Developers surveying a recent spate of land sales at sky-high prices are concerned that the market has overheated, and a repeat of the 2008 crash is not far fetched if the market shifts and buyers can’t secure project financing or deliver the promised product, they said.
“You can overpay for an apartment building or for an office building because you have cash flow so you can kind of wait it out,” said Scott Alper, a principal of the Witkoff Group, speaking yesterday at a panel discussion hosted by Haute Living. “As long as you have low leverage, you’ll be alright. With the land market, you have no income so if you overpay and then you can’t get your equity together, you can’t finance it and you can’t get a construction loan, that’s where you have problems. That’s what you saw happen in this past cycle with land.”
Indeed, land prices have reached previously untested heights, according to a recent report by commercial brokerage Avison Young. The average price per buildable square foot averaged around $400 in Manhattan in the first half of this year, the brokerage reported, but prices for land suitable for prime luxury residential development soared to $700 or $800 a foot in some instances.
“Land is back up to stupid levels again,” Alper said.
Michael Stern, CEO of JDS Development, the company building a nearly 1,400-foot residential tower at 111 West 57th Street, said his project makes sense because he already owned one of the pieces of his site, which he bought on a “disciplined” basis before land prices start to escalate.
“I look at some of the [more recent] prices for land trades that really make me wonder how they’re going to make money,” he said.
That’s especially true, Stern said, with the super tall residential towers born out of the need to get the most out of small lots.
“As you go up past 50 stories, the costs of construction really start to escalate a lot and there are really few places in the city that are economically viable to build that tall,” he said. “Those buildings can cost $900 or even $1,000 a foot to build. For a more typical mid-rise building, construction is around $350 to $500 a foot.”
The land price scenario has disrupted the market particularly for those developers who prefer to build and hold on to their assets as opposed to flipping or buying to sell, said Michael Rudin, vice president at Rudin Management, since the high prices dictate the construction of luxury condos. Finding projects that the family-run company can hold for the long term as rentals has become nearly impossible in Manhattan, where its rental portfolio has a 1 percent vacancy rate, he said.
“We obviously like to create value, but we like to create value for future generations as opposed to creating immediate returns,” he said. “The last seven or eight years, there’s been a lot of international money – pension funds, private equity funds, you name it – getting into the New York market that we didn’t see as many of 10 or 20 years ago. Their hold periods are typically much shorter that we would look at so their underwriting is much more aggressive. That makes it much harder for us to find the off-market deals that not everybody is looking at.”
Meanwhile, JDS is managing to build an 800-unit rental project on the East Side, at 626 First Avenue, but Stern called that project an “anomaly” in the market.
“The only reason that deal was able to work was that it was such a large scale site the buyer pool was extremely limited,” he said.