real estate

March 17, 2020 by Jason Barr 11 Comments

In a City FAR, FAR Away: Building Height Regulations and Their Impacts

Jason M. Barr March 17, 2020

Your New Job

Imagine the governor of your state announces that she is going to create a brand-new city out of whole cloth. The state has purchased 200 square miles (519 km²) of farmland (around the size of Chicago) and will begin auctioning off lots for development. The governor is working with officials to build the transportation and infrastructure network. But she has turned to you with a critical mission: to formulate the regulations about building heights. Your job, as Chief Building Heights Planner, is to develop a series of plans about how dense or tall the structures can be throughout the city.^[1] Where should you begin?

Options

You can think of the possibilities as existing along a continuum. On one side is to write no rules and allow buildings to be as tall or as dense as developers want. If someone builds a 100-story skyscraper in the middle of a leafy residential neighborhood, so be it. If builders cover 100% of the lot and put their neighbors in darkness, that’s okay too.

The other extreme is to order the city entirely. Say you build a 3D model in your office and arrange the exact scale, density, and height for every structure. There can be no deviation. Building #1 must go here and must be so many stories. Building #2 must go there and have exactly so many floors, and so on.

Option three, of course, is somewhere in between, where you designate some rules on height and density, and let the real estate community figure out the rest. But even within this option, there’s a wide spectrum. Do you set limits for everyone? Do you restrict hieght in some places but not others?

What Do these Four Buildings Have in Common? All of these Brooklyn structures have a floor area ratio of 3. Clockwise from top left: 181 Clermont Ave (2007, 6 floors), 761 Atlantic Avenue (1974, 31 floors), 109 3rd Avenue (1900, 4 floors), 1630 41 Street (1926, 4 floors). Source: OASIS NYC Map.

How FAR Can You Go?

After doing a little research, you find one popular regulatory tool is to limit the so-called floor area ratio (FAR).^[2]The FAR dictates how much building space can be constructed based on the lot size. For example, in an older (pre-car) dense apartment-based neighborhood, the rules might specify a maximum FAR of 3. This means that on a 2,000 square foot (186 m²) lot, the most a new building can have is 6,000 square feet (557 m²) of living space.

If we assume, for example, that each household in the building rents 600 square feet (58 m²), then that building will have ten units. A FAR increase to 4, means the structure can be 8,000 square feet (743 m²), with 13 units. If each apartment, on average, holds two people, the FAR-3 building has 20 people, and the FAR-4 building has 26 people.

Building Heights

FAR limits say little about building heights directly. In a FAR-regulated city, the height is chosen by the developer, based on what works best for her. In the FAR-3 example, she can build a three-story building that takes up the entire lot, or she can erect a six-story building that covers only half the lot. Yet both will hold the same number of people.

Thus FAR limits mean that building bulk and height are substitutes—the taller the building goes, the narrower it must be, with more open space surrounding. This strategy presumably mitigates the negative impacts of tall buildings, such as shadows on neighboring properties. For these reasons, FAR regulations are popular among planners. They are a simple way to reduce the density of both people and buildings.

Wheel of FARtune?

By how do planners choose the “correct” FAR values across the city? The answer is: they just pick numbers that seem right—usually some higher numbers in the central core (say 8 to 15), medium numbers in the dense residential rings (say 2 to 4), and much smaller figures further out (typically one or less). These values are often based on what “feels” appropriate, or are politically salable, and are not tied to any economic research that attempts to weigh the costs of restrictions versus their benefits. A survey of maximum FARs in central cities around the world shows that planners have chosen a wide range of numbers. Their arbitrariness is also supported by the research discussed below.

Average Maximum Allowable Floor Area Ratios Versus Distance from City Center for New York, Chicago, and Bengaluru. For each city, I took the average of the maximum allowable FAR for buildings in 1 kilometer rings from the center city. In New York, the average allowable FAR within 1 KM of the center is about 9. For Chicago, it is about 12, and in Bengaluru it’s about 1. Sources: New York: NYC PLUTO, Chicago: Building footprint shapefile, Bengaluru: Breuckner and Bertaud (2005). Note: Average FARs were not weighted by lot size.

FARnomics: The Economics of FAR Regulations

Recently, economists have begun to question the wisdom of choosing urban FARs based on planners’ notions of what constitutes the “good” city. Economic analysis about FAR regulations starts with a series of questions: What would density look like without any FAR limits? Under what conditions would restrictions help improve city well-being? When would FAR restrictions make things worse?

The Order without the Design

As Alain Bertaud discusses in his 2018 book, Order without Design: How Markets Shape Cities, a bustling metropolis without any FAR restrictions will generate a natural order. In the central city, where land values are high, developers will be incentivized to provide taller builders on relatively small lots. As land values decline moving away from the center, buildings will get shorter, on average.

A well-functioning land market will also create a predictable pattern for population density. Near the center, where land is expensive, households will live in apartment buildings. Further away, where lots are cheaper, people will occupy larger houses. Thus, density will be high near the center and fall from there. This outcome is based on the choices of households and represents what they prefer—better accessibility to the center versus more housing and open space further away. The price of land is the nexus between what households want and what kinds of real estate will be constructed. Overly burdensome regulations will distort land prices and prevent them from efficiently allocating housing demand with housing supply.

Key Assumptions

The optimality of this natural order is based on a few assumptions. First is that there are no negative spillovers or externalities from this arrangement. That is, the tall buildings in the city don’t create excessive shadows, promote hyper-congestion, or generate undue health or social problems. Additionally, economists assume that residents or visitors are indifferent to the building designs and shapes that would spring up when the real estate market is relatively open. Tall or dense buildings, it is assumed, don’t offend people’s aesthetic sensibilities.^[3]

The presence of these possible harmful elements has been the driving force and justification for imposing FAR restrictions. City officials argue they are necessary to relieve congestion, provide open space, improve urban health, and make the city “beautiful.” But the economist would respond: if this is so, what are the “right” set of restrictions (assuming that restrictions are the best way to solve these problems) that best balances the trade-offs. The truth is, as of this writing, no one knows. The proper calculations have yet to be done.

The Case of New York

Take New York City as an example. The city’s FAR-based regulations were enacted in 1961. They were designed to reduce density as compared to the 1916 zoning codes, which were seen as not being restrictive enough. While small FAR changes (rezonings) in different neighborhoods occur from time to time, there has been no systematic change in the regulations in over half a century. In other words, the same FAR codes, more or less, are in effect today as when John F. Kennedy was President and when The Andy Griffith Show was one of the most popular TV shows in the nation. (If you’re young enough not to know what I’m talking about then I think I’ve made my point.) Once FAR regulations are imposed, they are nearly impossible to dislodge, despite mounting evidence that they are harming the city.

