend on both the “adding” and the “subtracting” forces.

Two Decades In

In 2002, the city had about 3.2 million housing units. By 2020, that number was just over 3.6 million units, a growth rate of about 13.5%. In the same period, New York’s total population grew by about 10%. On the surface, this seems promising; the housing stock increased faster than the population.

But the difference of about 3 – 4% is problematic on several fronts. First, a healthy housing market should have a reasonably high vacancy rate, say between 7-10%. The market should have enough available units so that new people coming in and those switching their housing all have enough choices and are not duking it out over just a handful of options. Before the pandemic, the city’s overall rental vacancy rate was 3.3%, and 10.5% of rental housing was overcrowded. Furthermore, the vacancy rate for rent-stabilized units was a minuscule 2.06%, while private, non-regulated units were vacant at a 6.07% rate. Consider that about two out of every three New Yorkers is a renter, and 58% of rental units are regulated or rent-stabilized.

Second, a relatively high number of units—especially in Manhattan—are used as a pied-à-terre or second home, which remain empty for a significant fraction of the year and are not available for residents. One estimate puts that figure at 10,415 units for Manhattan. While that is only 1% of all Manhattan units, it’s another source “removed” from the local market. This issue is likely made worse by Airbnb, where visitors can soak up “slack” housing.

Household Size

Additionally, the “desired” household size has been shrinking over time. As incomes rise, people are less willing to shack up with roommates, and they want more space. Also, the composition of households is changing. The proportion of traditional nuclear families with two spouses with children has dramatically fallen. In contrast, households of couples with no children and single-person households have grown in their place. All these various demand-side changes put pressure on New York’s housing stock.

Given the overall difficulty in building, new construction appears mainly at the higher end of the market. So, the average net difference between the population and the housing stock growth might not reflect housing access across all groups. As a hypothetical example, it may be that the net growth in housing units relative to the population for the upper-income households is 10%. At the same time, for the lower-income folks, it is 1%, leaving an average difference of 4%. And while recent research shows that even high-end high-rise apartment building construction helps reduce prices, its impact on lower-income residents is less direct.

A way to understand the relative growth in the 21^st century is to look at another time in New York history when the population grew rapidly while maintaining relatively affordable housing prices. Census data from 1910 and 1930 reveal that New York City’s population grew by 45% in the two-decade period, while the number of households (our measure of housing units) grew by 78%. Prorating that to the 10% population growth seen in the 21^st century would suggest housing stock growth would need to have been at least 17% to keep prices in check (assuming, as well, that housing is broadly created for those across the income spectrum).

In short, when we consider all the forces as work, a net gain of housing units of about 3-4% higher than the population growth shows that housing supply is not matching demand across the entire income spectrum.

A Tour Across the City

What has happened to New York’s housing stock across different neighborhoods since the beginning of the 21^st century? Using our data set and focusing on the city block level, we created three categories. Category I is “Lost Units.” A block in this group had six or fewer units in 2002 as compared to 2020. Category II is “No change.” Being in this group means that the block was within plus or minus five units over the two-decade period. Lastly, category III is “Gained Units,” which means a block added more than five units. The five-units cut-off is admittedly arbitrary but seems reasonable to understand better changes in units over time: loss, about the same, or growth.

Static New York. A map of New York City blocks that lost units (dark blue) or stayed about the same (light blue). Here “same” means unit counts changed between +/- 5 units since 2002. Source: NYC PLUTO files.

We then created a map of New York City, which shows, for every block, if that block either stayed the same or lost units (the “Gained Units” map is here). In a growing and flexible city, we would expect to see many neighborhoods “share the burden” to accommodate that growth. But in fact, we see something very different. The vast majority of New York City over the 21^st century either lost units or remained about the same. Of the approximately 29,000 city blocks, 75% saw either no change or a loss of units, with 4% of those losing six or more units (14% of blocks lost one or more units–see map below). Only 25% of blocks saw an increase in six or more units. In short, the block-level analysis shows that much of the city is quite static, unwilling or unable to pony up more housing.

