The New York City Real Estate Model

Understanding the challenges of development in high-density, hyper-competitive markets

It is hard to say exactly what the future of our cities will look like, but it is safe to say that they will likely be much denser. With corporations increasingly moving into urban centers to both chase and attract young, highly-educated talent pools, developers are helping to remake city centers into denser, more walkable districts. 

According to Ryan Baxter, PropTech Advisor for the New York State Energy Research and Development Authority (NYSERDA), this trend is putting the eyes of developers around the world onto New York City. “As more and more urban areas seek to embrace density, it’s our belief that more markets will begin to replicate New York City’s strangeness and follow in its footsteps.” 

New York had been the model nationally (and even internationally) for a major metropolis until the popularization of the automobile. Then, throughout much of the twentieth century, developers moved away from the urban model of dense cities to create more sprawling, decentralized ones like Los Angeles and Houston. However, In recent years, millennials and others are moving back into city centers accelerating urban renewal and driving demand for denser, more walkable neighborhoods. It’s a shift developers around the country are working to adapt to, and their model has once again become Manhattan. But what lessons can developers around the country learn from those in New York? 

First off, higher density, taller buildings and more valuable real estate often translates into more protectionary measures from cities. “Building New York City is very challenging, from finding the land, to finding the right team to build, it’s a challenge in ways you would never really encounter otherwise,” says Carlos Valverde, Vice President of Real Estate Development at Silverstein Properties. He noted the unique challenges of undertaking development projects in such a dense market as Manhattan, “assuming you want to get into this headache…because it is.” In these environments, developing a single building can cost upwards of a billion dollars and take over 5-10 years to complete. 

Even though regulatory hurdles are a problem for NYC real estate companies, anticipating tenant expectations is still one of the key factors of success when developing such mammoth projects. “What we’re realizing is that there’s a lot of value in being close to sources of transit,” Karen Oh, Director of Energy Solutions at Vornado Realty Trust, explained. In developing Vornado’s Penn Plaza, proximity to key transit hubs like Penn Station was a major benefit to tenants. “A lot of our tenants are not mainly in New York City. We’re realizing that they have [office] locations all over the country, sometimes all over the world. So, what we see is for some of our tenants who might have an office in Washington DC, they can take the Acela, get into Penn Station within two hours, and then be at their next meeting without sometimes even leaving the underground transit hub.” Oh also noted that Vornado has been looking for ways to save on energy costs, while tenants have been asking about Wellness features like air-quality improvements or daylighting. 

For Christian Heimple, Vice President of Construction at Brookfield, building amenities are a major consideration in any new project. “We focus on place-making, and really making a culture, an environment, through Brookfield Arts,” Heimple said. “That’s creating culture at the streetscape with retail, events, engagement of the tenants within the space. But also, they’re looking for hotels, either on-campus or nearby, gym facilities, day-care; really providing an all-around experience.” Heimple continued that technology integration is another amenity tenants are increasingly demanding. “There’s a push for tying-in BMS systems, security systems all throughout, our elevator control systems. Being able to tie our base building data into their own systems so they can know when a visitor has come in the elevator, or their CEO is in so they can light up the HVAC in his or her office, security systems [because] they want to look at the lobby cameras, and BMS [integration because] they want to control their after-hours air, they want to be able to monitor their set-points.”

One of the main challenges for developers of large projects in high-density areas is behind the scenes. In New York City, developers are thinking about how to balance their square-footage between tenants’ wishes and building necessities. “Spaces that were traditionally undesirable are suddenly being snatched up so quickly,” Oh explained. What was once an underground mechanical room may now be used by tenants as showers, or a napping room. Heimple added that public utilities have also become a consideration following the city’s 2003 and 2019 blackouts. “We used to think that utilities would always be there—electricity, water, everything,” he noted. “And now we design buildings with the mindset that what happens if I take one, two, or three of those [utilities] away?” 

“Being able to build in flexibility is the best thing that we can do,” Heimple said. It’s a conclusion that points to the sometimes tenuous nature of building in Manhattan. But as developers around the country look to the city for guidance, the risks and challenges of such high-density developments can also bring enormous rewards. It’s a balance that developers will increasingly need to adapt to. 

As cities become denser there are more possible uses for any property. The densification of cities is partially created by the network effect that comes from having intelligent, productive workers concentrated in one area. This generates economic growth by accelerating the pace of innovation. The quickly changing nature of how we work and live is something that cities, and those who build them, will have to think about more, just like New York City has had to do for decades.

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