Land is often the crux of a great development deal, but in New York
City, where developable land is scarce, it often comes with an
expensive price tag. Now, some developers say they are seeing signs of
change.
Ralph Trionfo,
president/broker of Upside Ventures, a commercial real estate firm,
said he is about to list an approximately 200,000-square-foot mixed-use
development lot in Long Island City for $125 per buildable square foot.
He said last year at this time, lots in the same area were selling for
about $200 per buildable square foot.
Paul Massey, founding
partner and CEO of Massey Knakal Realty Services, said changes in land
values are starting in the outer boroughs.
“It’s a little hard to
tell exactly what’s going on, because velocity has slowed down so much;
there’s not a plethora of comps and facts,” he said. “But the outer
markets have seen a definite dip in values ranging from 20 to 30
percent.”
Because of the decrease
in fourth-quarter sales volume, it’s hard to point to specific
instances of reduced prices, real estate experts said. It’s possible
that many sellers are still holding fast to unrealistic asking prices,
they said.
John Reinertsen, senior
vice president at CB Richard Ellis, said there is “probably” a 20
percent reduction in land prices in the boroughs. “But,” he said, “It’s
going on in the negotiations. It’s not in the asking price as yet.”
At this point in the
market downturn, brokers said they are trying to gauge when the
expectations of sellers will drop to meet the financing capabilities of
buyers, which have been greatly reduced by the credit crunch.
Land prices “are not
spiking as they were in the last 24 months, and in some cases,
landowners or sellers are recognizing that they have to adjust their
expectations,” Trionfo said. “We’re currently in the process of
educating our clients looking to dispose of sites or assemblages about
this.”
Massey said land prices
in Manhattan, along with prime parts of Brooklyn and Queens, are
holding much better than the rest of the city, because those properties
are versatile.
“Interestingly, in the
Manhattan market, values may have slipped a little, but some of these
proposed residential uses, when the land didn’t sell, could also be
office or retail, and that kind of props up values,” Massey said.
Prices may have fallen
5 to 10 percent in Manhattan, he said; some of the neighborhoods being
hit are Chelsea and the East Village.
“We’re starting to see the trades come in to prove
that out,” Massey said, though he could provide no
specific examples.
Eric
Anton, executive managing director of Eastern Consolidated, a real
estate investment services firm, said prices have not “zoomed down.”
“It’s more the case
that the velocity has zoomed down,” Anton said. “If the seller is
asking $400 or $500 a foot, and nobody shows up to buy, they don’t drop
it to $200 a foot. They just don’t sell it.”
Lenders who are fearful
of making bad loans are asking potential land purchasers to put more
equity into deals. Developers said that should eventually help to
depress prices and open up opportunities for residential projects.
“Before, you used to
build your acquisition financing at 80 percent loan-to-value,” said
Daren Hornig, managing partner of SAXA, a commercial real estate
services and development firm. “Now, it’s probably 50 percent.
“So if you went to buy
a piece of land for $20 million, you used to be able to put down $4
million. Now you have to put down $10 million.”
On top of that, loan
interest rates are about 300 basis points, or three percentage points,
higher than they were a year ago, Hornig said.
“It’s almost come to
the point where I won’t even look at a raw piece of land to develop it,
because with the difficulty financing it, the pricing is so out of
whack to reality,” he said.
Sources theorize that
new restrictions on the 421-a property tax abatement will also exert
downward pressure on residential land prices.
Effective July 1,
developers in many areas of the city will qualify for the tax break
only if they set aside 20 percent of the units in their developments
for affordable housing. Many developers believe that makes what was
once a lucrative tax break a wash.
“I think with the 421-a
going away, people are going to pay even less for land because they’re
not going to be able to get as much money for non-421-a apartments,”
Hornig said.
Louis Dubin, the
president and CEO of the Athena Group, a private real estate
investment, operating and development company, said he hasn’t seen a
drop yet. But he predicted land prices are poised to fall
significantly.
“I think the $400- to
$450-a-foot price point that everyone’s been talking about for your
average, well-located site in Manhattan will come down by at least $100
a foot,” Dubin said.
And with the 421-a tax break changing, that “will throw at least another $50 a foot to the diminution of land prices,” he said.
The
number of new residential projects in the pipeline is certainly
dropping; as evidence, developers point to a 40 percent drop in the
number of building permits issued in the first quarter of 2008 over the
same period in 2007.
“There’s no question
there will be a slowdown in new construction for a while,” said Steven
Kohn, president and principal of Cushman & Wakefield Sonnenblick
Goldman. “In markets like New York and Washington, D.C., and other
strong central business district markets, there is still pretty much a
shortage of good land, and sometimes it does lag — it takes a while for
that pricing to move.”
While smaller condo
projects less than 100,000 square feet may still be bankrolled, lenders
are shying away from anything larger, Anton said, especially with
thousands of apartments already under development.
“I don’t think the
banks are going to get comfortable any time soon financing residential
condominiums,” he said. “Now they’re more comfortable financing
residential rentals; however, the prices of land are still too high.
Most developers think you need to pay somewhere between $100 to $150 a
foot, or $200 max is where you need to be for a rental project.”
However, Kohn said he
believes rental projects could possibly be done in certain pockets in
Manhattan (such as the far West Side and the Lower East Side) and
Brooklyn and Queens locations where land prices are below $200 a foot.
Trionfo of Upside Ventures said affordable housing is currently an
attractive and feasible option for developers, and will become more so
as land prices drop.
Once sellers realize
that they can’t get as much for their land as they could have before
the credit crisis, they may try to structure a different type of deal,
Dubin said. They may “hypothecate” their land, meaning they would
pledge it as a security to a developer without transferring possession
or title.
“You’re going to see
many more deals where the sellers are staying in,” Dubin said, meaning
there may be more partnerships between landowners and developers.
But some sources said
they aren’t certain that land prices will fall much in Manhattan,
partly because land there is such a scarce commodity.
“My feeling is that
there are so many funds, so much money, so many well-heeled private
established companies that are looking for these low-cost
opportunities, that it’s almost a safety valve for the market to keep
prices from going too low,” said Scott Singer, executive vice president
of the Singer & Bassuk Organization, a real estate finance and
brokerage company.
“As prices start coming
down, each of these groups is going to have a strike price where
they’re interested, and at some point, they’re going to be interested
enough to where they’re going to start competing to buy into these
things,” he said. “That’s going to prevent prices from drastically
dropping.”
