A Case Study: New York City
The true social cost of land speculation is not to be reckoned in the profits gained by landholders. That may seem a lot — and those individuals, who did nothing to earn it, are glad to get it — but to society as a whole it’s (relatively) small potatoes. The real cost to society comes in the productive activity that the community loses while land is withheld from use — which is usually far greater than the selling price of land. Nowhere can this be seen more clearly than in the “real estate capital of the world,” New York City.
The beginning of European settlement of Manhattan has been called the greatest real estate deal in history, but it was hardly that. Did Peter Minuit really buy Manhattan for $24 worth of trinkets? Certainly not, in the eyes of the original inhabitants. Georgetta Stonefish Ryan, a Lenape Indian historian, writes:
The “sale” of Manhattan was a misunderstanding. In 1626 the director of the Dutch settlement, Peter Minuit, “purchased” Manhattan for sixty guilders worth of trade goods. At that time Indians did everything by trade, and they did not believe that land could be privately owned, any more than could water, air, or sunlight. But they did believe in giving gifts for favors done. The Lenni Lenape — one of the tribes that lived on the island now known as Manhattan — interpreted the trade goods as gifts given in appreciation for the right to share the land…. It has been commonly thought that sixty guilders equaled about twenty-four dollars.
**This case was overturned a year later in Worcester v. Georgia, which held that the Cherokee were indeed a sovereign nation — but president Andrew Jackson refused to enforce the ruling, instead decreeing that the Cherokee would be moved to a new “Indian Territory” in Oklahoma, whence began the infamous “Trail of Tears” migration in which many thousand Cherokee died.However, European notions of private land ownership, based on Roman law, took precedence over Native traditions.* Private ownership of land became sacrosanct in North America. With, as the European settlers saw it, a whole free continent open to them, private ownership of land seemed to harm no one, and to make perfect sense. Early US Supreme Court decisions, such as Johnson v. M’Intosh and Cherokee Nation v. Georgia**, essentially held that because the Indians held their land in common, having no legal tradition of alienability of land, the legal doctrine of “Discovery” took precedence. The US claimed sovereignty over all the territory from Jamestown, Virginia west to the sea (wherever that might be, exactly). Founding Fathers such as George Washington and Thomas Jefferson went on to make lots of money speculating in newly-opened lands west of the Appalachians.
The Panic of 1837 was one of the worst years ever for property values in New York City. Many New Yorkers lost their homes to foreclosure, and so many others were in default on their mortgage payments that the state passed a bill granting a year’s grace period for them to catch up on what they owed.
According to economist Milton Friedman, the five-year financial crisis was comparable in severity to the Great Depression. But while investors throughout the city were losing their proverbial shirts, John Jacob Astor, the founder of the Astor dynasty, was prospering.
In the midst of a freefall in property values, Astor snapped up $224,000 in Manhattan real estate… Later, when interest rates climbed to 7% and property owners could no longer make payments on the mortgages he controlled, Astor promptly foreclosed on scores of them. Critics said that Astor was such a hardnosed speculator that he built his empire with no thought at all toward community improvement. They noted that he would acquire vacant plots of land from the city and leave them undeveloped or unmaintained….
Astor’s appetite for New York real estate appears to have had no limits. On his deathbed in 1848, he is said to have exclaimed, “Could I begin life again, knowing what I now know… I would buy every foot of land on the island of Manhattan.”
…When Astor arrived in Manhattan in 1783, New York’s population was at 25,000 inhabitants. But at the end of his life, it had shot up to about 500,000.
— Alex Ulam, The Real Deal, New York, 2008
NYC History, Seen from the Ground
While New York City was becoming a preeminent center of industry and commerce (and a wonderfully diverse port of entry for immigrants of all kinds), it was also becoming “the real estate capital of the world.”
Indeed, if one looks at New York from the unconventional point of view of its land, it becomes clear that the city’s history is characterized by a constant tension between blight and gentrification. Harlem was once a ritzy suburban community, until the British burned it during the Revolutionary War — but it regained its glamor after the Civil War. It first became known as a poor, predominantly African-American community in the early 1900s. Today, Harlem residents increasingly worry about gentrification, as upscale developments, and rapidly increasing land prices, drive out renters. The Upper East Side, now widely known as some of the priciest real estate in the world, used to be the working-class, German immigrant neighborhood of Yorkville. And, famously, The Soho district, now home to trendy art galleries and boutiques, was an abandoned post-industrial wasteland until its collapsed land values made it attractive to impecunious artists. A similar process is now underway in the once-downtrodden (and once-affordable) Lower East Side, as well as in various neighborhoods in Brooklyn.
By the 1890s, NYC’s development was severely hindered by mind-numbing traffic jams, and streets slick with manure. Loads of people lived in Brooklyn and the Bronx, but how could they get back and forth to their jobs in Manhattan? So, the city did an eminently sensible thing: it created a subway system, which would soon cross the East and Harlem rivers to enable those millions of riders to get to and from work. Initially the subway was funded by private investors. Nevertheless, they maintained another sensible policy: they kept the fare low — a mere 5¢ — for over thirty years. This made sense for the investors because the main profits gained from this venture — like other US railroads — came in the form of sharply increased land values in the areas the trains served. The City built its own new line, the Independent or IND, starting in 1932.
By 1940 the two private subway companies, the IRT and the BMT, could no longer make a profit on such a low fare, and New York City took over the consolidated subway system — but the efficient public-transit system continued to enhance real estate values citywide.
Alas, New York City failed to take the third sensible step in public-transit management: it did not collect public revenue from the land values its world-class transit system created. As a result, the subway was starved for funds. By the 1970s, like much of NYC’s infrastructure, the subway had fallen into infamous levels of disrepair.
Today, it is well-known that fast-food franchise outlets often operate as placeholders for land speculation. It’s quite easy for corporations to relocate their capital equipment to other sites and cash in on the value of the site, when the price is right. In the meantime, the community misses out on the jobs, building space and economic activity that could have been happening there. Here are a few examples of grossly underused sites just around the corner from NYC subway stations.
Of course, it is well-known that the biggest fast-food chain, McDonalds, is also one of the world’s biggest real estate companies — and that is where McDonalds corporation makes the lion’s share of its profits. But, in Manhattan, everything is built bigger — when it gets built at all. Here is a drive-through burger joint that occupied the corner of 10th Avenue and 34th Street for 25 years.
This block (click on the images to see larger versions) is part of New York’s monumental Hudson Yards development. You can see what each parcel on it sold for. For decades, the West Side tracks leading into Penn Station were uncovered — and undeveloped. In the 1980s there was talk of building a stadium there, but the plan never materialized. Now, the City is providing heroic levels of public subsidy to bring development to the area. Buildable platforms above the tracks have been built while the trains continued to run. The #7 subway has been extended to the Northwest corner of this block, at a cost of $2.4 billion. NYC taxpayers are covering interest payments on loans to Hudson Yards developers until their buildings are up and running.
Just one more example we couldn’t resist showing you: For over 25 years this surface parking lot was at the corner of Park Ave. South and 28th Street in Manhattan, right beside a subway station. In 2006, the lot sold (along with a neighboring lot) for $31 million. A luxury hotel, built at a cost of $200 million, opened in on the site in 2010.