The Real Deal New York

The Long View: Here’s where resi development would boom if NYC had no zoning

Economist IDs areas where building more apartments would make financial sense for developers

November 23, 2016 07:00AM
By Konrad Putzier

(credit: Jason Barr) Click to enlarge

The numbers indicate by what factor residential square footage could increase in each zip code if it weren’t for zoning and landmark restrictions (credit: Jason Barr) Click to enlarge

What would New York City look like if there were no zoning or landmark restrictions? Gowanus could be a skyscraper canyon, the West Village could look a lot more like Murray Hill and the low-rise neighborhoods of northeastern Queens could see a construction boom – at least according to one urban economist.

Through an economic analysis of building density, Rutgers University-Newark’s Jason Barr found that Red Hook, Gowanus, Carroll Gardens, Park Slope Brooklyn’s Chinatown, the West Village and northeastern Queens are the city’s most underbuilt residential neighborhoods. If zoning restrictions were removed, he says, the housing stock in these areas could surge.

Here’s what Barr did: first, he calculated the median residential sales price for each zip code based on public sales records between May 2015 and April 2016. He then estimated average construction costs by building height based on his own prior research – ranging from $250 per square foot for single-story buildings to $1150 per square foot for 91-story towers.

Barr assumed that in a free market without zoning restrictions, developers will build exactly the amount of residential space that maximizes profits – i.e. maximizes the difference between current residential sales prices and construction costs.

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Based on that assumption, and his estimates of construction costs and sales prices, he calculated the total square footage of residential space for each zip code that would maximize developer profits. Then he compared that profit-maximizing square footage to existing residential square footage. If zoning restrictions were removed, the areas where the difference is greatest are the areas that are most underbuilt and would likely see the most residential construction.

The map above shows Barr’s findings. The dark blue spots are zip codes where the profit-maximizing residential square footage is more than five times the existing square footage. In other words: these are neighborhoods where developers would, in theory, build five times as many apartments as currently exist, if zoning let them.

In Red Hook and Gowanus, two of the dark-blue zip codes, gentrification has driven up apartment prices, but much of the neighborhoods is zoned for industrial and low-rise use, meaning developers have had a tough time meeting all that demand. In Brooklyn’s Chinatown, an influx of overseas investors has pushed up prices, but low-rise zoning means little new construction has followed. Restrictive zoning has also held up supply in northeastern Queens and the West Village, the two other dark-blue areas on the map.

We asked around among zoning experts and brokers, and without having seen Barr’s research, they agreed with some of his findings. Stephen Smith, a partner at data-centric real estate firm Quantierra and a blogger at Market Urbanism, said that New York’s most underbuilt area is “what used to be called the Lower West Side (Tribeca up through West Chelsea),” followed by areas where single-family homes dominate, such as Forest Hills and Ditmas Park, low-rise areas closer to Manhattan such as Brooklyn Heights, and industrial neighborhoods like Sunset Park. All the areas Smith pointed out are dark on Barr’s map.

Ron Solarz, an investment sales broker at Eastern Consolidated TRData LogoTINY, said he considers Gowanus and Red Hook the city’s most underbuilt areas, saying “they would explode” if zoning restrictions were removed.

There are some flaws to Barr’s calculations. The most important one: He uses current sales prices, but if developers were to flood the city with new supply, prices would quickly fall — meaning developers would likely end up building less than his calculations suggest. Moreover, Barr’s data doesn’t weed out multifamily sales that are likely development deals, or sales of stabilized properties. The fact that he only looks at a year’s worth of sales means his data may be skewed by a single big sale for some zip codes. And finally, it doesn’t account for lot sizes – neighborhoods with large lots tend to be more hospitable to development than those with small ones. These flaws mean we shouldn’t treat Barr’s map as an exact guide to how much developers would build absent zoning and landmark restrictions.

Still, the data gives a general sense of which neighborhoods are held back by zoning and landmark restrictions. It also shows which neighborhoods aren’t significantly underbuilt – and one of them is East New York.

The neighborhood is the focal point of the de Blasio administration’s push to use upzoning to encourage affordable housing construction. But Barr’s calculation suggests that a simple rezoning won’t do much to encourage construction: apartment prices in East New York are simply too low to spur large-scale development.

The rationale behind the city’s rezoning push is to spur market forces to increase housing supply, thereby driving down apartment prices across the city. So why wouldn’t it focus on rezoning the neighborhoods where those market forces would be greatest, namely the most underbuilt areas?

The dilemma here is that neighborhoods that offer the most potential for development due to their high apartment prices also tend to have a high number of wealthy, well-connected residents. Cue NIMBYism. “The parts of the city with the most demand also have the most resources to fight these things,” Smith said. “The easiest places to get rezoned tend to be low-income neighborhoods like East New York — for better or for worse.”

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