NYC’s land rush

Developers play with thin margins as Manhattan land prices skyrocket

Dec.December 01, 2013 07:00 AM
From left:

From left: Josh Goldflam, Bill Picoli, Vincent Carrega and James Nelson

Call it New York City’s new land rush. In the last year, prices for land and developable sites in the city — particularly in Manhattan and prime Brooklyn — have skyrocketed.

In this month’s Q&A, The Real Deal talked to investment sales brokers, new development marketers and other experts and analysts to get, well, a lay of the land.

Those sources described a frenzy of activity and said that prices have jumped by as much as 30 to 50 percent in the last year or two. In in many cases, they said, buyers are tangling in bidding wars and paying well above asking prices.

Indeed, broker turned developer Michael Shvo made headlines when he bought the former Getty gas station in West Chelsea for a record $850 per buildable square foot. But he is not the only one.

“There is nowhere that I’m not hearing of [records] being broken,” said Andrew Barrocas, CEO of brokerage MNS.

Those high land prices have made it virtually impossible for developers to build Manhattan rentals, which usually come with lower returns. And the Manhattan condos that are being built are skewing further and further toward the luxury market, with larger, pricier units than comparable projects would have had just a few years ago. That, of course, means fewer units that first-time buyers can afford. It also means that many developers are on the hunt for cheaper land in Brooklyn and Queens.

Some said that land prices have gotten so out of control that it’s hard, at least from the outside, to figure out how deals pencil out.

“The only way these deals are being financed is that the developers are really betting on condo sellout prices that are higher than current comps,” said the Highcap Group’s Josh Goldflam. “Hopefully they have no unexpected delays or problems, because their margins are so thin that one little thing can put your entire project under water.”

For more on where there are still deals to be had and on who is buying and selling these sites, we turn to our panel of experts.

Josh Goldflam, managing principal, Highcap Group

TRD and others have reported on the ballooning prices for developable land in NYC. What are you seeing in terms of prices for developable land in the city today? How much are prices up (or down) compared to a year ago, two years ago and during the recession?

The words “historical” and “trendsetting” best describe what’s going on right now. Some development sites in prime areas of Manhattan have gone up 30 to 40 percent since a year ago, and many locations are starting to demand pricing that’s never been seen before. Furthermore, some neighborhoods that many developers would have turned a cold shoulder to in the past are starting to get major attention because of the serious lack of inventory and incredible amount of capital on the street right now. Some of the biggest developers in the city would laugh at me when trying to pitch them a site in Gramercy for over $450 per buildable square foot in the recent past, and then Toll Brothers strolls in and closes at $750 per buildable. Granted, their recent purchase on 23rd Street has a major retail component that can justify a higher price.

What is going on in terms of trading activity for Manhattan and Brooklyn land? How much is buying activity up (or down) in the last year, two years and since the recession? 

During the recession, there was very little land trading outside of Manhattan and not too much trading inside. In 2008 nobody was really interested in raw land to build on, and no bank would even look at a land acquisition or construction loan. In the last one to two years, activity has gone up significantly both in Manhattan and Brooklyn, but only in the recent past have Brooklyn’s B and C neighborhoods been seeing more sales.

What is the competition like for land and other development sites in NYC, and how does it compare to the recent past?

We are seeing bidding wars on a daily basis for sites with “real sellers.” We’re negotiating a contract right now on a Soho loft building that the seller was happy to get $14 million for. A contract is out at $16 million and there’s a backup buyer ready to go if the current buyer can’t pull it off.

We know banks have started warming up to financing condos again and that high land prices have made it more difficult to pencil out rentals. What type of properties are the developers planning for most of the land they are buying?

I really don’t see much being bought in Manhattan or prime Brooklyn that’s being underwritten as a rental unless the buyer has a basis in the land that’s lower than typical market value of the property. The rental projects being built are on bigger swaths of land that have been bought at “non-booming” prices, and many are 80/20, so they have inclusionary housing bonuses and 421a tax abatements in order to make them feasible.

Sources have said lenders might soon pull back on financing because land prices have gotten so high. Are you seeing that?

I don’t necessarily see lenders pulling back on financing, but I do think things have gotten a little loose again since the crash, and banks will start getting a little more conservative once some of the guys paying high prices start getting in trouble. I have seen numerous deals that I cannot make any sense of. The only way these deals are being financed is that the developers are really betting on condo sellout prices that are higher than current comps. Hopefully they have no unexpected delays or problems, because their margins are so thin that one little thing can put your entire project under water.

Bill Picoli, senior managing director, Landauer Advisory

What are you seeing in terms of prices for developable land in the city today?