Furthermore, in 1961, when these regulations were set, planners with who felt that promoting the tenants of modernism was surely the path to urban utopia. Clearly, by 1975, when New York City was ready to declare bankruptcy (see “Ford to City: Drop Dead”), utopia was on the minds of few. Sticking with these outdated zoning rules is like trying to use a Commodore 64 computer to process “big data” data.

Estimating the Impacts of FAR Regulations

Recently, however, the urban economist Jan Brueckner, of the University of California-Irvine, and co-authors have studied the impacts of FAR restrictions around the world. His research asks the question: What are the costs of excessive FAR restrictions, imposed in the name of improving the common good?

Bengaluru (Bangalore)

Indian cities have some of the lowest central-city FAR values in the world. Planners have established them, evidently, as a backdoor way to impose their notion of a better city, and because officials couldn’t provide the city services needed to support a dense urban core. As Brueckner and Bertaud (2005) write, “It is believed that ‘excessive’ density results in a loss of environmental quality and increased traffic congestion. In addition, higher densities would place greater demands on urban infrastructure, which Indian cities, plagued by weak technical capacities and inadequate tax revenue, feel ill-equipped to provide at appropriate levels.”

Unlike New York (with a maximum central-city FAR of 15), and Shanghai (with a maximum central-city FAR of 8), Bengaluru has a central-city FAR capped at less than 1.5. This number is considered reasonable for a suburban residential neighborhood of garden apartments, but absurdly low for a central business district in a metropolis with 8.4 million people.

Maximum Allowable Floor Area Ratios in Central Areas for Selected Cities. Source: Brueckner and Sridhar (2012).

In their paper, Brueckner and Bertaud explore the economics of these excessive restrictions. They demonstrate that these FAR limits promote denser development in the suburbs than would otherwise be the case, and create larger, more sprawling cities. The attempt to limit building heights in the center to reduce congestion inadvertently creates more congestion by promoting more driving. If we think about the (lightly-regulated) city as a block of clay. The draconian FAR restrictions are tantamount to smashing the clay. The result is a flatter, wider entity.

They perform some calculations for Bengaluru, and find that the excessive sprawl reduces average household income from extra commuting by 2%. It’s also worth noting that, in recent years, Bengaluru has achieved an international reputation as a tech hub. Limiting densities may have other consequences, such as reducing the opportunities of firms and workers to interact and learn from each other. These restrictions are likely reducing citywide productivity than otherwise.

101 Indian Cities

In a 2012 paper, Brueckner and his collaborator, Kala Seetharam Sridhar, investigated the impact of FAR restrictions on urban sprawl for 101 municipalities throughout India. First, they find a wide distribution of maximum central-city FARs. The lowest city has 1, and the highest has 4.125. The average city in the sample has a central-city FAR of 2.87. Again, compared to other cities around the world, these figures are low.

They next study how these FAR restrictions impact the total land area of municipalities, which is a measure of urban sprawl. Based on their analysis, they conclude that if the average city in India raised its central-city FAR by one unit (e.g., go from 2 to 3), the, it would need 20% less land area to hold the same amount of people. Or, on the flip side, on average, a city that decides to lower its central-city FAR by one is generating an increase in its land area by 20%.

Land Values in China

A well-functioning land market is the main means by which the city orders itself. If land values rise at a specific place, it signals that the residents want taller buildings. If FAR regulations are overly tight, they can lower the value of land, which will then generate buildings that are economically “too short,” denying residents the opportunity to live and work in the location of their choice.

Brueckner, and his co-authors, Shihe Fu, Yizhen Gu, and Junfu Zhang, study the land market in China. Unlike the U.S., there is no private property. Instead, all the urban land is “owned” by the respective municipal governments, who sell long-term leases to developers (70 years for residential and 50 years for commercial). The revenue from these land-leases is used to fund infrastructure and other government projects.

Because municipal officials control this land, they can impose FAR regulations on the developers when they win the right to build. We tend to think of modern Chinese housing as mostly dense, high-rise apartments. This is true, but municipal officials frequently require developers to adhere to relatively low FARs of between 2 and 3. The effect is to create a Corbusian city of tower-in-the-park complexes.

Findings

To study the question of how these FAR restrictions impact land (lease) values, they constructed a very large data set with over 50,000 transactions across more than 200 cities from 2002-2011. Each land-lease transaction also includes the maximum FAR requirement. Across cities, they find that the average residential FAR is only about 2.4.

The authors also find that the higher the FAR restrictions, the greater it reduces land values. Loosening these restrictions would allow land prices to more accurately reflect the benefit of various locations throughout the city. The results suggest that the current FAR values are actually not allowing central locations to be as dense as residents would want.

The Trade-offs

Since Chinese officials lease the land, one would think they have the incentives to provide even looser FARs to increase their revenue streams. However, local leaders must balance the revenues from these land leases with the costs of building infrastructure. So the FAR restrictions may not only be related to notions of sound design principles but also limiting urban density growth to something that will not overly burden the current level of infrastructure. Or, as Brueckner et al. hypothesize, “In this sense, local officials behave as net revenue maximizers, taking into account the public costs associated with land development into account.”

However, if city size or budgetary issues were important than the data would show a relationship with FAR restrictions. But, based on their analysis, they do not find evidence that this is so. Instead, they find little explanation for FAR stringencies across China, aside from the fact that places with ancient historical sites are stricter. Their results seem to indicate that FAR limits are based on the preferences of city officials rather than on underlying economic principles.

High-rise living in four Chinese cities. Clockwise from top left: Shenzhen, Changchun, Shanghai and Hong Kong. Photos by Jason M. Barr

Land Values in the United States

Brueckner and his co-author, Ruchi Singh (2020), study land values and FAR stringency across U.S. cities. The lower the average allowable FARs, the lower the land values are likely to be, and hence the greater is the “gap” between what residents want and what developers can supply. In particular, they investigate how FAR regulations impact land prices in New York, Chicago, Washington DC, Boston, and San Francisco from 2000 to 2018.

Their analysis allows them to estimate the gaps. They find that New York City is supplying only about 70-77% of the demand. For Washington DC, this number is between 60 to 72%, which makes sense given that DC also has height caps. Boston is supplying around 78 to 83%. And Chicago is at 92 to 94%.

Interestingly, they find that San Francisco’s gap is only between 90 to 93% of what the market wants. Their findings are likely being driven by the relative stringency in each city’s central business district. The demand to live and work in Manhattan is quite strong.^[4] Unlike San Francisco’s business district, which “competes” with Silicon Valley, Manhattan has few direct local competitors for its financial and tech services. Similarly for Chicago and Boston.

What Would you Do?

I asked Professor Brueckner to summarize the findings from his body of work. He indicates that, in short, city planners should be careful for what they wish for. He says,

FAR limits reduce housing supply, raise prices and lead to longer commutes. If there are no good reasons for the restrictions, such as better neighborhood ambience, the outcome is a loss for city residents.

