What the Last Frontier of Manhattan Says About the Economics of Housing

Hudson Yards, the largest private real estate development in U.S. history, is being built during a time when New Yorkers worry about the burdensome cost of housing. Will the megaproject alleviate the city's housing pressure?
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Hudson Yards construction progress in 2015 as seen from the High Line.

Hudson Yards construction progress in 2015 as seen from the High Line.

On the far west side of midtown Manhattan, a massive new neighborhood rises into the sky.

Standing amid the flurry of construction in Hudson Yards—a $25 billion megaproject that's become the largest private property development in the history of the United States—you can see marvels of human architecture coming into shape: new parks, an avant-garde art installation, a half-billion-dollar cultural center, a seven-story mall that will house dozens of high-end shops and restaurants, and groves of sleek, translucent towers.

The path to creating Hudson Yards began in the early 2000s, when city officials dreamed of a gleaming new business district and sports stadium, which they hoped would grow the city's economy and lure the 2012 Summer Olympics (an ultimately fruitless endeavor). Mayor Michael Bloomberg came into office championing the idea and offered a comprehensive plan to develop the neighborhood in 2003.

Back then, Hudson Yards was a 360-acre industrial wasteland, cut off from the subway system and full of run-down warehouses, factories, and rail yards. To transform this no man's land, it would take political wrangling over re-zoning and expansion of the subway, wooing of investors and developers, and billions upon billions of public and private dollars. It was an audacious idea, and when marshaling support for the project, officials liked to drum up the drama by referring to the area as the "last frontier available in Manhattan."

Fast forward 15 years and Hudson Yards is being erected during a time of deep anxiety about the lack of affordable housing in the city. New York has what economists call an inelastic supply of housing. When cities have this type of housing market, a lack of new supply acts sort of like a pressure cooker for rising demand, and the result is prices that shoot up like screaming steam. Despite a massive increase in demand to live in New York, housing supply has increased only about 11 percent since 1996—and the consequence has been a 190 percent increase in prices. Contrast that with cities like Las Vegas, Austin, Charlotte, and Atlanta, all of which have elastic housing supplies. There, instead of skyrocketing prices, strong demand for housing feeds a frenzy of new construction, such as the over 53 percent increase in housing stock seen in Atlanta since 1996. This difference in supply has been key to explaining why the elastic metropolises have seen swelling populations and relatively moderate price increases while the inelastic ones have seen the inverse.

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There are two major factors that economists believe can make a city's housing supply inelastic: restrictive government policies and a shortage of developable land. New York provides a prime illustration of both. What initially attracted European settlers to the region in the 17th century—its natural harbor and waterways—has since become a double-edged sword when it comes to housing costs. The Massachusetts Institute of Technology economist Albert Saiz has measured the degree of land constraints in U.S. cities. He estimates that over 40 percent of the New York City area is undevelopable due to its geography, which makes it one of the 25 most land-constrained cities. Combine that with the fact that New York is a relatively old and long-desired city—with centuries of development leaving few big frontiers like Hudson Yards left—and it's easy to see why geography is a major constraint.

And while city developers could, in many cases, bulldoze existing low-rise structures and build vertically, government regulations often stymie those projects. It's a problem that's ultimately political in nature: a bulldoze-and-build-vertically strategy can make politicians enemies—from existing owners who don't want to lose their properties, neighbors who don't want to see their home values dip with a flood of new supply, and preservationists concerned about destroying historic neighborhoods.

It's no coincidence that city planners were excited about Hudson Yards as the site for a megaproject. It wasn't historic. It sits on the outer rim of the island and neighbors a commercial area that already has big buildings. It had only a small population of denizens. And while there was some opposition to the redevelopment plan, the antagonizers had neither big money nor numbers, and those voices were quickly drowned out.

