Last Thursday, the Land Use Committee and the zoning subcommittee of the City Council passed the long awaited Midtown East rezoning plan to take a large chunk of Midtown Manhattan east of Fifth Avenue and increase the potential densities for new office construction.
Since then, naturally, all of the elected officials who worked on it have counted it as a major accomplishment that will stimulate the rebirth of Midtown East with as much as 6.5 million square feet of sorely needed new office construction and $500 million of private sector money going into public improvements.
But how much new construction will this plan realistically stimulate and over what period of time?
Essentially, the way the plan works is that properties along the major avenues and wide streets will be permitted to increase their floor-to-area ratios (FAR) by purchasing transferable development, or air, rights from the 45 landmarked properties within the district, making payments into the public realm fund or completing major transportation infrastructure improvements.
But how economically feasible is purchasing the additional FAR? The city had an appraisal done, which determined the value of the FAR to be $393 per square foot. This figure was widely disputed within the industry and the Real Estate Board of New York commissioned a study that determined that the commercial air rights should be worth approximately $175 per buildable square foot. The $393 figure would have been suitable for residential air rights but is far too high for office construction.
The city also wanted to impose a 20 percent tax on these air rights sales with the tax money going into the public realm fund for improvements. This would mean that each sale would contribute $78.60 per square foot into the fund.
Given the strong opposition to the $393 figure, the subcommittees dropped the minimum tax payment to $61.46, or 20 percent of the sale price, whichever is greater. This minimum payment implies a value of the air rights at $307. As this lower price is also well above what a developer could afford to pay for air rights to build an office building, it was fortunate that the city made the $61.46 tax payment the minimum (and not setting some mandatory minimum sales price of $307 a foot) allowing owners of landmarked properties the ability to sell for any price they wish.
It also means that, essentially, the plan has created a Dutch auction scenario among all landmarked property owners. Some of the landmark properties do not have any excess development rights, leaving only approximately 40 candidates as potential sellers. Given the realities of site specifications in the plan, it is unlikely that there will be more than one or two properties under construction at any one time. This means that the developer who is building a new building will go to the first landmarked property owner and simply ask, “How low will you go?” Then call the second landmark property owner and say, “Your competitor will sell for $X, how much lower will you go?” And so on.
For potential development sites in transit improvement zones, the realities could be far worse. The plan calls for certain improvements to transit infrastructure with an amount of buildable square footage associated with each improvement. For example, in exchange for a new $20 million subway entrance, a developer will receive X square feet of additional FAR. When the schedule was made up, $393 was the intended cost. One could assume that the city would simply take the estimated cost of the improvement and divide it by the $393 to determine how many square feet that improvement was worth. So the question is, Will these costs be divided by the new $307 figure? If so, and our thesis about the $307 not being economically feasible for office construction FAR is correct, none of these improvements will get done.
Another reality to look at is the number of sites that can take advantage of this new zoning in the short term. When I was asked at the Cushman & Wakefield midyear press conference about the impact this new zoning could have, I said much of the activity would probably occur between 2027 and 2037 without much activity in the short term.
The city has identified 16 projected sites that they feel will take advantage of this new zoning. The vast majority of those sites involve multiple ownerships with some consisting of as many as eight to 10 individual properties and owners. I have assembled sites like that in my career, and taking seven to 10 years to put something like that together is not uncommon. Additionally, there are five sites that have single ownerships, but within the buildings on those sites, there are 20 to 40 tenants in each of those buildings with varying lease expirations. Buying these tenants out, in addition to the cost of buying the additional FAR, plus the cost of new construction and loss of rent will have to be weighed by an existing property owner relative to what that new building will be worth.
This leaves just three sites that could potentially take advantage of the new zoning in the short term. The most likely is the W Hotel site on Lexington Avenue. Another potential property is the Intercontinental Hotel on Lexington Avenue; however, the owners just completed a $180 million renovation, and it is not likely to take the building down anytime soon. The third site is the Pfizer site at 219 East 42nd Street. This activity excludes the properties in the Vanderbilt corridor, which was rezoned under a separate zoning initiative.
Based on this, don’t expect to see much new office construction in Midtown East anytime soon. Seems like 6.5 million square feet and $500 million private sector dollars for public realm improvements are a long way off, at best.