As Brueckner’s research shows, the path to getting things right begins with measuring the costs of excessive restrictions. Not going too far with FAR stringency can help a city reduce the negative impacts of density, without eliminating or reducing its benefits. And now, with this in mind, what have you decided to do in your role as Chief Building Heights Planner? If you want to take a look at my planning ideas, you’ll have to stay tuned for a future post on the subject.

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[1] You will be part of a team that is developing other rules, including building codes, requirements for health and safety, as well as regulations about land uses. Your decisions will be made in consultation with them.

[2] “Plot ratio,” “floor space ratio,” “floor space index,” “gross plot ratio,” and “site ratio” are other terms also used to designate the FAR.

[3] To the best of my knowledge, there is little research on how residents feel about different kinds of architecture, building shapes and arrangements, and their willingness to pay to be in these neighborhoods. Architects and planners, who have strong feelings about what is right and good, are usually the ones, along with politicians, writing the rules about building heights and densities. There is research to support the notion that walkability and mixed uses are good for residents’ well-being. These findings suggest that there is too much automobile usage and too many zoning restrictions. Good policies can reverse be undone by them as well.

[4] A similar 2019 study for New York City was performed by Brueckner’s student, Byunggeor Moon. Here Moon did the analysis with properties bought to be torn down, rather than vacant lots as in Brueckner and Ruchi (2020). Moon’s findings compare similarly to those of Brueckner and Ruchi.

January 14, 2020 by Jason Barr 4 Comments

No Vacancy? Why Housing Prices in New York City are So High

Jason M. Barr January 14, 2020

Note: This post is one of several about New York City. More posts can be read here.

Costanza versus the Andria Doria

In Season 8, Episode 10 of Seinfeld (“The Andrea Doria“), George Costanza, the neurotic buddy of Jerry Seinfeld, has found a fantastic Manhattan two-bedroom apartment with a huge bathroom and walk-in closet. The only rub—there’s competition for the unit. An older man who lives upstairs also wants it. He was a survivor on the ocean liner, The Andria Doria, which, in 1956, was struck by another vessel and sank off the coast of Nantucket, killing 51 people. The building’s tenant association feels pity and wants him to have the apartment.

But George, being George, is not above suppressing his dignity to get what he wants. He attempts to sway the association’s members by recounting his pathetic life story and his innumerable sufferings, or as Jerry calls them, “The Astonishing Tales of Costanza.” While we don’t know if he gets the apartment, the show ends on a hopeful note—his tales of woe were far superior to his rival, who was “merely” rescued by a lifeboat.

While Costanza’s dilemma is, of course, fiction, it’s funny because it rings true. The episode’s comedy is premised on the notion that the right to live in Manhattan is based on some form of housing gladiatorial competition—one person wins, and the other loses. The city’s real estate is a zero-sum game. But, do the tragicomedies about our lives really need to be about finding affordable housing? Perhaps we should take a step back and think about the problem from a different light?

Housing and Food Costs in the NYC Metro Area since 1953. The blue line is an inflation-adjusted index of shelter costs. The orange line is an inflation-adjusted index of food costs. Over this time, food has become cheaper and housing more expensive. Sources: Housing Cost is BLS series CUURS12ASAH1, “Shelter in New York-Newark-Jersey City.” Food Costs is BLS Series CUURS12ASAF11, “Food at home in New York-Newark-Jersey City.” General price level is BLS series CUURS12ASA0, “All items in New York-Newark-Jersey City.” Shelter and food indexes are divided by the CPI and set so 1953=100.

If Apartments were Like Milk

For most things in life, we take it for granted that they will be available if we want to buy them. Nearly all the time, there’s milk at the store, and, in general, milk prices remain steady over the long run. In fact, inflation-adjusted milk prices have fallen by about one dollar per gallon since 1995. At the risk of repeating myself: milk today is about 25% cheaper than it was a quarter-century ago. Can you say that about your housing?

The reason that milk prices remain reasonable is that there is more milk available at any one time than consumers want to buy. You go to the store, and it’s plenty stocked. You can even say there’s nearly always milk “vacancy”–the many containers just sitting there waiting to be purchased. It’s only when the excess supply begins to shrink relative to demand that prices rise.

To take an extreme example, right after Hurricane Sandy wiped out local refineries in late 2012, the Governor of New Jersey implemented gasoline rationing for about ten days. His purpose was to keep prices artificially low for the short-run since gasoline “vacancy” would have been negative. That is, the amount of gasoline available would have been far less than what consumers wanted to buy—and prices would have spiked as a result. Once the refineries were back online, things went back to normal. The same principle works for housing. If housing is to be affordable at all income levels, there must be many more units available than the demand at a given time. It’s that simple.

Blaming the Messenger

Somehow people see rising prices in cities like New York and blame landlords, or they see “greedy” developers building supertall luxury towers and blame them for gentrification. As a result, they turn to the city government to curb developers from increasing the housing supply. Simply put, they blame the messenger and not the restrictions that the residents themselves have required. But, the more limits in the housing market, the higher are housing prices. If people want affordable housing, they should insist upon more construction. If milk were like apartments, we’d all be very thirsty indeed.

NYC Rental Vacancy Rates versus U.S. Average, 1960-2017. The graph shows that New York’s rental vacancy rates have been about a third of the national rate over the last half century. Source: Justin Fox’s article on Bloomberg.com.

Vacancy in New York City

Since 1943, New York City has had some form of price controls in its housing market. Today, the most important is rent stabilization. Landlords who own units subject to this program are limited to increasing their rents to specific percentages fixed by the Rent Guidelines Board. For October 2019 to September 2020, building owners can only raise rents by 1.5% for one-year renewals and 2.5% for two-year renewals.

Under the law, the Rent Stabilization Program stays in effect if citywide rental vacancies remain below 5%. But the perverse incentives for new construction created by the program means vacancy rates remain low, maintaining the program indefinitely. If there was ever such a thing as a perpetual-motion machine, this comes close. In terms of rental apartments, about 57% of them in New York are regulated in some way—and two-thirds of residents are renters.

Citywide Vacancy

The Board’s latest report, issued in May 2019, should give us pause. The citywide rental housing vacancy rate was 3.63% in 2017, which compares quite unfavorably with the national rate of about 7.2%. But the citywide rate is misleading. The biggest problem is among those units which are rent-stabilized. Vacancy in pre-War stabilized units is only 2.4%, and in post-War stabilized units, it is only 1.2%. Free-market units have a vacancy rate of 6.07%, closer to the national average. In a city of over eight million people, there were only about 20,000 free units in rent-stabilized apartments in 2017. If these units had the same vacancy rate as the free-market ones, that would have been an additional 38,700 units to choose from. If those apartments had the same vacancy rate as the national average, then that number would rise to nearly 50,000 more units.

