The Market For Air : The Indicator from Planet Money How something that's all around us came to be worth millions of dollars.

The Market For Air

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DARIUS RAFIEYAN, HOST:

Down on the Lower East Side of Manhattan is a little one-story brick building - Katz's Delicatessen. It is America's oldest Jewish deli. And it's currently run by Jake Dell, the fifth-generation owner of Katz's.

JAKE DELL: I grew up here in the business. The sights, the sounds, the smells are part of my blood at this point.

STACEY VANEK SMITH, HOST:

Katz's really is one of New York's most iconic businesses. People line up for their famous pastrami sandwiches. The walls are covered with pictures of celebrities who've eaten there. It has been featured in the movies. If you have seen "When Harry Met Sally" - and if you haven't, you need to...

RAFIEYAN: What are you doing?

VANEK SMITH: ...Press pause and go watch it right now. That is where they shot the famous I'll have what she's having scene.

DELL: We've been here 130 years. And we've always just kind of been the center of the Lower East Side.

RAFIEYAN: And the Lower East Side, it's changed a lot over the years.

DELL: When I was growing up, this was an incredibly dangerous neighborhood. I mean, this is where you came to buy drugs and find hookers. I mean, it's (laughter) - now it's food scene and art galleries.

VANEK SMITH: Which in a lot of ways was great for Jake and Katz's Deli. But in a lot of ways, it was also really difficult. For instance, back in 2015, Jake's overhead and his property taxes just started to skyrocket. He watched as all the other Jewish delis around him went out of business. And he started to think, you know, maybe a little family owned deli just cannot survive here.

RAFIEYAN: And that's when he realized he had something else he could sell, something more valuable than sandwiches and coleslaw, something that had been there under his nose the entire time - or rather over his head. Jake decided to start selling air. This is THE INDICATOR. I'm Darius Rafieyan.

VANEK SMITH: And I'm Stacey Vanek Smith. Today on the show, the market for air - how something completely invisible, completely intangible can shape the world around us in very real ways.

(SOUNDBITE OF MUSIC)

RAFIEYAN: So when you buy a plot of land in New York, it comes with what are called air rights. That essentially says how much you're allowed to build on that plot of land. It varies a lot. But let's say you buy a plot of land, and it comes with 10 stories' worth of air rights. That means you can build a 10-story building on it.

VANEK SMITH: But you, you are an ambitious real estate developer, and you want to build a 50-story megatower. Well, you are going to have to go out and buy that extra 40 stories' worth of air.

RAFIEYAN: Now, in the case of Katz's Deli, Jake Dell owned five stories' worth of air. But his deli is only one story, so he had some extra air to sell. Specifically, he had 27,960.66 square feet of air to work with. And that is today's indicator - 27,960.66.

VANEK SMITH: I like the 0.66.

RAFIEYAN: Jake ended up selling that extra air to a real estate developer. And he wouldn't tell me exactly how much money he got for it, but it was widely reported at the time that Katz's got $17 million out of the deal.

VANEK SMITH: That is some pricey air.

RAFIEYAN: That is prime Manhattan oxygen right there.

VANEK SMITH: (Laughter).

RAFIEYAN: That is peak market Manhattan air.

VANEK SMITH: I mean - and it is true. For a developer, those extra floors can be very valuable. Taller apartments with better views fetch higher prices, so a lot of people are willing to pay a lot of money for extra square feet of air.

RAFIEYAN: And, Stacey, over the years, this market has become really sophisticated. And in fact, it has given rise to a whole new profession - the air broker.

VANEK SMITH: Oh, my God.

RAFIEYAN: Essentially air salesman. And the greatest air salesman of all time everyone agrees is Bob Shapiro.

BOB SHAPIRO: I have now become known as the sky king.

RAFIEYAN: The sky king.

VANEK SMITH: Bob has been in the air business for more than 50 years. And he says when he first started, the air deals were pretty simple. The air sold for $10 or $20 a foot. People didn't really understand the value. And that is understandable 'cause it's kind of bizarre selling air. But as the buildings have gotten bigger in New York and the land has gotten more expensive, air has become more scarce. And the prices have gone way up.