Loss Clusters

If we zoom into the clusters that lost housing, we can see that they are mainly in Manhattan and Brooklyn. One set of loss clusters—the Upper West Side, the Upper East Side, and Greenwich Village in Manhattan and Brooklyn Heights and Park Slope in Brooklyn—have many landmarked historical districts. It appears that landmarking residential neighborhoods is a great way to shrink the housing stock.

Likely, because of their charm and the limits to new construction, wealthier people move in and then combine units. Brownstone buildings with, say, eight apartments could be bought and converted to a single-family dwelling, or someone could buy two adjacent apartments and combine them into one. The takeaway is that while landmarking may be a way to preserve the city’s built heritage, it comes with a price: Less housing for everyone else.

The third “loss cluster” is southern Brooklyn, particularly in the Gravesend and Sheepshead Bay areas. Stephen Smith, a New York housing expert and blogger at Market Urbanism, has written on this phenomenon in the Observer. The neighborhood has emerged as an ethnic enclave for Syrian Jews, who are tearing down older two-family homes and replacing them with single-family ones or are combining lots to build one house in place of two.

The Losers of New York. Left: Maps of Manhattan Blocks that Lost More Than Two Units between 2002 and 2020. Right: Same for Brooklyn Note: Boroughs not to scale. Source: NYC PLUTO files.

What Drove Changes in the Housing Stock? A Block Level Analysis

More broadly, besides landmarking, what can help account for changes in the number of housing units, at the block level, across the city, on average? To do this, we performed a statistical (regression analysis) that looks at the factors likely to be driving changes (or not) on each block. The analysis looks at characteristics of blocks and neighborhoods in 2002 to see which are predictors of the relative changes in housing units over the two-decade period. (The data and the statistical results can be found here.)

The analysis shows that historical landmarked residential neighborhoods are “bad” for housing stock growth, as the maps suggest. For example, a block with ten landmarked properties in 2002 lost 2-3% of its housing units two decades later, on average. Interestingly, however, landmarked commercial districts had the opposite effect. Those areas that were formerly retail, lofts, or businesses, and were landmarked, saw their housing stocks grow because the insides were converted to apartments. However, the number and size of residential landmarked districts are much greater than the number of commercial landmarked districts, so the net effect of landmarking was to decrease the housing stock.

A Heavy Lifting Index

The statistical analysis lets us create a “heaving lifting index” that shows the community districts that saw significant construction. The map below shows the community districts in the top quartile for proportionally adding units, all else equal. They tend to be in the densest parts of the city (and in gentrifying neighborhoods, see below).

But within these neighborhoods, most of the increases in the housing stock came from “low hanging fruit” lots, what one might call the non-NIMBYable blocks. That is, most of the blocks that saw housing unit growth had formerly been those with many commercial/non-residential structures or were parking or vacant lots. In other words, residential districts in 2002 were more likely to lose units over the two-decade period than their more commercial counterparts. The results strongly suggest that once a block is converted to residential use, its prospects for adding more housing are bleak.

Finally, the results also show that those neighborhoods with more generous zoning provisions added more housing. Here we look at the average allowable floor area ratio on each block in 2002, where the FAR measures the total allowable building area per square foot of land. We find that, on average, a block with a 10% more generous FAR led to 1.2% more housing, all else equal. Not a huge number, but it suggests that restrictive zoning is bad for the housing supply. (We leave for future analysis the causes and consequences of rezonings on New York’s housing supply.)

“Heavy Lifting Districts.” The blue community districts were in the top quartile for adding units between 2002 and 2020, holding building and neighborhood factors constant. Source: See here.

The Gentrification Effect

One of the most contentious issues for urban America in the 21^st century is gentrification. The renewed desire for young professionals to live in the city has meant that some lower-income neighborhoods have seen an influx of high-educated, high-skilled workers. The demographic shifts in these neighborhoods have generated resentment from the old-timers, who see the newcomers as driving price increases, displacement, and changes in the character and feel of their communities.

