Why is NYC Commercial Real Estate So Expensive?

Why is NYC Commercial Real Estate So Expensive?

New York City real estate is notoriously expensive, with Manhattan boasting some of the world’s highest commercial and residential prices. Office rents, retail rents, and housing prices cost more than anywhere else in the U.S. San Francisco and Los Angeles might be the only two other cities in the same league as NYC when it comes to real estate prices.

If you’re not familiar with the workings of the NYC commercial real estate market, you might be asking yourself: how did the city become so expensive? The answer is manifold, and today, we’re going to go through four of the most crucial factors that have made New York one of the priciest places in the world to work or live in.

1. A limited amount of space

There is only so much land space to build on in New York City. In areas like Midtown Manhattan, there is already a high density of skyscrapers and land scarcity with zoning that would permit profitable construction. This is why many investors look to buy air rights from low-rise buildings to pursue new developments. Take JPMorgan Chase, for instance, demolishing its existing headquarters at 270 Park Avenue, with plans to build a new, taller office building that can accommodate more of its employees.

The limited amount of space, coupled with the fact that nearly one-third of Manhattan is landmarked, has pushed developers to other boroughs like Brooklyn or Queens, and real estate development there is in full bloom. Developers have also looked at underutilized Manhattan areas for redevelopment opportunities, which was the case with Hudson Yards. This former industrial part of Manhattan has been transformed into a world-class commercial district that rivals the Plaza District or Park Avenue. The Class A office towers at Hudson Yards have been attracting companies like a magnet, as they offer modern amenities that aren’t very common in Midtown’s older office buildings.

2. Strict zoning laws

Another crucial reason that makes commercial real estate in NYC so expensive is that developers are subject to strict zoning regulations. They have to follow strict rules related to height, floor-to-area ratio, setbacks, parking, and so on, and these rules can differ from borough to borough or from zoning district to zoning district. A study run by The New York Times on how zoning rules have changed over the years revealed that 40% of existing buildings in Manhattan could not be built today because of zoning laws.

Zoning laws in NYC were established in 1961, and they state that any property that shares at least 10 feet of its lot line can purchase air rights belonging to adjacent buildings. This, in essence, allows developers to build taller and make use of vertical space in the absence of available land. However, while some parts of the city are more flexible regarding air rights, like Grand Central Station, the Theater District, or Midtown East, others boast stricter rules.

What’s more, air rights can be quite expensive, depending on the submarket, which adds to the total cost of building in NYC, which is already a pricey affair. Take the unassuming, four-story commercial building at 147 West 40th Street in the Theater District. It’s currently on sale for $26 million because it comes with close to 30,000 square feet of commercial air rights and nearly 20,000 square feet of residential air rights.

One Vanderbilt is an example of developers using air rights to build skyscrapers in Midtown Manhattan. The fourth-tallest building in NYC officially opened this fall, with the aid of 525,000 square feet of air rights acquired from neighboring buildings, including Grand Central Terminal.

3. Intense competition

Because vacant land is scarce in New York City, the competition for potential development sites is brutal. The demand for available land suitable for commercial or residential development often surpasses the supply, causing prices to go up.

Over the decades, this fierce competition over NYC real estate has led to rents in the city being among the world’s highest. Office rents in NYC, particularly in Manhattan, often surpass $100 per square foot for Class A space. Companies and corporations from all around the world want to establish a presence in Manhattan. Startups and mid-sized businesses are often priced out of the costlier neighborhoods, establishing themselves instead in more affordable markets like Chelsea, Flatiron, or SoHo.

When it comes to the residential market, the competition is incredibly intense. The influx of high-net individuals into the city over the past decades has led to a massive surge in rental costs, and developers are focusing on luxury residential developments more than other types of housing. The fact that wealthy CEOs and business people are willing to spend tens of millions of dollars on penthouses on Billionaires’ Row doesn’t bode well for the average New Yorker.

4. Rent control and stabilization laws

Finding a reasonably priced rental apartment in the city is a challenge, and the competition over any vacancy is brutal during normal times. In 2015, a Washington Post story revealed that 88,000 people applied for 55 affordable apartments in the same building, emphasizing the fact that more people want to live in the city than there are housing units.

NYC’s rent control policies have been around since World War II, and if you’re lucky enough to find a rent-stabilized apartment, you’ll be able to pay a monthly rent that’s well below the market rate. However, these types of units rarely become available, as rent stabilization policies grant tenants an automatic renewal right, and more often than not, existing tenants stay put. Why would a tenant want to lose a rent-controlled apartment where they pay $1,200 per month to rent a market-rate property for $3,000 a month instead?

5. High construction costs

Commercial and residential prices are so high in New York City that developers need to recoup their construction costs, and these costs are again higher than anywhere else in the country.

According to a 2019 report by the New York Building Congress, NYC boasts the highest construction costs in the entire U.S. What’s more, for Class A office construction, prices here are 15% to 50% higher than in other major U.S. cities, and as much as $300 higher per square foot than cities in Asia and the Middle East. This makes NYC the most expensive market in the world when it comes to office construction costs.

The report cites the booming NYC construction market in recent years as the primary cause, which has increased demand for materials and labor. Over the last decade, construction in the city has ­­ on Class A office projects and luxury residential towers, and public infrastructure projects, driving construction costs higher than in other cities.