Air rights, once coveted, plummet in value

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Two years ago, demand for air rights was, well, through the roof. “For residential use at the peak of the market, [air rights] were between $400 and $500 a square foot,” said Stuart Siegel, executive managing director at commercial real estate firm Grubb & Ellis.

The rights, often called development rights by those in the industry, were being traded by everyone from real estate giants like the Related Companies to small-time developers. The goal: to erect ever-taller buildings, with which to pull in more income.

Stephen Lefkowitz, a partner at Fried Frank, which handled the transfer of several hundred thousand square feet of air rights from the St. Thomas Church on Fifth Avenue to the MoMa Tower to be built at 53 West 53rd Street, noted that at the time sales for air rights were “very active.”

“People were looking to accumulate floor area from wherever they could,” Lefkowitz said.

Take the sudden interest in air rights available in the theater district. For years after the Midtown theater district was rezoned, developers simply weren’t taking advantage of these rights, but there was a flurry of activity starting a few years ago.

The Related Companies and Boston Properties, for example, transferred a total of 120,319 square feet of development rights from three Shubert-owned theaters in order to construct an office building at 740 Eighth Avenue, which is now on hold until the economy rebounds.

But now, as prices have declined throughout New York City’s real estate market, the downturn has grounded the cost of air rights.

Siegel estimates that today, air rights in Manhattan are worth $150 to $300 a square foot, though he said it’s nearly impossible to come up with an exact valuation because no one is trading them, and thus there are no comps.

“The only reason to be seeking air rights is if you’re going to develop the land rights, and no one is doing that right now,” Siegel said.

Evidence of dipping prices can be found in the West 30s, where what had been a consistent rise in the value of air rights has now reversed.

Specifically, as part of the city’s rezoning of the West Side in 2005, the city created a program that allowed developers to get a zoning waiver of sorts through the District Improvement Fund Bonus. “They are a pool of development rights that were selling to anyone who wanted to develop in that certain area,” Lefkowitz explained.

The program allowed developers to pay for the right to exceed “the base floor area ratio” on their projects. The city then used the funds to provide infrastructure and other upgrades to the Hudson Yards area.

Since the DIFB was created in early 2005, the price of the rights increased every year — until this one.

Last month, the city dropped the price for those rights to $113.22 per square foot from $114.83.

Lefkowitz said that it’s not the small amount of the decrease that’s significant, it’s the fact that there was a decrease at all.

“They were never that expensive — they wanted to sell them — but I think it’s more symbolic than anything else,” Lefkowitz said.

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“The demand for development rights has shrunk, thus their value has declined.”

He continued, “People assumed that the prices would continue to rise, but they lowered them, which is a sign that [the value of] development rights [as a whole are] going down.”

Indeed, while more than five years ago development rights were priced at a significant discount to land rights, that spread virtually disappeared during the boom.

“There was no hard and fast rule, but maybe 40 or 50 percent,” said Lefkowitz, estimating the discount one could purchase air rights at compared to land rights pre-boom.

“There was such a hunger for development rights and development sites,” Lefkowitz said, explaining why the discount evaporated. “But now the spread between the land value and the development right value has increased again.”

Siegel noted that even though purchase prices for buildings are down in the ballpark of 30 to 40 percent, land prices and development rights are off even more.

The decline is such that many people who bought development rights during the good times might now be regretting it.

“You pieced everything together in 2004,” said real estate appraiser Jim MacCrate of the Long Island-based MacCrate Associates, which does work in the five boroughs and throughout the metro area.

“[But] by the time you get to 2009, you should be building and you’re sorry you bought the air rights because it might be 15 years before that building should be built,” he noted. “It might be better as a parking lot.”

Siegel is intimately familiar with this phenomenon.

He is representing 100 Vandam Street, a five-story building in Lower Manhattan purchased by Beck Street Capital in the fall of 2006. The firm had intended to use 32,000 square feet of air rights, which came with the building, in order to go up an additional 10 floors.

“We would have had 15 stories there,” said Siegel. “But with the change in the market, we’re not going forward with speculative development. You sell or rent the space you have.”

The building is now on the market for $30 million, including the air rights; it was purchased for $20.5 million.

“You come up with a price that makes sense on a per-square-foot basis; the air rights are like a bonus,” said Siegel. “If you only ascribed $100 a foot to the air rights, that’s $3 million.

“We look at the air rights as part of a redevelopment of the property for a user or an investor that has a vision to keep the building in its current state, rent it out, carry itself and then build when the market changes,” he added.

While it’s unclear when that change will happen, many believe that air rights will retain value over time.

“Inherently air rights still have their value; it’s just that right now you can’t find it,” said architect and real estate agent Doug Korves. “Cities get taller, buildings get bigger, building up is always going to be the way to go.”