Continually evolving highest and best use of real estate

The Park Lane Hotel, located on Central Park South, adjacent to the world famous Plaza Hotel in New York City is known for its irreplaceable high value location. However, the building is perceived as tired and in need of capital refurbishment.  When the property was purchased in 2013 for US$660 million or US$1.1 million per room, it was reported that the building would be renovated, either fully or partially converted to residential use, or demolished and redeveloped from the ground up as either residential, hotel or a mixture of both. An investment team led by Witkoff Group recently announced it is halting its plans, at least for the near term, to redevelop the property into luxury residential condominiums.

An influx of luxury condominiums during recent years in Midtown Manhattan has shifted the supply/demand equation, creating a crowded market for newly constructed high end residences. Demand from wealthy domestic and foreign buyers has recently decreased due in part to weakening of the euro against the US dollar, gyrations in the Chinese stock market and a losing year for hedge funds. New York’s high end residential condominium inventory has ballooned in recent years as developers focused on building large and lavish units for wealthy investors. While in 2013, the highest and best use of the Park Lane Hotel site appeared to be a major redevelopment, it appears the dynamics have changed. The interim highest and best use has evolved to the continued use of the site as a functionally and physically obsolete hotel with positive cash flow until such time when a proposed redevelopment of the site becomes financially viable once again. A major factor in any highest and best use analysis is also the enhanced risk of re-developing a property of this magnitude. The re-development would most likely take several years, at which time the highest and best use could once again shift.  

Highest and Best Use is often identified as the key concept supporting real estate use and value decisions. The highest and best use of a specific parcel of land is not determined through subjective analysis but rather, it is a use shaped by the competitive forces within the market where a property is located. The exact definition of Highest and Best Use varies but generally is the most probable use of land or improved property that is legally possible, physically possible, financially feasible, and which results in maximum profitability. The highest and best use as vacant land may be the same or different as the highest and best use as improved.

So long as the value of a property “as improved” is greater than the value of the site as “if vacant,” the highest and best use is typically the “improved” property. Once the value of the vacant land exceeds the value of the improved property plus demolition costs, highest and best use usually dictates that improvements be demolished.  Similar to perceived value of an asset, the highest and best use of real estate is extremely dynamic and evolves over time, sometimes overnight. Clearly the highest and best use of a proposed hotel site situated in lower Manhattan was dramatically different on September 10, 2001 when compared to 24 hours later.