Housing Price Changes vs. NYC Vacancy Rates — Increases in NYC Shelter Costs versus Vacancy Rates. This graph shows that there is a strong negative relationship between NYC rental vacancy rates and increases in the cost of shelter (corr=-0.52). That is, on average, high vacancy rates are associated with lower housing cost increases (as shown with the black trend line). Note that this graph shows only a correlation, and the direction of causality cannot be inferred. Sources: The NYC vacancy data is the same as the figure above (selected points for years between 1960 and 2017). For % change in shelter costs, I take the percent change in the nominal BLS shelter index for the NYC metro area (from above) for the same year as the vacancy observation. For example, in 1970 vacancy was 1.5%. In that year, NYC metro area shelter costs rose 9.7%.

Elements of Vacancy

Just as important is affordability. The law of supply works for housing just as it does for milk: the more units brought to the market, holding demand constant, the lower the prices. As I will discuss below, there’s a strong negative relationship between the number of vacant units and the cost of housing in New York City. And the finding strongly suggests that New York is harming itself by over-regulating its housing market.

Of course, before we can make this conclusion, we must ask what drives housing to be vacant—both rental and owner-occupied units. To begin, let’s divide the discussion into two modes—what I call the upswing and the downswing. The upswing is when the community or city is doing well. Employment is high, the neighborhood is attractive, and all is normal with the world. The downswing is times when either the neighborhood is in bad shape due to some local problems or when, more broadly, the economy is doing poorly.

The Upswing

What causes vacancy during the upswing? First is simple: “churning.” People come and go, and some units are empty until they find new occupants. Another reason is construction. When a new building is erected, it takes time to fill it up. Ideally, a developer would like to have contracts signed on all apartments the day the doors open, but that’s not always the case. Lastly, vacancy during the upswing can be caused by a kind of “hold out” issue.

In many situations, a developer buys a building with tenants, and, over time, gets them to move out so she can tear it down or completely renovate it. Here, she is removing units from the market. In the first two cases, we would expect a neighborhood with higher vacancy rates to have lower prices. In the third case, the reverse is true if there are fewer opportunities for residents. As long as the first two cases dominate the second, more vacancy means more lower prices.

The Downswing

During the downswing, vacancy would mostly be driven by people moving out—either the neighborhood has fallen on hard times, or the economy is in bad shape, and people are exiting the city in search of opportunities elsewhere. Or the landlord finds that she can’t rent units at a price that pays for the costs and lets them fall into disrepair. At any rate, this means that prices are likely to be low regardless of vacancy because it’s a low-demand area.

Vacancy and Housing Prices in New York City

If, on average, housing vacancy represents an “oversupply” of units, then the question we’d like to know is how does this additional housing affect the market prices especially during the upswing? Presumably if there are extra units available, consumers have more choices and they can then get lower prices. But this discussion raises two points about measurement. First is that we can’t simply look at the raw correlations between neighborhood vacancy rates and housing prices—though, on net, across New York City they are negative. It’s necessary to control for neighborhood, building characteristics, and citywide growth, to more accurately measure vacancy’s impact on housing prices. To solve this problem, I have collected data on several important building and neighborhood characteristics to better isolate the impact of vacancy.

The second problem relates to the direction of causality. When a unit is vacant it may be because price changes are driving the decision to leave the unit empty. In the upswing case, the landlord might be taking units off the market until she can tear down the structure, or completely refurbish them. In the downswing case, the landlord might decide to stop maintaining the unit because rents are too low. But, our interest in looking at how vacancy affects prices, not how prices affect vacancy. To get at this issue, I look at vacancy rates at different geographic levels. First is within small areas around each building (that is, at the census tract level), and second is an average of vacancy rates outside the census tract.

The key point here is that, in principle, we don’t care what causes the vacancy rates in surrounding neighborhoods, but we are interested in whether, on net, they spillover to prices in a given neighborhood. That is to say, in theory, the vacancy rates in surrounding neighborhoods are exogenous with respect to the prices of housing in any given neighborhood. Additionally, I was able to get data on why the units are empty (such as being on the market or sold but unoccupied). This allows me to control for units that might be unavailable for residents to choose from when they are looking for a new place to live.

The Results

Using the statistical method of regression analyses (details here), I investigate the determinants of the sales prices of over 40,000 residential building in 2016 and 2017 across New York City. In particular, I’m interested in isolating the impact of the number of vacant units in a census tract and surrounding tracts on the prices of individual building sales. Note that I do not have data on apartment rents or the sale of condo and coop units. Since rents determine the sale prices of rental buildings, I implicitly measure the impact of vacancy on rents for these buildings.

The findings are robust and strong: across the city, a 10% increase in the number of vacant units in surrounding neighborhoods, reduces the sales price of a residential building by about 6-7%, on average. Within census tracts, a 10% increase in vacant units reduces prices by about 0.2-0.3% on average. The results also apply to the poorest neighborhoods—those with median incomes in the lowest 25^th percentile. The findings suggest that new construction throughout the city helps everyone, though the impacts likely decline with the distance from that construction.[1]

How Come We Can’t See It?

But if vacancy—primarily through new construction—is good for affordability, how come people can’t see it? The answer is that over time the demand to live and work in New York is increasing. As a result, average prices are rising faster than new construction. Any benefit from a high vacancy rate is often “suppressed” by price increases more broadly. From 2016 to 2017, average citywide prices grew by over 14%.

To have any “bite,” vacancy across the city must outpace demand–only then will residents begin to feel its benefits. This means the city must undertake substantial new construction–way beyond anything being done now. In 2017, for example, New York City added nearly 26,000 units of new housing. But in a total stock of 3.54 million units, this new housing represents less than 0.1% of additional homes (and does not count demolished units). This is why housing in New York is so expensive.

A Way Forward?

I want to stress, however, that rent regulations are not the only thing preventing new construction in New York City. There are several forces at work. First is, of course, rent stabilization, which gives tenants a good deal and the right of first refusal on lease renewals. These keep people from moving out of these buildings, and so they are effectively removed from being torn down and replaced by denser buildings. But just as important are zoning policies, which limits how much can be constructed in each neighborhood across the city. As I have discussed elsewhere, nearly 50% of the residential land in New York is reserved only for one- and two-family homes. Allowing these neighborhoods to densify to low- and medium-rise apartments, for example, would help affordability significantly. Finally is the cost of construction. New York has some of the highest costs in the nation, which is a big disincentive to adding to the housing stock.

The Political Economy

But perhaps the biggest problem is the political economy of the issue: the coalition of anti-new-housing in the city remains strong. Several groups (ostensibly) benefit from stringent regulations that limit new construction citywide—and they make up the majority of residents.[2] First are those in regulated units who are unwilling to give up that perk. Second are homeowners who seek to limit construction for fear that it will lower their property values. Third are preservationists and anti-gentrificationists, who feel that any new construction destroys the feel of the streets, removes beloved architecture, and promotes luxury apartments for billionaires.

