If you’ve walked through Midtown Manhattan, leaned back and looked up (and up, and up) at the buildings towering overhead, you may have wondered how such a lofty skyscraper with a relatively tiny footprint could pierce the clouds. Welcome to a physical impossibility made possible by a legal loophole: air rights.
In commercial real estate (CRE), the ground on which you stand only reveals part of the story. The empty space above your head? That’s where you can often find the real money. Understanding air rights can mean the difference between a stagnant asset and vertical abundance.
What are air rights?
These rights give you the legal entitlements to use, develop, or manage the vertical space above a property. It helps to visualize your building as a three-dimensional envelope.
Historically, the legal doctrine cuius est solum eius est usque ad coelum et ad infernos (which literally translates as “whoever owns the soil, it is theirs all the way to the sky and to the depths”) suggested that you owned everything from the heavens to the center of the earth. Today, the FAA and local zoning boards have grounded us somewhat. But in a modern CRE context, air rights (often called development rights) represent the unused floor area ratio (FAR) permitted by zoning laws.
If a city says you can build 100,000 square feet on your lot, and your current building takes up only 20,000, you have 80,000 square feet of air sitting there. In high-density markets, you can use that air as a tradable commodity.
The O’Hare factor
Before we explore the legalities of zoning, let’s look at one of my favorite movies, which happened to include a bit of prophecy. If you’ve seen The Lorax, you know Aloysius O’Hare. In a world where no more Truffula trees stood, O’Hare became the richest man in Thneedville by doing one thing: bottling and selling fresh air.
We haven’t quite reached the point of paying for Premium O’Hare Air in a plastic bottle, but the CRE world has adopted his business model — vertically. In cities that lack land for building, fresh air (or the right to occupy the space where it resides) is the last product to sell.
Unlike O’Hare, you’re not selling air to breathe, but you can sell the right to build into it. The logic is identical. When a resource becomes scarce, the person controlling its rights wins.
Not all air is created equal
Lisa Segal-Bloom, a commercial real estate transactional attorney at Davis+Gilbert LLP, said the market is currently buzzing with the sale of air rights in connection with neighboring redevelopments. But if you’re looking for a standard price per square foot across the board, you won’t find it.
“It’s site by site,” said Scott Bloom, president of Bloom Real Estate Group LLC. “There are areas that are absolutely down from eight years ago, but others that are double what they were.”
Why the discrepancy? Leverage and density. Imagine you’re a developer. If you buy air rights from a neighbor to move from a six-story building to an eight-story building, you’ve got a nice bump. But if you’re in a district where you can aggregate rights from multiple neighbors to jump from six stories to a 25-story luxury tower, the value of that extra air is exponential. The higher you go, the better the views, and the higher the price per square foot of the finished units.
In NYC, it’s almost a block-by-block battle. One street might be in a protected historic district where air rights are trapped; the next block might feature a slender skyscraper alley where air is worth its metaphorical weight in gold.
How the transfer works
The CRE industry refers to the mechanics as the transfer of development rights (TDR). This engine drives urban density.
- The seller is often the owner of a landmarked church, theater, or low-rise building. They have extra air rights, but either can’t build (because of landmark status) or don’t want to. Selling these rights allows them to access significant capital without moving a brick.
- The buyer is usually a developer on an adjacent or nearby lot. Purchasing these rights allows the buyer to attach that unused square footage to their own project, basically bypassing the standard height and density limits of their specific plot.
- The total allowed square footage on a city block doesn’t change, but the distribution shifts. The city gets its density. The landmark gets its funding. And the developer gets the tower.
NYC: An air rights lab
New York City is the undisputed champion of the air rights game. Consider 432 Park Avenue. That slender “pencil tower” — possibly inspired by similar buildings in Hong Kong — didn’t happen by accident. The developer purchased air rights from surrounding properties to achieve its 84-story, nearly 1,400-foot height.
Another example is the 2018 St. Bartholomew’s Church deal. This historic church sold its air rights for over $20 million to JPMorgan Chase. At the time, the church planned to use this windfall to cover renovation projects necessary to preserve the building. That same construction JPMorgan Chase project (a new 70-story HQ at 270 Park Avenue) also included another $240 million to acquire 680,000 square feet of air rights from Grand Central Terminal.
Buying and selling air rights requires negotiating many regulations. NYC’s zoning resolutions are notoriously complex. You can’t buy air rights from a Queens building and move them to Chelsea, for example. Typically, you can transfer air rights only to a contiguous property (touching your lot) or to a designated district (like the Special West Chelsea District or the Midtown East rezoning area).
The implications for property owners and developers
Air rights can serve as an insurance policy for property owners. In some cases, unused density might prove more valuable than the rent you collect from your ground-floor tenants. For developers, air rights offer a great tool for site assembly. Why? Because you’re buying land and the right to build higher than your competition.
There are, however, limitations. As the super slender towers of Billionaire’s Row have illustrated, air rights transactions can lead to public pushback regarding:
- Shadows, since tall towers can darken public parks substantially.
- Infrastructure, since the subway system or local power grid may not have the capacity to support a 25-story building where a six-story building once stood.
- View corridors, since protecting a neighborhood’s character can pit developers against residents.
AI and vertical data
As we approach the next decade of CRE, the air rights market will become even more data-driven. We already have AI tools that can instantly calculate the highest and best use of a city block by scanning zoning maps and identifying every lot with unused floor-area ratio (FAR), like Deepblocks and ArchiWise.
The invisible market won’t stay that way for much longer. For savvy players, instead of looking for your next deal on the sidewalk, try looking up into the sky. In some areas like NYC, the space above the roof is among the most expensive real estate on the planet. Not accounting for your air rights means you’re leaving money in the clouds.
Are you a commercial real estate investor or seeking a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from over 90 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