SHAPIRO: Well, we just closed today for 29,000 square feet at $500 a foot. Well, that may seem some crazy price. When you're selling these apartments for $7,000 or $8,000 a foot, it isn't so crazy.

VANEK SMITH: And as the value of a foot of prime Manhattan air has increased, the deals have become more and more complex.

RAFIEYAN: One of the most iconic modern air rights deals was done by none other than Donald Trump when he built his Trump World Tower. He pulled a sort of domino maneuver. Basically, he transferred the air from one lot to the lot next door. Then he took all that air and transferred it next door again. And he did this seven more times, snowballing, collecting more air along the way until eventually he had enough to build a 72-story apartment tower across the street from the United Nations.

VANEK SMITH: This just blew my mind.

RAFIEYAN: Yeah, people get very creative with these air rights deals.

VANEK SMITH: And in fact, the industry's kind of conducive to that. The rules of the air industry are a little fuzzy. It is not as tightly regulated as, like, the real estate industry. And it's based largely apparently on handshake deals and, like, personal relationships. And a lot of the people in the air rights business, says Bob, are, you know, a little bit shady.

SHAPIRO: One time we did air right deal, and we were dealing with this guy. The only time I could call him was when he was in - he was in jail for tenant harassment (laughter). I had to - you know, when he could get to a phone to negotiate the deal.

RAFIEYAN: Sounds like sometimes it can be like the Wild West out there trying to get these air rights.

SHAPIRO: Oh, yeah. Yeah.

RAFIEYAN: So, yes, there are some seedy characters in this air marketplace. But it's not just the playground for unscrupulous real estate developers. For a lot of nonprofit organizations like churches or theaters or community centers, selling their air has become the only way they can stay open. For example, I spoke with the pastor of the Church of the Holy Family on 47th Street. It's this beautiful little church. And it was one of the properties that sold its air rights to Donald Trump for his controversial domino maneuver. And they got $10 million for their air from Donald Trump. And the pastor says they put it in a trust fund that helps this church stay open, a church that might not otherwise be able to exist.

VANEK SMITH: This market for air helps to create towering skyscrapers that blot out the sun, but it also helps preserve some of the city's most beloved institutions.

RAFIEYAN: Which brings us back to Jake Dell and little Katz's Deli.

VANEK SMITH: Katz's Deli.

RAFIEYAN: The air that Jake sold to that developer...

VANEK SMITH: For $17 million.

RAFIEYAN: ...For $17 million is currently being used to build an 11-story luxury condo building right next to Katz's.

VANEK SMITH: Wow.

RAFIEYAN: It's going to have an Equinox gym with a juice bar and a spa. Studio apartments start at just over a million dollars. Get yours before it's too late.

VANEK SMITH: With the money that Jake got from selling air, he expanded his business to be this kind of national thing. He bought a warehouse. He built a mail-order business. So now he is shipping pastrami all over the country, exporting the Katz's brand everywhere.

DELL: The proceeds from that air rights deal - we would've never been able to build this wonderful warehouse. And this warehousing and shipping and all these protect sort of back-end, non-glamorous aspects of the business that do make the economics of deli incredibly difficult. So I am very confident in the long-term future of Katz's, and in large part that's because of this deal. Not to mention, also, I mean, the overheard on air - way better than it is on pastrami.

RAFIEYAN: And so this market for air, it's totally abstract. It's almost imaginary, really.

VANEK SMITH: Almost - almost imaginary.

RAFIEYAN: I mean, it's definitely imaginary. But it has these very real effects on the landscape of our city.

VANEK SMITH: And the skyline.

RAFIEYAN: Yeah. And you can see it when you walk down Houston Street, when you walk through the Lower East Side and it's towering building after towering building. And then tucked away, almost preserved in time is little Katz's Deli with its neon sign and the salamis hanging in the window and the weathered poster that says Katz's, known as the best since 1888.

(SOUNDBITE OF MUSIC)

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