Why is NYC Commercial Real Estate So Expensive?

26 November, 2020 / Alan Rosinsky

You’re not alone if you’re wondering why New York City’s commercial real estate prices remain high despite the challenging market. To shed light on this mystery, we’ll explore five key factors that continue positioning the city’s commercial real estate prices around the top of the global real estate market. Together, they tell a fascinating story of why owning or leasing NYC commercial real estate comes at a premium. Let’s dive in.

1. A Limited Amount of Space

Imagine playing a game of Tetris on a board that’s already filled to the brim. That’s what property development in New York City resembles, a complex puzzle with scarce room for new pieces. Nowhere is this more apparent than in Midtown Manhattan, a concrete jungle filled with towering skyscrapers and zoning constraints that limit profitable construction.

Clever developers have found a way to game the system. Instead of looking for open land, they look upwards. Consider the strategic move by JPMorgan Chase. By demolishing their existing headquarters at 270 Park Avenue, they plan to erect a taller structure, increasing their space without expanding their footprint.

The tight squeeze has sparked creativity. For instance, landmarking approximately one-third of Manhattan has led developers to venture into neighboring boroughs like Brooklyn and Queens. In addition, developers are breathing new life into underused areas of Manhattan. Hudson Yards is a shining example. This former industrial site has been reborn as a state-of-the-art commercial district, attracting companies like a magnet with its fresh, modern amenities – a rare find in Midtown’s older buildings.

2. Strict Zoning Laws

In New York City, building regulations act as the gatekeepers of construction. Detailed zoning laws govern everything: height, floor-area ratios, parking, and setbacks. Moreover, these stipulations shift across boroughs and zoning districts, adding layers of complexity.

If proposed today, current zoning laws would outlaw almost 40% of Manhattan’s existing buildings, which is astounding. That’s the takeaway from a revealing New York Times study. With such restrictions, developers look upwards, seeking the sky as their new frontier.

But ascending skyward is a challenging feat. Each property can buy the right to expand upwards, also known as air rights, but the rules vary across the city. Plus, the cost of these rights can significantly inflate the already substantial expense of NYC construction.

Take the case of a modest four-story building at 147 West 40th Street. It’s on sale for $26 million, but that price includes valuable air rights. Moreover, look at One Vanderbilt, the city’s fourth-tallest building, made possible by a hefty 500,000 square feet of purchased air rights. The takeaway is that building upwards isn’t just an option—it’s a necessity. 

3. Intense Competition

New York City: where commercial real estate resembles a fierce battlefield. A scant availability of vacant land sets the stage for relentless competition. Demand surges, outpacing supply, and this imbalance inevitably drive prices skyward.

In this pressure cooker, office rents, especially in Manhattan, command rents that often exceed $100 per square foot. 

Moreover, with globally renowned corporations eagerly vying for these prestigious addresses, startups, and mid-sized businesses are often priced out into more affordable neighborhoods.

So why is NYC commercial real estate expensive? The saga of intense competition, spurred by scarcity and global prestige, unveils a complex narrative.  

4. Rent Control and Stabilization Laws

We must consider local legislation when pondering why NYC commercial real estate is expensive. Initially established in the World War II era, rent control and stabilization laws play a pivotal role. 

Rent control and stabilization laws protect tenants, guaranteeing renewal rights for rent-stabilized spaces. It’s a rare and coveted opportunity for businesses to secure such a unit, often with rent significantly below market rates. And once businesses secure such spaces, they will likely hold onto them. 

Imagine running a business from an office that costs $1,200 per month, starkly contrasting to market rates reaching upwards of $3,000.

However, these laws inadvertently contribute to the high demand and limited supply, ramping up the competition and cost. It’s a classic case of demand exceeding supply, thus increasing prices. So, while the laws protect some, they inadvertently fuel the race for affordable commercial spaces, pushing the market prices sky-high.

5. High Construction Costs

The staggering construction costs are the final factor that answers the “Why is NYC commercial real estate expensive?”. NYC holds the dubious honor of being the priciest construction market in the U.S., according to a 2019 report by the New York Building Congress.

Consider this: the cost to build Class A office space in NYC outstrips other major U.S cities by a startling 15% to 50%. Surprisingly, it can even be $300 more per square foot than certain Asian and Middle Eastern cities.

Why such exorbitant prices? The answer lies in a construction boom over the past decade, driving up the demand for materials and labor. This upward trend in the construction market has predominantly focused on Class A office projects and public infrastructure projects. Consequently, these sky-high construction costs directly impact the final cost of NYC commercial real estate, explaining its expensive reputation.

The Key Takeaway

New York City’s commercial real estate resembles a prized artifact at an auction. Everyone wants a piece, but only the highest bidders get it. So we’ve journeyed through the maze of scarcity, zoning regulations, relentless competition, intriguing rent laws, and towering construction costs that answer the question, “Why is NYC commercial real estate expensive?”

The key takeaway? It’s straightforward. NYC’s commercial real estate is costly because it’s intensely desirable. It’s where businesses crave to set up shop, seduced by the allure of success and prestige that the city offers. As a result, businesses are willing to pay a premium to be part of the NYC scene. So, the expensive tag on NYC commercial real estate isn’t just about costs. It’s also about the city’s unique appeal, which remains undisputed. 

 

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