Space exploration: The solutions to land scarcity

By Marc Wieder, Anchin, Block and Anchin

In New York and other dense urban areas, space is an increasingly precious commodity.

Here are some of the trends developers are embracing as they search for solutions to address the scarcity of land for development.

Cantilevered Buildings

Most developers are familiar with the practice of transferring “air rights” — that is, the right to build or develop in the airspace above a property.

If zoning laws permit it, acquiring air rights from nearby owners who don’t plan to use them allows a developer to build higher than zoning restrictions would otherwise allow. Generally, taller buildings command higher resale values, particularly on the upper floors, boosting the developer’s return on investment.

Going taller isn’t always an option, though. A planned building may already be at the legal limit. Or, even if it’s possible to acquire additional air rights, the developer may be concerned about the risk that the city will impose new height restrictions down the road. In recent years, an increasing number of developers have maximized their spaces (and increased their profitability) by acquiring the right to cantilever their buildings over adjacent properties. Cantilevered buildings offer a variety of benefits: For example, they allow developers to extend their horizontal spaces beyond the constraints of the building’s footprint and to add value by expanding apartment layouts, improving views, and bathing units in natural light.

In addition, cantilevered buildings use a sort of “inverted pyramid” approach, which enhances value: Floors get bigger as one goes higher, where space is more valuable.

Developers considering this strategy should be sure to work with financial and legal advisors who have experience with air rights and land use issues.

Cantilevered structures can be expensive and challenging to build. And valuing air rights (values can be 60 percent or more of comparable land values) and negotiating their transfer is a complex process. Missteps can lead to costly surprises.

For example, if the transfer isn’t negotiated and documented thoroughly and precisely, there’s a risk that the seller will retain rights that can interfere with the buyer’s plans.

And buying air rights from condo buildings can be tricky, because typically it requires the approval of each unit owner.

Converting older buildings

Another strategy developers are using to tap new sources of developable space is to convert existing buildings — such as schools, hospitals or churches — into residential, retail, or mixed use properties.

The availability of these buildings is on the rise, as struggling schools and houses of worship close and health care facilities close or are consolidated.

Other possibilities include banks, movie theaters, warehouses, government buildings, industrial facilities, parking garages, and fire stations.

Many of these buildings boast historic or distinctive architectural features and unique structural elements — such as high ceilings, large windows and skylights, unusual building materials, and unconventional layouts — that lend themselves to intriguing residential and retail spaces. Plus, these buildings are often located in desirable neighborhoods.

Converting these types of buildings also presents several significant challenges that require the assistance of experienced advisors.

In addition to the architectural and engineering challenges associated with such a conversion, there may be zoning, land use, historical preservation, building code, and other regulatory issues, as well as potential environmental obstacles. Hospitals, schools, and industrial buildings, for example, may contain hazardous substances that require remediation. And certain conversions, churches in particular, may be controversial in the community.

Micro-Units

Most developers focus on the luxury market and strategies for expanding spaces. But there’s a burgeoning trend toward “micro-units” — studio apartments as small as 300 square feet or less but with high-quality amenities — that appeal to the relatively untapped market of young singles who want to stay in the city.

This trend has yet to take off, and many developers are skeptical about the profitability of micro-units. But based on the enthusiastic response to the first micro-unit buildings to hit the market in New York, this strategy may be worth a look. Rent per square foot for micro-units is substantially higher than that of larger apartments, and developers can maximize their profits by squeezing many units into a relatively small space.

Of course, in most cases renters can get more for their money by sharing apartments with others, but many young people are willing to trade space for privacy.

So far, there hasn’t been much interest in micro-unit condos, but that may change. We’re beginning to see a market for these units among young professionals looking to buy on their own, parents seeking alternatives to the dorm for their children in college, and people looking for a pied–à–terre.

Be Creative

As developers confront the challenges of a dwindling supply of developable space, these and other trends may offer solutions. To remain competitive, developers must be creative and push the boundaries of traditional development strategies.

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