We wanted to understand how gentrification might be driving changes in New York’s housing stock. To make matters more concrete, we define a census tract as “gentrifying” based on two conditions. First, in 2000, it had an average income in the bottom half of all census tracts in the city. Second, in the two-decade period, it was in the top half of growth in the share of college-educated residents. In short, the idea was to look at those relatively low-income neighborhoods in 2000 that saw a large influx of higher-education residents during the period (the gentrifying neighborhoods map can be found here).

The census tract analysis shows that, typically, gentrifying neighborhoods were associated with a rise in the total number of units. On average, if a census tract was classified as gentrifying, it saw an increase of about 4-6% in the number of units, all else equal.

Recent research has not found strong evidence of gentrification driving displacement. Since gentrifying neighborhoods tend to be more dynamic, the evidence suggests that higher educated folks replace the residents leaving for reasons independent of displacement. Other research has found the rise of “Yuppy fish tanks”—pockets of new construction within the historic neighborhoods. Our findings are consistent with these.

The View from 1250 Feet

Overall, what does our analysis suggest? First, the total growth in the housing stock appears not to have kept up with the demand and increase in the population. While net housing units grew about 3-4% more than the population, this has not been enough to meet New York’s housing needs.

The second is that many neighborhoods lost units over the two-decade period. Much of this loss was in historic districts. In Brooklyn, several loss pockets came from teardowns of two-family homes replaced by one-family homes. While some housing loss across the city is natural in an evolving and dynamic metropolis, the loss we see does not appear to come from switches to other vital purposes, such as for hospitals, schools, or business. Instead, the disappearance is directly tied to upper-income households removing units from the market.

Across the city, only about one-quarter of New York’s blocks added more than five units in the two-decade period. The rest remained about the same or lost units. Those neighborhoods that added their fair share did so by primarily converting non-residential lots to residential use. And much of the new construction occurred in gentrifying neighborhoods in a ring around the heart of Manhattan.

In the next post, we will turn to the relationship between supply and prices to see how they are linked (or not) in the Big Apple’s housing market.

More posts on NYC housing can be found here.

Thanks to Jenny Schuetz for helpful comments on the post.

September 16, 2020 by Jason Barr 8 Comments

The Skyline versus the Sprawl-line: CO2 Emissions and Building Types in New York City

Jason M. Barr September 16, 2020

Hong Kong on the Hudson?

When we think of New York City, we think of Manhattan and its supertall skyscrapers. As a result, we believe that New York is one of the densest places on Earth: a Hong Kong on the Hudson. And yet, craning our necks upwards diverts our attention from another fact. New York is not very dense at all when you look towards the horizon. Once you get out of Manhattan and past the historical outer-borough neighborhoods, you will find a distinctly suburban city. The landscape comprises block after block of one- and two-family homes, strip malls, and wide, car-friendly streets. New York is thus a tale of two cities—the skyline and the sprawl-line.

An Urban Greenhouse?

The “competition” between density and sprawl leads us to the question of which is worse for the environment, and greenhouse gas (GHG) emissions, in particular. Skyscrapers are frequently criticized as emitting too much CO₂—their size and heights make them particularly carbon-intensive. Because their facades contain broad surface areas of glass, they absorb a tremendous amount of sunlight, which means higher cooling needs, and more greenhouse gas emissions. Additionally, running elevators, with heavy steel cables, is energy-intensive; the taller the building, the more CO₂ production from vertical transportation.^[1]

But when one discusses the carbon footprint of tall buildings, it’s vital to distinguish between the building itself and the occupants. Even the most efficient structure may be carbon-heavy if those inside use excessive amounts of energy. All else equal, wealthier households will consume more than lower-income ones, generating more carbon from their lifestyles. It is necessary to try to hold all things equal, if possible, to understand the impact of building heights per se.

