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Air Rights, the Hidden Component Of Density

In dense cities, what you can build above land is as important as what you can build on it. As developments push ever higher, air rights are becoming a serious source of equity. Cities and owners are finally realizing the value above them, selling unused vertical space for millions to cantilevered neighbors. Pricing airspace as property is the hard part. 

The legal theory around air rights, often called transferable-development rights, traces its roots back to the 13th-century ad coelum legal doctrine. The legal maxim “Cuius est solum, eius est usque ad coelum et ad inferos,” Latin for “whoever’s is the soil, it is theirs all the way to Heaven and all the way to Hell,” was first recorded by Accursius, a Roman jurist known for his codification of law. For centuries the maxim guided the property industry until the invention of air travel. Planes and helicopters changed everything, the value of air wasn’t just what could be built in it anymore but now included what could travel through it. 

In 1946 the United States Supreme Court began the end of the ad coelum legal doctrine with its ruling in United States vs Causby. The plaintiff said military planes flying overhead were causing his chickens to die from stress, arguing he was entitled to compensation. Justice William O. Douglas wrote that while landowners must have the right of exclusive control in their ‘enveloping atmosphere,’ property ownership does not extend upward indefinitely. The decision noted that ad coelum “had no meaning in the modern world.” The court ruled property ownership only extends 365 feet upward, and passed that, the United States government claims exclusive sovereignty of all ‘navigable airspace.’ Any structure above 500 feet is considered an obstruction by the Federal Aviation Administration and must comply with special laws regarding lighting and marking. Architecture and engineering changed the conversation around air rights with the rise of cantilever buildings. The strength of steel and concrete allowed cantilevers to act as structural support skeletons so that buildings could make use of adjacent vertical space with overhangs. First popularized by Frank Lloyd Wright, cantilever buildings and skyscrapers are now commonplace in dense cities around the world. 

Architecture and air travel have created a marketplace for air rights but pricing is never clear. It’s all about density. Air rights are tied to Floor Area Ratios (FAR), a building-to-land ratio calculated by dividing the gross floor area of a building by the area of the plot. Think of a building’s FAR as the 3D rectangle the property occupies from the ground level to 500 feet. The higher the FAR, the denser the development. Buildings with low FAR can share or sell unused space, creating the market for air rights. 

San Francisco’s density has created one of the most lucrative air rights markets in the world. The city is trying to cash in by selling up to 1.2 million square feet of unused development rights above City Hall that would allow developers to increase the size of adjacent projects. San Francisco hopes to charge $37.50 per square foot, bringing in an estimated $45 million. This isn’t the first time San Francisco has tried to monetize its density. Back in 2014, the city sold 1.1 million square feet of air rights above the City’s War Memorial, funding more than $32 million in repairs with the proceeds. New York is the only comparable air rights market. In 2018 owners of Grand Central Terminal broke a record when they sold 680,000 square feet of air rights for $240 million, paying $352 per square foot for air. 

Pricing air rights is difficult because of variability. Determining site feasibility requires some imagination and planning. Some skyscrapers need development rights to allow for crane access over another building, pricing the cost of the rights into construction. Sometimes air rights simply are not for sale, competing projects withhold development rights to prevent neighboring towers from rising to block their own views. Often construction costs make further vertical development unreasonable. Zoning plays a big role in determining how much air above your property you’re allowed to use through height restrictions. But air rights aren’t just for making buildings taller. Vertical spaces above buildings can be used for telecommunications, solar panels, and billboards, each with the potential to boost an asset’s NOI. 

“We recently sold a property involving a billboard company leasing the air space above the building for $45,000 a year,” Tom Aylward, a manager in Melbourne sales and investments at JLL, said. Like in New York, the density of Australia’s biggest cities has the commercial real estate industry paying attention to air rights. “You have a right to it, so you can lease it, assign or sell it. The air above your building or land has the potential to generate significant profit.”

Asset owners and managers always looking for ways to maximize the profit of the plot or building are finally understanding that the value of property extends upward. Today some of the most beloved skyscrapers like Chicago’s Prudential Building wouldn’t exist without acquiring the air rights of neighbors. Already a source contention and laden with complexity, air rights are only getting more complicated with the widespread adoption of drones. Low-flying aircraft are changing the definition of navigable airspace, further clouding how much air above your property you actually own. Air rights are becoming a privacy issue, not just a development issue. Determining how much privacy is worth above your property is even more difficult than vertical development. 

As buildings get taller, cities denser, and drones more popular, air rights become more important. Air rights are no longer a quirky esoteric set of real estate laws but an essential part of urban asset ownership. If you’re buying, selling, or managing a building in a dense urban setting, understanding the asset’s air rights is part of due diligence. 

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