David Evanson and William Kahane

Forbes.com, Winter, 2012

When Peter Minuit acquired Manhattan for $24 in 1626 there were about 643 million square feet of land area for 4,000 or so inhabitants of what was then an outpost in the New World.

At the turn of the 20th Century, when there were about 3.4 million New Yorkers, they still had the same amount of property to divvy up.

Today, with more than 8.1 million residents, there is still just 643 million square feet. And that, in a nutshell, is the argument for investing in New York City in general and Manhattan in particular: It’s supply constrained.

Yet demand for space is moving inexorably up along with the population. Twenty years ago there were approximately 400 million square feet of office space in Manhattan, and today there is approximately 400 million square feet of office space, no net additions in 20 years.

I have a long history of investing in Manhattan real estate, and I’m passionate about it. Regardless, the numbers tell the story. In 1984, the properties median per square foot sales price of a condominium was $359. By 2000, the figure grew to $553. By the third quarter of this year, the figure was $1,233. This residential trend mirrors similar movements in office and retail space as well.

But it’s not just about condominium prices, or the gravity defying prices for trophy buildings in New York City. There are commercial real estate properties of all types and sizes in New York City. You can make money buying trophy properties but often the below the radar screen deals provide the best returns.

Institutional investors who have held New York City property for a long time know this. Making the case for individual investors is a little more difficult, but can nonetheless be done by looking at some of the REITs that focus on New York. For instance, Alexander’s (ALX), a REIT that buys property in New York City has, since 2000, delivered to investors compound annual price appreciation of 17.1%. In the same time frame, SL Green (SLG), which invests primarily in New York City properties, has delivered compound annual growth of 9.1%. And Vornado (VNO) with a large New York City portfolio generated compound share price appreciation of 8.2%. Interestingly, the purer the play in terms of New York real estate, the higher the return.

All in all, the Big Apple has delivered spectacular returns for patient investors. As John Jacob Astor suggested, “Could I begin life again, knowing what I know and had money to invest, I would buy every foot of land in the Island of Manhattan.”