Sunday, April 22, 2012

Can We Build Our Way Out of High Rents in Manhattan?

Zoning controls and land use restrictions limit dense development in many areas. Most of the literature looks at the effect of minimum lot size zoning and concludes that such restrictions create sub-optimal levels of density. In some cases, such as Edward Glaeser's Triumph of the City and his related academic work, scholars argue that places like Manhattan restrict development too much and future residential development should be skyscrapers. As the argument goes the increase in supply will lower prices. This is true if A) the demand for Manhattan living is stable, and B) the average unit size remains stable. I'm skeptical of both assumptions and that we can build our way out of high rents in lower Manhattan. 

High rents are not necessarily a problem for the city or region more broadly. There are areas that are highly desirable--and rightly so--and have very high rents. The average rent for a two bedroom in Manhattan non-doorman building in March 2012 is $4,208. The median rent for a two bedroom in Inwood, the northernmost neighborhood in Manhattan, is $1,600. In trendy TriBeCa the average rent for a two-bed non-doorman building is $8,013 while in Harlem, about nine miles and 40 minutes by subway north, the average rent for a similar unit is $2,132. High rents are really a problem for a few parts of Manhattan. There are certainly other issues at play, but because the super desirable places in Manhattan are so limited I'm not sure enough apartment supply can be built to satisfy existing demand, yet alone new demand that will occur.

As an example, here is a story from today's New York Times about the increasing size of Manhattan apartments. The story is explaining how large apartment conversions are:

A decade ago a typical Manhattan combination was closer to 3,000 square feet. “Now 6,000 square feet is the new 3,000 square feet,” said Kelly Mack, the president of Corcoran Sunshine Marketing Group. “The highest tier of buyers is really looking to create these mini-megamansions in the sky.”
Even without combinations, the average high-end apartment size has grown over the past decade as developers have recognized the demand for larger and larger. When the Time Warner Center opened for business in 2001, the average size of its apartments was 2,217 square feet. In 2003, at 1 Beacon Court, it grew to 2,362 square feet. Then, in 2005, the developers of 15 Central Park West built apartments averaging 2,655 square feet, according to Corcoran Sunshine.
The latest is 157 West 57th Street (One57, as it is branded), which opened for sales this year with an average apartment size of 3,584 square feet. In fact, more than half of the condos in the building have 3,000 square feet or more, said Gary Barnett, the president of Extell Development Company, which is building One57.
Yet even with 10 full-floor apartments selling for about $50 million each and a duplex penthouse listed at $115 million, Mr. Barnett was finding that demand among the world’s superrich for the largest apartments was heavier than he expected. The full-floor apartments — all bought by billionaires — are almost gone. So two months ago, the developer combined smaller apartments into four apartments of 5,500 square feet each that could be configured with five bedrooms or with four bedrooms and a library. Asking price: around $35 million apiece.
“As pricing has escalated,” Mr. Barnett said, “you are reaching into a new class of buyer, a wealthier class of buyer, and they want to live graciously. It is not the amount of bedrooms that counts, it is the graciousness of the space that matters.”
Because the demand for apartments in lower Manhattan is global and from extremely wealthy people, simply relaxing restrictions on height or preservation is unlikely to bring down apartment prices. As the price of residential space per square foot declines people will consume more space per apartment. The difference between Time Warner Center and 15 CPW is about 25% of the TWC apartment size. Every five TWC apartments are four 15 CPW apartments. That's just new construction. Combinations are reducing the supply of apartments in older buildings. (I've posted about this previously.) Those arguing that current land use regulations are getting in the way of the market should be prepared for plausible market-based outcomes that are no more socially optimal, at least do not offer cheaper rents, than the current system.
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