With just under 50 units, the building is currently priced around $1,000 per square foot. Minimum bids will probably be set at around $600 per square foot, the lender said.
Here’s my question – what is the marginal cost of building another square foot in NY? If you walk around Manhattan, one of the things you notice is that while there is plenty of new construction, in general the new buildings are not the tallest around; the big 40+ story residential towers generally predate the late 1970s economic meltdown. $600/foot sounds high for the extra steel, concrete, and labor of putting up another floor.
One of the finest articles I have ever read on real estate hit the NYT Magazine on March 5, 2006 – just in time, as it turned out. It is a profile of Edward Glaeser and his work on the impact of zoning regulations.
As Glaeser says: “It’s so easy to forget the world that we were living in around 1970, when basically almost all of the value of houses was in the physical infrastructure. That was actually the cost. There was some land, and it was worth something, but it wasn’t worth more than 20 percent of the value of the house.” Even in New York City, Glaeser says, the price of an apartment back then was essentially the cost of building the next floor. In researching New York City’s housing prices, in fact, Glaeser and Gyourko discovered that over the past 30 years, the average height of new residential buildings in Manhattan decreased in size. “That’s crazy,” he insists, especially in light of how much the demand to live in New York has increased. “You know, if prices in Manhattan are skyrocketing, you should be building more and more at 50 stories, rather than at 30. Not the reverse.”
Let’s go back to Manhattan in the 1920’s, Glaeser says. “New York in the 1920’s is a pretty developed place, a pretty mature place. But they’re producing a hundred thousand units a year. They’re tearing up swaths of Manhattan and building higher buildings.” That would be legally and politically impossible today, but as he and Gyourko see things, it is precisely those legal and political roadblocks to “tearing up” the city that have made the place so expensive. Actually, in 2004, the two men took a close look at Manhattan and estimated that one half or more of the value of condominiums in the borough could be thought of as arising from some type of regulatory constraint preventing the construction of new housing.
And on the subject of bubbles, here is Doug Short‘s graph of market crashes: