- REAL ESTATE EDUCATION
- GIVING BACK
Testimony of the Real Estate Board of New York Before the Manhattan Borough Board, in Support of the Greater East Midtown Rezoning
March 2, 2017
Subject: Greater East Midtown Rezoning
Sponsor: New York City Department of City Planning
The Real Estate Board of New York (REBNY) is a trade association with over 17,000 members comprised of owners, builders, residential and commercial brokers, managers, lenders, and other real estate professionals active in New York City.
The East Midtown business district is a tremendous driver of economic activity and employment, and is critical to the City’s tax base and economy.
The Greater East Midtown rezoning plan is faithful to the framework of the Steering Committee report that emerged after a year-long collaborative process among the key participants. An important benefit that came out of this collaborative process is the as-of-right transit bonus, which will facilitate new office development and important public realm improvements for the district. REBNY supports the rezoning plan to invigorate East Midtown, enhance the public realm and provide real benefits to landmark properties.
However, we think that there are aspects of the plan that are serious impediments to the realization of the plan’s goals: revitalizing the office district, funding vital improvements to the public realm, and providing our treasured landmarks with the opportunity to transfer their unused development rights to fund their ongoing maintenance, operations, and, in the case of religious institutions, their mission.
The concept of a floor price to establish a minimum contribution to the improvement fund is an obstacle to achieving these goals. In a market where prices are coming down, the minimum contribution, as a percentage of the total value of the transaction, will rise above the proposed 20%. This will discourage sellers from conveying unused development rights as their return would be seriously diminished by this fixed minimum contribution.
Commissioning the city to prepare a new appraisal is little comfort given the time it would take to complete this assignment. Additionally, given the overstatement of the value of air rights in the initial market survey, there are no assurances that even the new results would match the buyer and seller’s assessment of the market value of development rights.
The floor price established by the city based on the market survey is flawed. For instance, the land sales cited in the Landauer survey are approximately $400 psf at the low end in the study area. However, in East Midtown we are not conveying land; we are conveying development rights. According to the market survey, a development rights transaction which would permit residential use has a value of less than $250 psf at the low end. It seems to us that this is the more appropriate value as a basis for establishing a floor price to determine the contribution for the overbuilt floor area.
This rezoning plan contains remnants of the 2013 plan, namely a desire to encourage new development along the avenues. We must acknowledge that the definition of a qualifying site in this plan is more flexible than the earlier plan, but more flexibility is needed.
However, as a number of our members have noted, the cost for a new office building, even at the higher FARs, is prohibitively expensive in East Midtown for a number of reasons. Site acquisition costs on the avenues with the highest FAR, such as Park Avenue, exceed $1,000 psf. To achieve the higher FAR requires the acquisition of development rights, either through transit improvements or the purchase of landmark air rights. Other components are both the lost revenue from demolishing an income producing property as well as the cost and time to demolish an existing building in the middle of a dense urban environment. Lastly, there are the costs associated with the development of a new building: hard and soft construction costs, financing, marketing and lease-up costs, and tenant improvements.
We estimate total development costs to be around $2,340 psf. To make such a project economically feasible average rents for the entire building should be approximately $204 psf. At the moment, according to the city’s market study, the highest average rents in East Midtown are around $115.
To address this economic concern, we have recommended that development in the mid-block, based on qualifying site conditions that would produce the type of new development the city envisions on the avenues, and that enlargements of existing avenue buildings in a manner that effectively results in a new building both be permitted as-of-right. Also, in view of our economic concerns we think one location where new avenue development may be more feasible is along Third Avenue where site acquisition costs and lost revenue costs would be lower than Park Avenue.
There is no planning rationale for excluding the east side of Third Avenue. Not only is it an established commercial corridor, but its transit connectivity makes it one of the most well-connected corridors in New York City. Connected to seven different subway lines and a commuter railroad, the two stations that currently feed this area — Grand Central and Lexington Avenue/51st and 53rd St — are the 3rd and 11th most well-connected stations in the city in terms of access to jobs within a 40-minute train ride. Excluding the east side of Third Avenue from the rezoning, as some have advocated, would be a lost opportunity to revitalize East Midtown, would reduce demand for the use of landmark air rights, and would diminish the contribution into the improvement fund.
We also want to commend the City for the introduction of a public concourse special permit. In response to the community’s call for more open space, the City developed a special permit process that provides the development community with a meaningful incentive of a 3 FAR bonus in exchange for significant public open space, while retaining a public review process that will give the community and elected officials the opportunity to tailor new development to create the open space desired.
In conclusion, retaining Third Avenue and the Pfizer site in the plan, extending new as-of-right development to the mid-blocks, and permitting enlargements on the avenue would create a broad and competitive market for the limited supply of air rights, which would accelerate the sale of air rights and the contribution of funds for public realm improvements.
East Midtown is a key job center in NYC. Its building stock, however, is aging and outdated; many buildings lack the slab-to-slab clearances and design efficiency that today’s tenants require. This rezoning proposal is needed in order to create opportunities for updated workspaces that will continue to attract companies and employers, while also funding much needed transit infrastructure and public realm improvements. It is our hope that the Borough Board will consider the issues we raised and advocate for the strongest plan possible to ensure that East Midtown remains the world’s premier office district.