Will the Real New York Please Stand Up? Top: The Skyline of Manhattan. Bottom: The Sprawl-line of Eastern Queens.

Plastics, Benjamin

But, of course, free-standing houses in the suburbs have their problems. Since they are relatively large, they tend to have fewer people per square foot, requiring more electricity and fuel per person. Additionally, people who live out in the city’s less dense place are more dependent on their automobiles. Crave a pint of Ben and Jerry’s Cherry Garcia at 11:00 pm? You have to jump in your vehicle to get to the local supermarket. Need to get to work? It’s more convenient to drive since public transportation is thinner or less efficient out in ‘burbs. In this way, suburban homes are inherently linked to automobile transportation. You can have suburbs without cars, and perhaps you can have cars without suburbs.

Average Annual Household Carbon Foot Prints (metric tons) by Zip Code in New York City. Note, that on, average, household emissions tend to rise moving out from the center. Source: Jones and Kammen (2013).

The Efficient City

When discussing the trade-off between height and sprawl, however, we first must begin with a discussion of what urban form “should” look like if a city is going to efficiently allocate its valuable land to different uses. While much of city planning is about trying to arrange the city into neatly compartmentalized zones, economists have shown that cities are pretty good—though not perfect—at self-organizing themselves so that land is used in the best manner as possible.

The economics of urban form begins with the idea that land, as private property, is bought and sold in the marketplace. The question is, who pays for it, and at what price? To make things simple, let’s “anchor” the city with a central business district. Here land values are the highest. The reason is that businesses need to cluster together to perform better. Finance firms must be down on Wall Street. Marketing firms need to be on Madison Avenue, and so on. And they pay for the right to be there.

In general, the fundamental location decision for professional service-oriented businesses, who earn the lion’s share of the city’s income, is whether to remain in the cluster or not. Before the COVID-19 pandemic, midtown office rents averaged around $80 per square foot ($861 per m²). A firm could leave the center and save a lot of money. Office rents in downtown Newark, New Jersey, or Stamford, Connecticut, by comparison, are about half of that. But at what price? At the cost of losing an international reputation, access to the high paying clients, and a more skilled labor pool.^[2] In short, firms in the center pay to play.

The Commute

These business districts draw workers who commute from their homes. For the most part, employees cannot pay more in rent than their employers, so most folks reside outside the business districts. But far away is the vital question. Here the decision, again, involves a trade-off. The longer the commute, on average, the cheaper the housing, since its less convenient. If you want a three-bedroom, two-bath house with a backyard, you need to expect to be traveling up to an hour to work each way.

That’s the fundamental trade-off that generate the city’s basic “spatial structure,” where people typically live and work (with the recognition that we are abstracting here for simplicity). High prices in the center generate high land values that naturally produce taller buildings, which at their heart, are an efficient use of land. Similarly, larger houses in the suburbs represent the perks of living further away—people get more space, both inside and out. Thus, even suburban living is usually an outcome that reflects households’ preferences and can be an efficient land use.

The Externalities

But, of course, the story does not end there. In the central city, tall buildings can generate negative “externalities”—unintended side-effects. The most cited ones are crowded streets, shadows, fears of gentrification, and the emission of greenhouse gases. On the other hand, sprawl also has negative impacts, including traffic congestion, racial and ethnic segregation, and greenhouse gas emissions from larger houses and extra driving.

The problem of externalities that one person’s decisions about where and how to live frequently do not consider the impact on others. When was the last time, for example, that you decided not to drive your vehicle because you feared that you would slow down other drivers when you got on the highway? If you and others thought that way, there would probably be no rush hour traffic! Or have you ever decided not to use your car one day simply because you knew that gasoline combustion produces a slight amount of odorless, colorless carbon dioxide that would enter the great flow of air that covers our planet? Not likely.