For residential land sales that have closed in the second half of this year, we’re seeing an average of maybe $600 a [buildable] square foot. For the first half of the year, the numbers were closer to $400 a square foot. So year-to-date, the Manhattan average is about $475 square feet. … The 2013 numbers are a little more than 10 percent higher than 2012 and over 30 percent higher than 2011, so values have gone up significantly.

Who are the most active buyers of developable land in NYC right now?

They are the more high-profile developers. For example, Extell Development has been buying lots of land and air rights over the last few years for a variety of different sites. Currently they have One57 under development, and 225 West 57th Street. Meanwhile, JDS [Development] recently purchased 105-107 West 57th Street, where it’s proposing an extraordinarily high 1,000-foot-plus tower. The celebrated premier sites seem to be these Midtown sites with a long view of Central Park because they attract the ultra-wealthy and foreign buyers and command extraordinary prices.

Former broker Michael Shvo just spent a record $850 per buildable square foot to buy the former Getty gas station in West Chelsea. Are you seeing records being broken for land prices elsewhere in NYC?

Absolutely. [We’re seeing that] down in the Meatpacking District. There were two sales there that had extraordinary prices. One was the purchase of 860 Washington Street by Taconic. They paid about $1,300 a square foot to build retail and office. Retail is a big driver of value today. Developers are realizing they can rent stores for upward of $400 to $500 a square foot and that … basically underwrites the rest of the value of the site. It’s enabled developers to pay over $1,000 a square foot. [Another site is] 17 East 12th Street, which sold for $1,030 a [buildable] square foot. There are a variety of other sites achieving these kinds of numbers. … Another driver of the value is condo prices. Many areas in Tribeca and Chelsea have the opportunity to sell condos for over $2,000 a square foot. The Extell and JDS sites [will likely see] condo prices are anywhere from $3,000 to over $8,000 a square foot.

What prices per square foot do developers need to charge to make today’s land prices work?

It varies from project to project. In the case of some of these ultra-luxury projects, you are talking about a developer paying perhaps $1,000 a square foot for a development site and maybe another $1,000 a square foot to build the project. If they’re selling units at upward of $4,000 to $5,000 a square foot, they’re going to make an extraordinary amount of money.

Andrew Barrocas, CEO, MNS

What are you seeing in terms of prices for developable land in the city today?

They’ve doubled and tripled in certain instances from a year ago. A year ago you could find things at $300 to $400 a square foot in Manhattan south of 96th Street. That is nonexistent now.

Who are the most active sellers of developable land and other sites these days?

People who recently purchased. We have a lot of people that have seen significant increases in property prices over the last year or two. For those property owners, [it isn’t worth the] risk of developing. They are more willing to take their profits from selling the land and move on. For instance, you have developers who bought sites for $10 million who were thinking of building and hoped to make X dollars when all was said and done. If the land is now worth $20 million and the X is $10 million, do you go through the risk of developing to make that money, or do you take your profits off the table?

Former broker Michael Shvo just spent a record $850 per buildable square foot to buy the former Getty gas station in West Chelsea. Are you seeing records being broken for land prices elsewhere in NYC?

There is nowhere that I’m not hearing of them being broken. [Shvo] was extremely successful marketing other peoples’ properties and I think he will do extremely well there; it’s an incredible location.

What other development trends are you seeing in Manhattan these days?

There is nobody buying land that’s planning rentals in Manhattan. We do have a lot of projects coming to Manhattan on the condo side, but compared to 2006, the unit mix is more heavily on the larger side and there are fewer units in the buildings. Buildings that might have been 100 units are now 50-unit buildings.

Prime areas of Manhattan are seeing premium land prices, but where are there still deals to be had in Manhattan, Brooklyn and Queens?

A lot of Manhattan landlords are looking to go to Long Island City, Astoria and Brooklyn, and get into markets where they can buy land anywhere from $100 to $300 a square foot and get very good rents anywhere from $50 to $70 a foot. As you move further out into Brooklyn to Crown Heights, Prospect Lefferts Gardens and areas of Bed-Stuy, you can still get things in the low $100- to $150-a-foot range. Those are markets where we are doing a lot of business right now. In Long Island City, you can get stuff in the $150- to $175-a-square-foot range for desirable areas where you can achieve $55 a foot for rents and $900 a foot for condos. That’s an area where you will see a lot of retail and growth. [In Queens generally], we are hearing about deals from maybe a year ago that were as low as $100 and are now as high as $200 a foot. East Harlem is [also] a great market. You can get stuff there in the $150-a-foot range.

What are the prices per square foot developers need to charge with today’s land prices?

That depends on the site. If you use the example of the United Cerebral Palsy headquarters on 23rd Street … [a developer would] need to be achieving in the range of $2,500 a foot to justify buying the land at $750.

What concerns, if any, do you have about the high cost of NYC land?