All these residents are individually rational, as the benefits to them of new construction are uncertain and long term, and with significant disruption in the meantime. Collectively, however, they are helping to contribute to rising prices citywide. As I have discussed elsewhere, there are policies that can help balance the needs of today’s residents with the health and well-being of the future–affordable–city. But this takes enlightened and forward-thinking leadership. That’s a harder problem to solve.

Continue reading other posts about New York City here.

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[1] Lerbs and Teske (2016) find a negative relationship between prices and vacancy in German cities. Hsueh, Teng and Hsieh (2007) find this relationship across Taiwan.

[2] Regulated units in New York comprise 39% of housing units. Owned homes (free standing homes, condos, and coops) are another 32% of units. Source: Housing Supply Report (2019).

September 3, 2019 by Jason Barr 3 Comments

The Value of Dirt: Introducing the Astor Index

Jason M. Barr September 3, 2019

Astor’s Vision

On his deathbed in 1848, John Jacob Astor—America’s first millionaire—reportedly quipped, “Could I begin life again, knowing what I now know, and had money to invest, I would buy every foot of land on the Island of Manhattan.”

Astor came to America from Germany in 1783 with nothing but a few flutes to sell. He soon dived into the fur trade and other merchant ventures. With his profits, he turned, in the second half of his life, to investing in land. Astor is remembered an incredible visionary, since he was able to foresee the rise of Manhattan as a global metropolis. To be sure, Astor was perceptive in realizing that Manhattan real estate had tremendous potential, but certainly in the decades after the birth of the American Republic, New York showed all the right signs.

Some of John Jacob Astor’s Land Holdings circa 1815 (shaded blue). This map shows the farms and landholdings in the area between 7th Avenue and the Hudson River, from 40th to 52nd Streets. The streets and avenues did not exist yet but were soon to be created based on the Grid Plan of 1811 (which completely ignored historical property boundaries). The maps were produced by John Randel, Jr., in 1819. Source: NY Public Library.

Vacant Land: A New Hope

Astor’s strategy was to buy farmland north of the developed area of the city. As the population grew, rural land was converted to urban uses. First it was carved up into blocks according to the Grid Plan and then each block was subdivided into lots and then structures were built. As the process unfolded, Astor was able to collect higher and higher ground rents. One can say that the real wisdom of Astor’s plan was to buy early and buy in bulk.

His strategy suggests an important difference between lots with buildings and those without them. The value of a vacant (or nearly vacant) lot depends on its potential, as it is, literally and figuratively, a blank slate. In other words, the price of a vacant lot measures the buyer’s belief that someday it can realize its full development potential, or in real estate terminology, its highest and best use. In the central city, a tall tower might most profitable; whereas further away, a low-rise building might be better. In short, a vacant lot represents hopes and expectations. If bidders believe future rents or sales prices will reward them handsomely, they bid up the price. If they feel that the future is somewhat bearish, they might offer less.

Contrast this with a landlord who owns a building. The landlord can be you if you own your home, or she can be a stranger. Either way, the value of the structure is the income or benefit it provides, more or less, in the present. An apartment building, built in 1928 with 40 units on five floors, with a mix of studios, and one and two bedroom units, will be worth what the tenants are paying today (and maybe a little more for expected rent growth). But the building is set in stone—and its income potentially is capped.[1] In short, the value of a building represents its value to the present owners.

It’s virtually impossible to know the underlying motivations of market participants, however, it is reasonable to conclude that in highly developed cities, like New York, Chicago, or San Francisco, buyers of buildings are typically buying for the present income, while buyers of vacant lots are buying for future income. Of course, this is a simplification, but the key point is that an empty lot in the city is worth nothing more than what a future building will provide. There is no oil or gold below the streets of Manhattan—only dirt and potential.

Introducing the Astor Index

All of this background gets us to the heart of the matter. If real estate prices represent present worth and vacant land prices represent future worth, we can compare relative changes in the two to determine which seems more promising. Thus, I would like to introduce what I call the Astor Index, in honor of John Jacob Astor. This index is computed as the ratio of the price of vacant land to the price of buildings. Here I present this annual index for Manhattan from 1976 to 2018.

The index of vacant lot transactions comes from my research paper with Fred Smith (and updated to 2018). The buildings index comes from building sales provided by the New York City Department of Finance and processed by me. The figure below shows the values of the two (inflation-adjusted) indexes separately over time. The prices of both land and buildings have escalated in the last four decades. There was a run up in the mid-1980s, some retrenchment after that, but since the 1990s, both indexes have shown rapid appreciation (with a small setback after the Global Financial Crisis). But what about the ratio? What has happened to land prices relative to building prices?

Land and Buildings Indexes for Manhattan, 1976-2018 (1976=100 for both). The orange line is the relative price of vacant lots in Manhattan (left axis). The blue line is the price of Manhattan buildings (right axis). Both have shown dramatic price appreciation in the last four decades. Both series are adjusted for inflation. Over the 42 year-period, the average annual growth rate for buildings and land has been 6% and 11%, respectively.

The Downside

Before we get to the Astor Index for Manhattan, however, let’s pause to discuss the factors that are likely to affect it. That is, what is likely to determine whether land is more valuable than buildings or vice versa? Let’s start with the down. The index will decline when the future becomes increasingly uncertain or when the economy is doing badly. In this case, as the saying goes, a bird in the hand is worth two in the bush. While recessions may generate higher vacancy rates, buildings still generate income. Land, on the other hand, is riskier. The owner does not know when the down times will end. So while holding a vacant lot is costly, uncertainty means that the best option is to wait until the economic picture becomes clearer.

The Upside

But what drives a rising Astor Index? I can think of four reasons, though there could be more, and the ones below are not mutually exclusive. Implicit in all of them is that the local and national economies are strong so that developing the land will likely yield a higher profit. The first three relate to providing a building that generates more income as compared to surrounding buildings.

First is that developers can build taller. Second, they can build a higher quality building by adding high-end features and more amenities. Third, holding size and amenities constant, builders can provide structures more suited to modern tastes, such as with open floor plans or floor-to-ceiling glass windows.

The fourth reason is scarcity. As cities become developed, fewer and fewer vacant lots are likely to exist. The relative scarcity means that prices will go up. The vacant lots will be bought at prices based on who’s likely to occupy those spaces. In today’s urban environment those rare spots are likely to go to those with the most money, either wealthy households or businesses.