The point is that sometimes in life, you make a decision that impacts other people in a nearly imperceptible way. However, when thousands of people are doing this, the outcome is strongly felt—in this case, through rising temperatures and more erratic and dangerous weather patterns from CO₂ emissions. So which kind of living—in the skyline or along the sprawl-line—is worse for climate change?

CO₂ Emissions versus Building Form. Top Left: A scatter plot that shows a u-shaped relationship between the average number of residential building floors in a zip code and average household CO₂ emissions. Top Right: A scatter plot that shows a u-shaped relationship between each zip code’s floor area ratio (FAR)–a measure of building density–and average household CO₂ emissions. Bottom Left: This scatter plot shows the relationship between average household CO₂ emissions and average building height per zip code, with the impacts of driving behavior and income removed. In short, it shows very little relationship between the two after controlling for consumer behavior. Bottom Right: This Scatter plot shows average household CO₂ vs. residential FARs after removing the impact of driving behavior and income. Again, it shows little relationship between the two. Data source and analysis: here.

Carbon Production in New York City’s Housing Market

To answer this question, we need to investigate how residential building types affects greenhouse gas production, controlling for, or holding constant, other factors that might get in the way. To this end, I combined two data sets to analyze this question for New York City (the details and analysis can be found here). One part has the estimated average household CO₂ production for each zip code. The other part comes for the NYC Department of City Planning and contains information about building heights and floor areas.

To see the impact of building form on GHG emissions, I performed a statistical (regression) analysis that looks at how average zip code building heights and floor area amounts impact GHG emissions, holding, other factors constant. First, the results show that, on average, without controlling for household income or driving behavior, there is a u-shaped relationship between heights or building areas and GHG production. The worst emitters live in free-standing houses in the suburbs and supertall buildings in the center—though the suburbs are worse in this regard (see the figure below).

However, after one removes the impacts of CO₂ emissions from income and driving behavior, the relationship between building form and GHG emissions diminish greatly. General consumption patterns are are more important than if the unit is in the clouds or on the ground. In other words, the key to knowing whether a structure is GHG-efficient or not is to focus on two things: the average housing square foot per person in a neighborhood and its location relative the central city. Manhattan is much more energy-efficient than the other boroughs because people do so much less driving and live in smaller units.

The Right Policies

The lessons from this analysis are that, regarding household carbon production, building shapes matter less than income, driving frequency, and the amount of space that households occupy. As I have discussed before, the right policies need to be tied directly to consumer behavior and reducing dependence on automobiles (or getting rid of fossil fuels to power engines). Nonetheless, there are many in the planning community who advocate for “Goldilocks Density.” The perfect density—like New York’s Greenwich Village—they argue, should be imposed by fiat across the city. These areas have dense populations, but many lower-rise apartment buildings. The results of the analysis here, however, suggest that the theory of Goldilocks Density is misguided. Proponents look at the u-shaped CO₂-building density curve and conclude that all places should have a residential floor area ratio (FAR) of three. But this like using a hammer to solve all carpentry problems.

The urban spatial structure that naturally emerges from countless individuals’ decisions reflects their choices in the faces of various trade-offs. Yet sometimes these decisions generate externalities. The solution is to make producing the externalities more expensive so as to reduce them without fundamentally altering the freedom of individuals or households to make choices about what works best for them. While the suburbs may be stultifying to some, to others, it is paradise. At the same time, people who drive and consume big houses need to pay for the harm they impose onto Planet Earth. Similarly, living on the 50^th floor of a skyscraper may offer incredible views, but the carbon generated must be paid for. In the end, maybe some new towers will not be as tall, and some new suburban houses will not be as palatial, but they will remain if they provide people with a more rewarding life.

Read other blog posts on cities and climate change here.

I am grateful for valuable research assistance form Shaojie Wang and Ujjaini Desirazu.

[1] Another issue not addressed in this blog is that carbon emissions from the construction sector and the production of CO₂ in manufacturing materials like concrete or steel. Skyscraper construction might produce more carbon on a square foot or square meter basic because it uses more materials and requires more machinery. As discussed in the conclusion, policies should be designed to tax carbon-heavy manufacturing and incentivize those processes and materials that generate less CO₂.

