The Price of Land in the New York Metropolitan Area by Andrew Haughwout, James Orr, and David Bedoll at http://www.newyorkfed.org/research/current_issues/ci14-3.pdf

An interesting study was published recently by the Federal Reserve Bank of New York about the price of vacant land in the NY metro area.

It starts by citing a transaction in 2000: a 3.4 acre parcel on the southwest corner of Central Park which sold for $345 million, and whose buildings were demolished to make way for the Time Warner Center. That’s $100 million per acre. But it certainly isn’t a record, even in Manhattan.

And, yes, land value matters. It matters quite a lot, in ways that most of us don’t understand. (As my mother would have put it, “Our educations have been neglected” – but in this case, even those who should be teaching us can’t, because their educations were lacking!)

The article notes that

Physical space is a requirement for all types of economic activity, from housing to manufacturing and service production, making the value of land an important feature of any economy. The high price of the Columbus Circle property reminds us that the price of land in an urban area is a fundamental measure of the area’s attractiveness. Moreover, changes in the value of land over time and space can provide insight into a host of important regional and macroeconomic issues. However, because land often comes bundled with a structure — and thus is generally not priced separately in a real estate transaction — its value is difficult to measure.

Land value isn’t difficult to measure. It cost something to tear down the existing structure on that 3.4 acre parcel, and the cost of that demolition, added to the transaction price, gives a very good indication of the value of the site.

In places where land is scarce, and obsolete buildings abound, teardowns provide just as valid an indicator of land value as do the sales of vacant land. And one might be led to ask why on earth there should be ANY vacant land in Manhattan – what are the conditions that permit a landholder to keep a site in Manhattan, or any urban area, vacant?

The study defines the NY metro according to the data they had available – 4 NYC boroughs and ten counties in northern and central New Jersey – a definition which excludes Rockland, Orange, Westchester, Nassau, and Suffolk Counties in New York and Fairfield County, Connecticut, which are usually considered part of the NY metro area.

Further, it is confined to properties with occupied structures, which might exclude some properties which are being bought entirely for their land value, even if they come with tenants.

They estimate that the price of an acre of raw land near the Empire State Building was more than $90 million in mid-2006. (One might consider that the Roosevelt Hotel, which occupies about 1 acre near Grand Central Terminal has been rumored to be valued at $500 million to $1 billion as a teardown, in 2007-08, and that a one-acre site near Times Square with obsolete buildings which were promptly torn down, sold for $250 million nearly 10 years ago. Also, the land under the World Trade Center is said to have been worth roughly as much as the much larger lots under Laguardia and Kennedy Airports about 5 years ago; all owned by the Port Authority.)

They note:

Conventional wisdom holds that vacant land is rare in urban areas, particularly in the New York area. Of the 6,186 land sales we examine between 1999 and mid-2006, 623 transactions or roughly 10 percent, were in Manhattan and 1,639, or about 25 percent, took place in the other parts of New York City; the remaining sales took place in northern and central New Jersey. Overall, vacant land transactions occurred throughout the region, with a heavy concentration in the most densely developed areas

One might be led to ask why there should be vacant land in America’s largest city. What perverse processes are producing the incentives that permit that?

For each property in their database, they calculate its distance from the Empire State Building, as the crow flies; easy, but not necessarily relevant, given the importance of infrastructure and transportation systems.

Interestingly, **the study found that vacant land designated for commercial and industrial use doubled in value over the 7 years, and vacant land intended for residential use rose more than five-fold.**They cite the OFHEO data that residential property prices rose 130% during the period.

[I wonder whether “residential” for the purposes of this study – not the OFHEO data, but the study data – means high-rise condominiums and apartments, or single family homes.]

Their conclusions are these:

  • …we observe a relatively sharp decline in land prices with distance from the Empire State Building, our assumed center of the metropolitan area, and an upward movement in prices over time.
  • We interpret the rising price of sites for constructing businesses and residences as a key indicator of the strength of the area’s economy and the increasing value of the productivity and amenities of a location in the region. … The region’s increasing land prices also indicate a rise in the perceived value of owning vacant parcels as potential building sites to meet future property demands. The numerous ongoing conversions of existing property throughout New York City suggest that the value of this option may be particularly high in the city.

Henry George, David Ricardo and John Stuart Mill would be not be surprised. And most of us don’t recognize the significance of these data, and their effects on our day-to-day lives and opportunities, or those of our fellow human beings.

I’m glad to see the Fed starting to pay attention to this very important metric. (See also the studies* cited in the references.) Soon, I hope, our muncipal governments will begin to notice, and to realize that the solutions to many of their most pressing and difficult problems lie in collecting some, more, most of this community-created value for the community’s purposes!

* Davis, Morris A., and Jonathan Heathcote. 2007. “The Price and Quantity of Residential Land in the United States.” Journal of Monetary Economics 54, no. 8 (November): 2595-620.

Davis, Morris A., and Michael G. Palumbo. 2006. “The Price of Residential Land in Large U.S. Cities.” Board of Governors of the Federal Reserve System Finance and Economics Discussion Series, no. 2006-25, June.

Are we to have land speculation, or to have prosperity and opportunity for all? I’m not indifferent between the two.