Self-correction

In a relatively free market, however, as something becomes rarer, market forces generally operate to reduce the scarcity.[2] As I have discussed elsewhere, the prices of important commodities, such as oil, wheat, and gold, obey this rule. When prices rise, indicating relatively scarcity, consumers purchase other related products and suppliers seek out new sources. The process of price spikes—eventually—leads back to lower prices and a better balance between supply and demand.

The price of vacant land, in theory, should be tied, in the long run, to the price of structures. Empty lots don’t just magically appear; they are produced like anything. Generally, they come from the removal of outdated or underutilized structures, like parking lots, flea markets, or taco truck stops. As land values rise, the benefit of holding an underutilized lot becomes lower and lower and is thus more likely to be offered up to the great flow of land in the marketplace. So, if building prices and land prices get “out of whack” then economic incentives should be present to move them back into relative harmony. If land values begin to escalate relative to building prices it suggests the presence of what economists call “frictions”: barriers preventing the conversion of underutilized lots into vacant land and then onto more profitable uses.

The Index

The figure below presents the Astor Index for Manhattan from 1976 to 2018. For ease of exposition, we can divide the index into two periods. Period I runs from 1976 to 2001. During this time, we see two things. First, the Astor Index stayed in a relatively constrained range. And second it was able to return back to one. By construction, the Astor Index is set to a value of one at the starting year.

Period I

From 1976 to 1985, the index remained, for most years, below one. The phenomenon is likely caused by two factors. First, the 1970s were hard times for New York. In 1975, the City defaulted on loans and needed to implement tremendous budget cuts. Reductions in policing and sanitation helped fuel a sense of despair, during a time when manufacturing jobs were also leaving in droves. The 1970s were arguably a low point for New York’s economy.

The Astor Index for Manhattan, 1976-2018 (1976=1). This graph shows the ratio of the price index for vacant lots over the price index for buildings. A rising index suggests optimism about the future real estate market. The left vertical line (1993) shows the last time the index returned one. The right line (2001) is the apparent point of no return, when the index began its meteoric rise.

During this time, as property taxes were rising and rental incomes were falling, many landlords found it better to either simply walk away from their properties or to illegally employ arson to collect insurance payouts. As a result, the city found itself increasingly holding more and more vacant lots, especially in the historical tenement districts. In the 1980s, under Mayor Ed Koch, the city began selling these lots to developers, thus increasing their supply.

Starting in the late 1980s, the index shot up in the heady real estate market of the time. However, over-optimism lead to retrenchment. In 1993, the index was back at one. There was another run up in the 1990s until a downturn in 2001, but the uptick and the retrenchment of the 1990s were within historical bands.

Period II

I would argue that 2001 was the point of no return. Since then the Astor Index began its meteoric rise. Today the Astor Index hovers around 10, suggesting that land sells for a premium of 10 times that of buildings. But is this possible or realistic? I think so, since when we inspect Manhattan’s real estate, everywhere we see frictions. In a rising market, the low-hanging fruit of parking lots and highly underutilized lots will be offered up first. Then as they become developed, new land is created more slowly. Furthermore, given the economics of construction in New York, it’s more efficient to have a large lot. Assembling them can sometimes take decades and requires enormous patience. At any rate, it appears as if it’s becoming less and less possible for Manhattan to generate vacant land.

Land Uses in Manhattan

To illustrate this trend, the figure below shows the different land uses in Manhattan (as of 2016). Panel A shows the parks, playgrounds, and recreational areas. These areas are the vital lungs of the city and will not be developed. Next, in Panel B, are the historic districts and landmarked buildings (occupying 27% of Manhattan’s lots). Generally, these are buildings or areas that must be preserved the way they are. Their tear-down potential is thus very low.

Panel C shows those buildings that are coops or condos. These apartment buildings are owned by the occupants. In today’s climate, it is nearly impossible for owners to collectively decide to sell all their units to a new owner to tear down the building. Condos and coops make up 10% of Manhattan’s lots. Panel D shows buildings that have at least one rent stabilized tenant or are public housing. Rent stabilized tenants cannot (legally) be evicted. They have to right to remain in the apartment even if the landlord wants to empty it out (unless the landlord will occupy the unit herself). Again, this represents a very high hurdle to converting these structures to vacant land. Rent stabilized buildings occupy 30% of all Manhattan’s lots.

In sum, if we add up the landmarked buildings, the condos and coops, and rent stabilized units, that brings us to 67% of all lots on the island! Of course, this includes double counting between historic districts and tenant status. About 79% of rent stabilized buildings are not in a historic district or are landmarked (and let’s assume this value for condos and coops). This gives a ballpark figure of 55% of all buildings in Manhattan are either landmarked, condos or coops, or rent stabilized.

Land Uses in Manhattan. Panel (A) shows parks. Panel (B) are historic districts and landmarked buildings. Panel (C) are condo and coop buildings. Panel (D) are rent stabilized buildings and public housing. Panel (E) are buildings that are denser than the current law allows. Panel (F) are all these uses combined on one map. Note that the “helicopter view” tends to visually “overstate” the number of properties that have one or more of the frictions discussed above. See the figure below for zoomed-in maps of particular neighborhoods. Maps created by Jason Barr from publicly available data.

Zoning

New York City zoning rules dictate allowable building density. They limit the so-called Floor Area Ratio (FAR), which determines how many square feet of structure can be built per square foot of lot. For example, a FAR of 5 means 50,000 square feet of building area can be built on a 10,000 square foot lot (4,645 square meters on a 929 square meter lot). It’s up to the developer if she wants a 5-story building on the whole lot or a 10-story building on half the lot, for example. These rules, more or less, were established in 1961, though they have been modified to some degree across neighborhoods. However, in 1961, Manhattan already had substantial building development. In fact, 89% of Manhattan’s structures were completed before 1961, and 85% were built prior to 1941, with the majority constructed before World War I.

Many of these earlier structures were built more densely than the 1961 law allowed. They were, however grandfathered, as the density rules apply only to new constructions. Today, some 28% of Manhattan’s structures are denser than the law allows (Panel in E, in the above figure). If they were torn down, they would likely have to have less floor area than before—a great disincentive to tearing them down![3]

In total, back-of-envelope calculations yield the result that about two-thirds of all structures in Manhattan have some kind of “encumbrance” or friction that would make tearing them down much more difficult. So this means about only about one-third of lots are available for the land market, and of those many are smaller lots that need to be assembled into bigger ones before they would have value as vacant land.

“Unencumbered” Lots. The top map is the area from First Avenue to Amsterdam Avenue, from 112th to 126th Streets. The bottom map run from Second Avenue to 12th Avenue, from 34th to 48th Street (the left part includes Astor’s old holdings from the map above). By zooming in, we can get a better sense of which lots, in theory, are not subject to any of the frictions discussed above.

Where’s Manhattan Headed?