We are not going to see new product that comes at affordable prices for first-time buyers like studios and one-bedrooms. They aren’t being built south of 96th Street right now. For a new two-bedroom condo, we aren’t seeing anything under $2 million anymore.

Nicholas Silvers, founding partner, Tavros Capital Partners

What are you seeing in terms of prices for developable land in the city today?

Pricing has exploded over the past two years, in lock step with the recovery of the new development condo market. We were buying land in 2011 for $300 to $400 a square foot in good Downtown Manhattan locations. That land is now priced at $850 to $1,200 a foot.

What’s going on in terms of trading activity for Manhattan and Brooklyn land and development sites?

Activity is moderate. Nothing is cheap anymore and sellers have unrealistic expectations. [That’s even given] developers who believe that everything has the potential to sell out at $2,500 a foot as a condo.

Who are the most active buyers of developable land in NYC right now?

Large developers who need to feed the beast and those who are trying to make up for lost time because they missed the market.

Who are the most active sellers of developable land these days?

Many sold at the end of last year due to the tax-regime change. These had been long-term family owners. Now, the other sellers are flippers.

Prime areas of Manhattan are seeing premium land prices, but where are there still deals to be had in Brooklyn or Manhattan?

Downtown Brooklyn still has opportunities. There is a massive amount of supply on the horizon, which is keeping pricing in check.

Sources have said lenders might soon pull back on financing because land prices have gotten so high. Are you seeing that?

Not yet, but I don’t know many commercial banks who are comfortable lending to $1,500 a foot.

What concerns, if any, do you have about the high cost of NYC land?

Manhattan will only be left for the wealthy condo buyer and tourists.

James Nelson, partner, Massey Knakal Realty Services

What is the competition like for land and development sites these days?

In my 15-year career, I’ve never seen demand and pricing at this level for land. Specifically in Manhattan, land prices are up over 50 percent from 2010. On the high end, residential sites are reaching close to $1,000 per building square foot. In some instances, we are achieving well in excess of that. We are seeing bidding wars on most assignments. For example, we had priced 239 10th Avenue at $18.95 million, which was almost 50 percent above the last Chelsea land sale. After two dozen offers, we ended up over $4.5 million above the asking price.

How long is developable land staying on the market in NYC these days?

We are typically only on the market for three to four weeks before calling for bids. This is a lot quicker than a year or two ago and a fraction of the time it took during the recession.

Former broker Michael Shvo just spent a record $850 per buildable square foot to buy the former Getty gas station in West Chelsea. Are you seeing records being broken for land prices elsewhere in NYC?

We were fortunate to have brokered the Shvo sale, which was a record for Chelsea. We also achieved a record level on the Upper West Side, at $750 per buildable square foot on 77th Street. We are working on something right now in the West Village that should sell for well more than double this level, which will also substantially raise the bar.

What concerns, if any, do you have about the high cost of NYC land?

Without 421a [tax abatements], rental development is virtually impossible. To create more affordable and rental housing, the 421a program must be brought back.

Vincent Carrega, principal, Capital Markets Group, Avison Young

What are you seeing in terms of prices for developable land in the city today? How much are prices now, on average?

During the recession, land was trading at prices that were mind-boggling, they were so low. Good parcels were trading at under $200 a foot. There was a lot of debt being traded from lenders who wanted these properties off their books, so there were terrific deals to be had. Over the last five years, the market has steadily increased.

What is the competition like for land and development sites these days?

It seems like every time we see a sale, it has sold at a higher price than the last. We have traded above what we thought in our own minds that property would achieve. I think that will continue because there is a real shortage of developable land. Even in M zones, there is a lot of hotel activity, and there is demand for property that traditionally didn’t have much appeal.

We’ve recently written about all of the new development projects taking place in Queens. What are you seeing in terms of land prices there?

Most of Queens, like Forest Hills and Kew Gardens — not including Long Island City— is still in the $200-a-foot range and is mostly rental. You need to be mindful of what you can achieve in rents so there are relatively low land prices, relative to Manhattan and Brooklyn.

Kelly Kennedy Mack, president, Corcoran Sunshine Marketing Group

What type of properties are the developers planning for the land they are buying?

Residential development in New York is moving further toward luxury product. In Manhattan, over 60 percent of condo units planned for the next three years will be in the luxury sector.

What concerns, if any, do you have about the high cost of NYC land?

The luxury boom and soaring rental rates pose a unique challenge. We need affordable housing to meet the needs of working New Yorkers, and we need to figure out how that can be offered in prime areas. Mayor Bloomberg’s micro-housing initiative is a tremendous step. Within the next year, buildings like My Micro NY, the winning proposal that was selected by the administration, will offer 265- to 360-square-foot apartments with high-end finishes and condo-style amenities in Kips Bay. It’s an entirely new concept and price point, and cities around the world are looking to see how it works in practice here.


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