When it comes to redeveloping a neighborhood, the political battle usually centers on zoning regulations. In 1916, largely in response to resident outrage over the then-newly built skyscrapers' propensity for blocking sunlight, New York City became the first in the U.S. to pass citywide zoning restrictions. Zoning regulations dictate to developers what they can build and where they can do it. These and other regulations have accumulated considerably over the years—to the point that New York has one of the most restrictive building environments in the U.S. The economists Ed Glaeser, Joseph Gyourko, and Raven Saks conducted an analysis of Manhattan real estate and estimated that such regulations add a staggering 50 percent to the cost of building. They call this cost a "regulatory tax"—and they blame it for the decline of development in the city in past decades.

Hudson Yards, which long housed garment factories and the like, was originally zoned mostly for manufacturing. In order to get the project in motion, the Bloomberg administration had to fight for rezoning. That battle included quite a bit of concession on the mayor's part: Though he had originally wanted two blocks at the heart of Hudson Yards that would have no limits placed on building heights, that plan was scuttled after it faced heavy political resistance from legislative bodies. Nonetheless, the scale of Bloomberg's 2005 and 2009 rezoning victories stands as one of his major achievements. The neighborhood now sees the sprouting of so-called "supertalls," including 30 Hudson Yards, a 1,296-foot skyscraper that will house an observation deck higher than the Empire State Building's.

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While major world cities like New York have clearly seen large increases in housing costs in recent decades, there's a lot of research suggesting that real estate prices—even in major cities—didn't really grow as much as one might think before this era. A famous study by the Dutch economist Piet Eichholtz, for instance, examined prices of prime real estate along the Herengracht canal in Amsterdam over three centuries. His findings were surprising: while the value of these buildings would see sustained increases for periods as long as 50 years, ultimately they would come crashing back down. The cycle repeated itself over and over again. All said and done, he found that, between 1628 and 1973, real housing prices only grew at 0.2 percent per year. That means it took a home in a prime area of the city nearly 350 years to double in value.

Likewise, in a study of New York City's commercial real estate market over 100 years, the economists William C. Wheaton, Mark S. Baranski, and Cesarina A. Templeton found that, after controlling for inflation, commercial real estate values in the city were actually "30% lower in 1999 than they were in 1899." At first glance, that may seem surprising, but then just think about the massive increase in the supply of office space brought by the city's expansion upward with new skyscrapers and outward with new bridges, tunnels, and modes of transportation over those years. This expansion more than kept up with population and economic pressures that demanded more—and, as a result, prices today for Manhattan office space aren't much different than they were over a century ago.

Yet there's a crucial difference between the markets for commercial and residential real estate in New York: Commercial interests have been granted much more flexibility to build massive structures. A big reason for this, Glaeser, Gyourko, and Raven argue, is that "commercial and residential real estate are often located in different areas," which means that "residential property owners will have a smaller incentive to fight commercial construction."

The majority of Hudson Yards, which was rezoned to provide millions and millions of square feet in new office, hotel, and retail space, is reserved for commercial uses. That said, the neighborhood is expected to eventually offer up to 20,000 apartments—which is just under the total amount of new housing units built in all five boroughs last year.

The new neighborhood is also expected to reserve about 5,000 of these apartments at affordable rates, which is not nothing. These units, which are obtainable for low- and medium-income New Yorkers via a housing lottery, are one of the outcomes of the political tussling over rezoning. That said, the vast majority of apartments in Hudson Yards will be for the ultra-rich: at the One Hudson Yards high rise, for instance, one-bedroom apartments start at about $5,000 per month. Some economists argue that construction of any new housing units, whether luxury or not, will ultimately have a cascading effect that makes housing more affordable in general. But the recent blitzkrieg of luxury apartment construction in many cities, while making a dent in the price of high-end rentals, has yet to show up as a benefit for everyone else.

Hudson Yards demonstrates the power of the one-two punch of rezoning and public investment to jumpstart development. It's a magnificent showcase of modern architecture and city planning. But it's unlikely to change the dynamics that are transforming New York City into an exclusive playground for the rich. In fact, it looks like it will only play into this trend. The question remains whether we're in a new normal, where popular cities like New York continue becoming more and more exorbitant, or if the same processes seen in the past—continual development, both upward and outward—will help bring prices back down.

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