[2] This is not to say that some jobs can’t be outsourced or done from m home, but the vital, knowledge-based jobs, and the spontaneous productivity that emerges from being at the same place at the same time cannot be outsourced.

August 17, 2020 by Jason Barr 4 Comments

Boon or Boondoggle? The Long Run Economics of the Empire State Building

Jason M. Barr and Gabriel Ahlfeldt August 17, 2020

The Bricks of Ego

When most people look up at supertall skyscrapers, like the Burj Khalifa or the Shanghai Tower, they assume they have been constructed for irrational purposes. The most common belief is that they are built by ego-driven developers seeking to build monuments to themselves.

This certainly seemed like the case in 1931, when the two developers of the Empire State Building, former New York governor and 1928 Democratic presidential candidate, Al Smith, and retired General Motors executive, John J. Raskob, built the world’s tallest building. Raskob was motivated, in part, by a rivalry. He “wanted a building that would literally and figuratively put Walter Chrysler’s building in the shade.” If there was ever a structure built with the bricks of ego, it was the Empire State Building.

And in May of 1931, when the building officially opened, New York real estate was in free fall. As the city entered the Great Depression, people scoffed at Smith and Raskob’s folly by calling their beast, “The Empty State Building.” The vacant offices and negligible cash flow only confirmed what everybody already knew—supertall buildings don’t pay.

But this historical perception begs two questions. First, from the point of view of August 1929, when the developers were establishing their plans, were their decisions really so foolhardy? And second, what has been the long run economics of the building? Nine decades later, the Empire State Building remains a beloved icon. It is one of the most popular tourist attractions in the world, and the skyscraper is part of New York’s identity and heritage. How can we resolve the historical accounts of it being a lemon with our current perceptions of it as lemonade?

From Astor to Empire

Before the Empire State Building existed, the site, at Fifth Avenue and 34^th Street, housed the world-famous Waldorf-Astoria Hotel, which, since 1893, was receiving wealthy guests and holding lavish parties for the scions of the Gilded Age. In December 1928, Bethlehem Engineering Corporation purchased the lot, when the Waldorf-Astoria owners decided to construct a new 47-story hotel on Park Avenue and 49^th Street.

However, Bethlehem Engineering had trouble securing full financing for a new building; they then sold the lot to an investment syndicate, led by the Chatham-Phenix National Bank and Trust Company. Al Smith was familiar with the deal and pitched the idea of bringing in Raskob, also his former presidential campaign manager, to buy the lot and build a skyscraper.

Interestingly, the original plans for the site produced by Bethlehem Engineering was a 50-story structure that contained offices and loft space, which was more in line with the neighborhood’s character. Situated close to Penn Station, the district was home to hundreds of designers, manufacturers, and sellers of clothing for the local and national markets.

In August of 1929, Smith publicly announced the plans for the Empire State Building, with a crisp height of 1,000 feet (305 meters). The hope was that the skyscraper would help spur redevelopment of the neighborhood from a dingy industrial quarter to a shiny new corporate sector. After Walter Chrysler topped out his building in October of 1929, Raskob and Smith thought up the idea of adding a mooring mast to allow for the docking of dirigibles; this extruded the building’s height to 1,250 feet (381 m), 200 feet (61 m) higher than Chrysler’s building. No airship captain ever dared the landing.

Three Skyscraper Plans. Left: original plan for the ESB site—a 50 story building for lofts, showrooms, and offices. Middle: the original 80-story design for ESB before the addition of a mooring mast and observation decks. Right: a hypothetical skyscraper on 42^nd Street designed in 1929. Note that the setback style common to all three was due to the 1916 zoning codes. Sources: see here.

