Why Is Manhattan Real Estate so Expensive?

Manhattan real estate is expensive due to limited space, zoning rules, population density, accessibility of high paying jobs, high construction costs, safe haven demand and tourism.

As a result, Manhattan is home to some of the most expensive real estate in the world. The average sale price for an apartment in Manhattan is well over $1 million, and luxury condos are routinely commanding north of $4,000 PPSF for the most desirable views, locations and building amenities. In 2019, Citadel founder Ken Griffin set a record sale price for Manhattan when he paid $239,958,219 for a penthouse condo at 220 Central Park South.

The NYC borough of Manhattan largely consists of Manhattan Island which is bound by the East, Hudson and Harlem rivers. It’s a fairly small island which measures less than 23 square miles, and it’s home to more than 1,600,000 people. To put that in perspective, Manhattan has roughly 20% of the land area of Queens but over 70% of the population of Queens.

Because of the limited space on Manhattan Island, the vast majority of the land has already been developed. There are very few empty lots or otherwise undeveloped areas of Manhattan as of today.

In fact, the only way to add new apartments is to build additional floors on top of existing buildings or to demolish existing structures and build higher. However, restrictions on development rights (also known as air rights) and land use in the city’s Zoning Resolution make development a costly and highly regulated endeavor.

NYC sets limits on the use and development of land throughout the city according to New York City’s Zoning Resolution. Zoning regulations effectively determine what is permissible on a piece of property in the city based on the particular ‘zone’ the land is a part of. New York City’s Zoning Resolution effectively determines how tall buildings may ascend in various neighborhoods of the city.

The development potential for a lot in NYC is largely determined by the Floor Area Ratio (FAR) which describes how many square feet a building may contain for every square foot of lot size.

For example, a 2,000 SqFt lot with a FAR of 4.0 would allow the construction of a building up to 8,000 SqFt. Floor Area Ratios vary by Zoning District as well as uses (i.e. residential vs. commercial). Regulations for open areas, height and setback also impact the size and shape of permitted construction under the Zoning Resolution.

Much of the Lower East Side and the East Village were rezoned to the R7A and R7B classifications in 2008 to prevent continued, out-of-scale development which many felt was destroying the historical and cultural significance of these quintessential Lower Manhattan residential neighborhoods. The rezoning resulted in overall building height limitations between 75 to 80 feet, street walls between 40 to 65 feet high, and a FAR of 3.0 to 4.0 for much of these neighborhoods. While this may preserve neighborhood character, it does catalyze the continued increase in apartment prices in Manhattan.

NYC has over 27,000 people per square mile, giving it the highest population density of any major city in the country. Manhattan in particular has nearly three times the population density of NYC as a whole, with roughly 70,000 residents per square mile.

According to the Department of City Planning, there is a birth in NYC every 4.4 minutes. The sheer number of inhabitants creates tremendous housing demand in Manhattan, both for rentals and sales.

High paying jobs and other economic opportunities available in Manhattan naturally result in strong demand for housing in the borough itself. Virtually every major national and international company has an office in NYC, and the vast majority are located in Manhattan. Manhattan’s high cost of living has created a virtuous (or vicious) cycle, depending on your perspective, which has pushed up salaries considerably for virtually all New Yorkers.

Just about every profession pays more money in NYC than in other cities around the country, including nurses, plumbers, real estate agents, financiers, construction workers and secretaries. For example, a back office employee at a bank might earn $100,000 in NYC compared to $70,000 or less in Texas, Florida or Georgia.

NYC’s sky-high wage and high material costs have made it the priciest city to build in the world. The average construction cost in NYC is $362 per SqFt, according to Turner & Townsend. The combination of high construction costs and pricey asking prices for lots and development rights means that developers have ever-increasing price targets when it comes to new construction condos in Manhattan.

Manhattan is the primary target in NYC for wealthy people around the world who are looking to invest in NYC real estate. Manhattan real estate is prized by the global elite for its stability, relative safety, long-term upside and portfolio diversification benefits, especially for high net-worth individuals who live in countries with less robust legal frameworks and political governance systems.

New York City is one of the top 10 global tourism destinations. The millions of people who visit Manhattan each year drive up demand for hotels and short-term housing, which reduces the supply of housing available for rent and for sale. Tourism is also a major economic generator, and this drives up wages which in turn encourages more people to live and work in Manhattan.

Pro Tip: In recent years, especially after the pandemic of 2020-2021, Miami has experienced a dramatic influx of transplants from blue states like New York and California. As a result, Miami is now a serious contender vs NYC for the most desirable place to own real estate not just in the U.S., but globally. Learn more by checking out our Miami real estate market predictions for 2021.

Published: 11/21/19