While we currently don’t have a longer run Astor Index over the course of the 19^th and 20^th centuries, it’s reasonable to say that an Astor Index of 10 (using 1976 as a benchmark year) is unprecedented and bad for society. It means that lots are exceedingly scarce and so their prices get bid up because they will be used for luxury condos. Today’s real estate rules promote income inequality and reduce access to more affordable housing. And yet, to most New Yorkers, rent and zoning regulations feel right. Supporters argue that they slow down income inequality and gentrification. But in truth, it has the opposite effect. By promoting stricter regulations, New Yorkers are unwittingly promoting in the very things they seek to prevent. This is likely to drive further increases in the Astor Index.

So what avenues are available? If New Yorkers want to keep Manhattan the same as Parisians want to keep Paris—frozen in time—then reform must be applied elsewhere in the city. An initial useful strategy would entail loosening the restrictions that create one- and two-family homes in the outer parts of the city. If these neighborhoods allow for medium- and low-rise apartments it would help reduce the price of housing in working-class neighborhoods. It would take some of the pressure off the Manhattan market and allow the city as a whole to be more affordable.

Another possibility is for the city to move toward a land tax oriented system. Here real estate taxes are based on the value of the land and much less (or not at all) on the building’s value. This should encourage tear downs, since current real estate tax rates discourage new construction by “penalizing” a more valuable building. But I’ll leave a more detailed discussion of these ideas for a future post. In the meantime, if Astor could see what his purchases are worth today, he’d likely try to rise from the grave and get in on the action.

I’m grateful to Maria Thompson for valuable editorial assistance.

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[1] For the purpose of discussion, I’m oversimplifying. Clearly landlords frequently buy buildings with the intention of renovating or improving them in some way. But unless the building is torn down (or gutted), the structure’s income potential is arguably more limited than something built from scratch. Adding new floors to an old building is relatively rare and difficult.

[2] Here by “scarcity” I mean rareness, and not a shortage as is traditionally defined in supply and demand analysis.

[3] Today there are three ways to “circumvent” stringent zoning codes. First is via the purchase of transferable development (air) rights from neighboring buildings. In this case, a landlord with a building less than the maximum allowable FAR can sell the unused FAR to a developer who can increase the FAR of a new project. Second is by assembling a large lot a developer can keep a relatively modest FAR but still create a profitable high-rise tower. Third, in some cases the law allows a FAR bonus if the developer provides a public amenity, such as an open plaza or low income housing.

March 13, 2019 by Jason Barr 6 Comments

Skyscrapers and Shadows: The Value of Sunshine in the City

Jason M. Barr March 13, 2019

Almost none of the land use regulations that cities have ardently adopted for over a century have been justified by any serious quantitative work. The existence of even the smallest externality, such as a shadow, has been seen as justification for massive interventions in the housing market. – Edward Glaeser

The sun is the mother of life. Humans, like all biological lifeforms, need sunlight to survive and thrive. From it, they extract vitamin D; warmth for their furless bodies; and a general sense of well-being. Sunlight, however, is a scarce commodity; and even more so in the modern city. And as such, cities produce something of a paradox: we create them to satisfy our needs and wants—to provide jobs, housing, access to amenities, etc.—and, in the process, they generate some undesired outcomes or externalities. There is no free lunch in the urban world. One person’s “agglomeration economies” is another person’s traffic congestion. One woman’s fabulous views are another one’s shadows. One man’s trumpet makes music; to another it makes noise. And so on.

The ultimate—and age-old question—is: how do we create efficient cities—ones that provide the maximum flexibility and benefit, while minimizing the negative externalities?

The Dark Side

Today, one of the biggest controversies in the real estate world is the construction of superslim, supertall towers around New York’s Central Park. It seems that when one is announced there is an instant knee-jerk reaction against it. Critics present a laundry list of reasons about why they are “bad.” One item that dominates is that of the shadows they are likely to cause. Graphics of their effects on Central Park exacerbate the perceptions of darkness, by giving snap-shop depictions of the longest shadows likely to be cast at any time.

But are city shadows all bad? The answer is no, as they can provide both costs and benefits, which need to be fully measured and understood before we can draw conclusions and consider policies that are directly aimed at limiting real estate in the name of the almighty sun.

The new crop of supertall, superslim skyscrapers in Manhattan–presented with shadows at their worst. Source: Vanity Fair.

The Good

Why might shadows be good? First, is that in hot summers, shadows provide shade, not just to the people who are walking around, but also for the neighborhood to protect against the heat island effect. Plus, shadows can reduce electricity bills from air conditioning.

In Manhattan, real estate brokers try to peddle north-facing apartments—which get less sunlight—as the exposure allegedly preferred by painters, who apparently need softer, indirect light for creating their masterpieces. Residents in south-facing units—with less shade—are subject to oven-like temperatures from the direct beams of the sun.[1] Sunlight reflecting off buildings can become “death rays,” attacking the random pedestrian (arguably, the exact opposite of the shadows problem).

Finally, a building in a shadow might be more affordable to someone who would prefer living in the central city near employment opportunities rather than paying for a higher cost, sunnier unit. Access to sunlight might not be all that important to someone who spends most of the day away from home.

The Bad

But, of course, people, in general, enjoy access to sunlight. It seems to have a calming effect and improve mood and health. Companies prefer locating in glass box skyscrapers because their workers like sunnier offices with more natural light. Shadows might also hamper the ability of trees and plants to grow and can block light on rooftops that might otherwise be useful for solar panels. Shadows on the streets may increase the likelihood of crime and may, more broadly, diminish the quality of urban life. In cold winter months, shadows can increase heating costs.

The Ugly

But perhaps the key problem of shadows is that there is little understanding of their true impacts throughout the day and year. Shadows in the peak of the summer can be helpful for cooling and energy costs, while perhaps can negatively affect moods or well-being. During cold winter, shadows can make the city colder and require more heating, but don’t affect people on the street as much because it’s too cold to spend much time outdoors. And throughout the day, the sun’s position in the sky is changing; one person’s shadow in the morning becomes clear sunshine in the afternoon and vice versa for someone else.

In essence, the shadows problem is quite complex with its impacts on individuals varying throughout the day, the season, the climate, the topography, the location within the city and across the planet, and based on the nature of the built environment.

The Emerging Science of Shadowology

Until recently there have been very few, if any, systematic measurements of the amount of shadows and their impacts. Rather their effects on the city have been left to our imaginations or to simple snap-shot representations. But this is starting to change. Thanks to advances in data collection and computer science, the ability to measure the quantity of shadows in cities is, so to speak, coming out of the shadows. If we can measure the degree of “shadowification,” we can then see how it correlates with well-being and other important variables.