The 1929 Analysis

History has scoffed at Smith and Raskob for placing some two million square feet (185,806 m²) of office space on the market when the city’s economy was crashing. But from their point of view, in the summer and fall of 1929, when they were at the drawing board, what did the economic landscape look like then? Was their thought process really so irrational?

To answer this question, we need a benchmark. For this, we turn to the findings of authors W. C. Clark and J.L. Kingston (CK). In 1930, they published their book, The Skyscraper: A Study of its Economic Height. They play the role of a hypothetical developer of an office skyscraper in Manhattan, on a large lot directly across from Grand Central Terminal on 42^nd Street. In fine-grained detail, they itemize the various costs and revenues from erecting a building with varying heights, to identify the one that maximizes the return on the investment.

Based on their calculations, they found that the profit-maximizing height was 63 stories, with a 75-story one a close second. When we start comparing the costs and revenues from their hypothetical 63-story project to the Empire State Building, the differences between the two seem relatively minor. From the point of view of August 1929, the Empire State Building had a strong economic rationale, even if its height was not profit-maximizing. While the building became higher over the ensuing months, the total amount of office space stayed about the same.

Apples to Apples

Let’s turn to this comparison (for data analysis, sources, and notes see here). First is the size of the lot. To make the economics of a tall building work, a large lot is needed. In the CK case, their lot was 81,200 square feet (7,543 m²). The ESB lot is 91,351 square feet (8,487 m²), some 13% larger. Second, the cost of each lot was similar. CK estimated $200 per square foot for the land, while ESB the lot was bought for $175 per square foot.

The ESB has a gross building area of 2.8 million square feet (260,129 m²), whereas the CK building was to have 2.4 million square feet (222,967 m²)—each with a similar floor area to lot ratio. That gave a construction cost, on a square foot basis, for CK of $8.79 ($91/m²) versus the ESB of $7.93 ($85/m²). Turning to revenues, again Smith and Raskob were not unreasonable in their estimates, which they assumed would average $3.37 per square foot of office space ($36/m²), and was comparable to CK’s estimate of $3.81 per square foot ($41/m²). The difference seems justifiable given that the CK building was directly across from Grand Central Station.

Return on Investment Analysis for the Empire State Building and Hypothetical Skyscraper on 42^nd Street. The data for the ESB is for the original plan, before its height was raised some 200 feet. *Note that 80 stories was the original height. Today the building is 102 stories, but with 85 stories of offices, the rest are the observation decks and the mooring mast. Sources: See here.

When one does all the apples-to-apples comparisons, the best CK building had a return of 10.25%; their 75-story structure had a return of 10.06%. The estimated return from the Empire State Building comes in at 9.54%, which would offer the typical investor a more-than-satisfactory return. Also, keep in mind, these calculations were made without the observation deck, which, when included, would most assuredly have made the ESB a better investment than the CK structure.

The Market Value of the Empire State Building

What seemed reasonable at the time, of course, quickly became unreasonable, and was seen by the wider public as an example of irrational decision making. Smith and Raskob faced no shortage of troubles keeping their building during the Great Depression. With help from their wealthy backers, they persevered and made the best of a bad and stressful situation. But here we are nine decades later. What have been the long-run returns? Has it turned out to be profitable, and, if so, how does it compare to other investments from 1931 to the present day?

There are several ways to try to answer this question. For the sake of brevity, we are going to focus only on one approach–tracking the building’s sale price or market value over time, relative to the initial cost of construction. This is like looking at the returns to buying a home—we pay an initial price, and then down the road, we hope to sell it for a higher price. Market values reflect the underlying economic value, which, in this case, is the flow of profits from the skyscraper. Thus, we look only at the capital gains of the building over time, ignoring any profit payouts to the investors. This is also similar to tracking the value of the stock market, without worrying about dividends.

1951

Al Smith died in 1944, and his stake was taken over by Raskob, who continued to run the building until his death in 1950. His estate then sold it to a syndicate, which paid $51 million. The New York Times reported that the sale “was said to be the highest price ever paid for an office building.” And offered up that, “The structure…is now reported to be one of the most profitable single building operations in the world.” Also, about the same time, a 222-foot TV-radio tower was placed atop of the mast and was expected to bring in an additional $1 million in revenue per year. Not bad for the Empty State Building.

1961

Beginning in 1961, things got very, very complicated, with several different organizations having a piece of the ownership action (including through very long-term leases and subleases). In that year, for example, only the building, but not the land, was sold for $65 million. The land had been purchased by Prudential Insurance for $17 million back in 1951 (this was similar to the 1929 land price of $16 million). So, if we assume the building alone in 1951 was worth $34 million ($51 million – $17 million), then the net gain was from $34 million to $65 million, a near doubling in value in only a decade.

Market Value of the ESB versus the Stock Market (S&P Stock Index). This graph shows only the capital gains portions (and excludes any dividend distributions). Note that between 1931 and 1985, the two indexes tended to track together. Source: See here.

The 1990s

In 1991, Prudential was seeking to sell its share. This prompted the New York Times to get estimates of the true market value. It reported, “If it could be sold outright, unencumbered by the leases, the building would have a value of $600 million to $800 million in today’s real estate market”—a hearty gain over the previous three decades.

In 1994, Donald Trump, working with Japanese investors who bought Prudential’s stake, aimed to wrest full control away from the other owners. This was only possible, however, by suing them. In the end—not surprisingly—he failed. The foreign investors, who put their faith in Trump, lost on the gamble, while Trump walked away with substantial brokerage fees.

In the 21^st Century

In 2002, after nearly seven years of suits and counter-suits, complete ownership fell into the hands of Peter L. Malkin and his partners. Malkin, along with real estate mogul Harry Helmsley, had been involved with the building since 1961. In 2013, Malkin took his real estate holdings public by forming a Real Estate Investment Trust (REIT). At the time, the Empire State Building was worth around $2 billion. And, in 2019, the ESB had a market value of $2.3 billion. In short, over the very long run, the average annual growth rate for the market value of the Empire State Building has been about 5.3%.

It’s also worth noting that, on average, the value of the ESB and the stock market tracked each other for many years. After 1985, the two began to separate, with the stock market going on to greater heights; perhaps this says more about corporate stock prices than New York real estate.

The Mooring Mast and TV & Radio Antenna of the Empire State Building, circa 2000. Photo by Jason M. Barr.

Visions of Grandeur or Grander Visions?

The conclusion here is that, in the long run, the final ego-based version of the Empire State Building was likely more profitable than the more mundane office building originally envisioned by Smith and Raskob. The 1,250-foot tower, with its mooring mast, has provided a greater aesthetic elegance and allows for its famous light displays. Adding the observation deck has been a boon to both the building owners and the world (in 2017, the observatory had 3.9 million visitors who paid a total of $124 million for tickets). Its height also made it ideal for a large TV and radio antenna, which is profitable to both the building owners and society.

Though Smith and Raskob’s projections for office income might have been too rosy for the times, they were certainly not irrational, given that they assumed higher-end corporate clients would use the building. The Great Depression was a financial tsunami that no one could have foreseen and should not be used to judge the structure’s economic merits.

Ultimately, the real enemy of the Empire State Building was not the depression, but rather the slow, inevitable forces of economic change. After World War II, corporate America had a strong preference for larger floor plans and greater light exposures. The Empire State Building was arguably one of the last great old-style office buildings with smaller floor plans and narrower windows. Additionally, the building remained too far south from the heart of midtown. After the war, the new office skyscrapers were built further north of Grand Central Station. Today the Empire State Building remains a lonely giant in the historical retail and garment center.

Nonetheless, while Smith and Raskob struggled to make their building pay in the early years, it’s safe to say that what seemed, at the time, to be visions of grandeur, was, in the end, a grander vision.

More blog posts on the Roaring Twenties and New York City real estate can be read here.