Shadow Accrual Maps

A recent paper by a team of computer scientists attempts to get closer to comprehensive measurement of shadows throughout the day and across the city. “Shadow Accrual Maps: Efficient Accumulation of City-Scale Shadows over Time” (2018), by Miranda et al,. presents newly-developed algorithms to measure the total accrual of shadows using computationally efficient methods. Part of the analysis includes creating net shadow scores, which include both the positive and negative effects.

So what do they find? Using Manhattan as their case study, they analyze the new superslim buildings rising along Central Park South. They find that the total contribution of these structure is relatively modest. They write,

We see that these shadows behave as expected – a lower angle of the sun in winter causes shadows to cover the entire analysis area, while a higher angle in summer results in a tighter shadow area. Note that even though buildings, whether tall or short, cast long shadows at low sun angles (mornings and evenings), its contribution to the overall accumulation is small as reflected in the visualization (p. 10).

Again, it’s worth stressing that the shadows that would fall on Central Park from these new structures is the worst in the winter afternoons, the very time when the park is least likely to be used. Furthermore, when they compare the slim towers to hypothetical alternatives of shorter but bulkier versions, they find that the latter have a greater negative impact than the former.

What’s a Shadow Worth?

But given the ability to generate more precise shadow maps, this begs the question: what’s the cost to city dwellers? For this, we need to look at the net effect of shadows on things that we care about, such as happiness or the value of real estate. To this end, a recent study, called, “Valuing Sunshine,” provides some first estimates to this question. In particular, the authors measured the average number of hours of sunshlight that fall on some 5,000 houses in Wellington, New Zealand. They then investigated the relationship between average hours of annual sunlight and housing prices, controlling for a host of other things that might determine the value of the property, including the views.

The key problem to measurement here is that, ideally, all non-sun-related factors need to be held constant or controlled for, while variation in sunlight access across the city should be as large as possible, in other to better separate out the signal from the noise, as it were.

GIS Maps of Shadows on Housings in Wellington, NZ. Source: “Valuing Sunshine.”

Ceteris Paribus

Their focus on Wellington to isolate a pure “sunlight effect” had advantages. First, the city is small, and homes are relatively homogeneous, which helps reduce some sources of variation which might mask or confound the sun’s impact. Second, Wellington’s economy and housing market has been relatively stable over the last decade or so—again, reducing noise in measurement that might have come from the global bubble and collapse in the 2000s.

Third, Wellington’s climate is rather moderate. In summer, its average maximum temperature hits only 69°F (20.5°C), while in winter, the maximum average temperature is 52°F (11.1°C). This helps diminish the effect of shadows on energy costs. Lastly, the geographical topography of the city contains several hills and valleys, creating large variation in sunlight exposure for the houses in the sample. As the authors say, “Thus, it is not difficult to find houses that, located in the same narrowly defined neighborhood, have very different exposure to direct sunlight due to the effects of hills, valleys and nearby buildings” (p 270).

In short, they find that, on average, a house that receives an extra hour of sunlight per day throughout the year has a 2.6% higher price. For the average house in Wellington that additional hour of sunlight is worth about $NZ16,000 ($US11,000).[2] Or, on the flipside, a neighbor who is suddenly put in shadows for an extra hour per day due to a new building next door can expect to lose about 2.6% of the value of the house, on average.

Policies for the Shadows Problem

The Pigouvian Tax

Given the ability to measure the total additional hours of shadows from new construction, it seems a relatively straightforward exercise to “plug in” the shape of a proposed structure and estimate the average reduction in sunlight per hour per day on surrounding buildings and parks. Then a Pigouvian tax could be imposed of say 2.6% of the market value of the structure for each lost hour of direct sun (again an actual tax value would need to be determined from more research). If the levy is worth it to the developer, he goes ahead with the project, pays the tax, and the money is disturbed to the harmed parties. If not, he has the option to redesign the project to reduce the shadows and the tax. This policy has the advantage of being relatively simple and straightforward, and the tax burden will fall heavier on those building taller or bulkier structures.

But what’s to be done with the tax money given to owners of a park (the City)? Here the government would need to come up with ways to improve the quality of parks to offset the loss in user-value; this might come from adding trees or other amenities within the parks, or by providing more green space elsewhere in the neighborhood.

Market Value Insurance

The problem with the tax, however, (aside from the fact that it might be hard sell within today’s political climate) is that new construction provides both costs and benefits to surrounding properties. On one hand, it might increase foot traffic to stores or improve the general desirability of the areas and thus raise land values. On the other hand, it might create more traffic congestion, noise, and shadows.

This create something of a problem for Pigovan taxes in the city, since there are many negative externalities that would have to be taxed, while at the same time the positive externalities should be subsidized. What’s the right tax policy? Unlike, say a carbon tax on property owners to reduce C0₂ emissions, in case of new construction, the right policy is less clear.

A more generalized and easier-to-implement policy might be some form of market value insurance. The idea is that property owners pay a small annual premium against the loss of value to their properties due to changes in the value of the neighborhood itself or due to the actions of neighbors (and not due to market fluctuations or the actions of the owner). The point is that in a dynamic, growing city, new construction is necessary and inevitable, and can have both positive and negative effects on the surrounding structures. If owners had some means of being compensated, those harmed by shadows will get their due, and will hopefully avoid employing the NIMBYism that seeks to stop the city dead in its tracks.[3]

Seeing the Light?

The problem of city shadows perfectly illustrates the paradox of cities: they are both the solution to, and cause of, many problems with which humans must contend. But fundamentally cities are engines of growth and well-being. In the 21^st century, large metropolises, like New York, are increasingly important in our lives. But who gets to define what they will look like in the 21^st century–those who want to keep it in a form a status, or those who want to accommodate all who want to call it home?

The success of humanity over the long run has always been based in fostering increased trade and human interactions. The key to the efficient—well-functioning city—is to identify the negative externalities that arise from dense living and devise policies that alter the incentives to better balance the good with the bad. Simply saying “no” to growth and change may feel right, but in the long run, its rarely been a winning policy. Let’s not be afraid of our own shadows.

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[1] Manhattan is an interesting case-study in regard to the direction of its streets. In 1811, the Grid Plan Commissioners created blocks in an east-west direction, orthogonal to the two rivers (and no one really knows why). This had the effect of creating a kind of two-tired city. South-facing units get direct access to the sun. North-facing units do not. Throughout the rest of the city, housing units have more variation in their directionality and access to sunlight. (It seems there’s an economics paper to be written here by looking at how the block directions in the various boroughs affect access to sunlight and how that might affect housing prices. Contact me if you want to work on this project. GIS skills are a must.)

[2] Their sample includes transactions from 2008 – 2014. During this time, the average exchange rate was 1NZD = 0.76USD. Today the rate is 1NZD=0.68USD. Also note, the average house in their sample gets 6.7 hours of sunlight in winter and 10.7 hours in summer.

[3] A city might also consider a Pigovian tax for shadows just in parks, especially if the units remain empty for much of the year.