Manhattan land values are seeing their first dip in many years as sluggish condo sales and a slew of lightly pre-sold new luxury residential towers combine to create a land buyer’s market.
Industry experts say land values in Manhattan fell in the third quarter of 2006 as developers waited to see if there were enough buyers to absorb the large number of residential units set to come online over the next several months.
“According to the reports from the first half of the year, prices were remaining stable but the velocity of sales was slowing down, and that is always a precursor to falling prices,” said broker Robert Knakal of Massey Knakal Realty Services. “In the third quarter, prices were off. There are several transactions where we had an offer on a site five or six months ago, and now the top offer is 15 to 20 percent less than it was then.”
While drop-offs in excess of 20 percent from recent highs have struck some Manhattan neighborhoods, Knakal said the decline has not been uniform.
“When you’re talking about the land market, you need to a make a distinction between absolutely the most prime land and land that is in a secondary location,” Knakal said. “Clearly, what we’re seeing in Manhattan is that land in truly prime locations seems to be maintaining its value. There’s been no reduction in prices for those sites.”
Prime land, Knakal said, is limited to parcels along Central Park, nice block fronts on the Upper East Side, well-located parcels in Soho, or just about anywhere in Midtown.
According to Robert Von Ancken, managing director at Grub & Ellis, prices remain particularly high in Midtown, where condo-weary developers are taking advantage of the area’s zoning and planning other types of developments.
“Lots in that area can be used for a variety of purposes,” Von Ancken said of Midtown, where property has recently sold in excess of $500 per square foot of FAR, or floor-to-area ratio. “It seems that the big push with the current high occupancy rates and the very, very high room rates is hotels. It seems that these properties are being sold with the anticipation that they could be developed as either traditional hotels or hotel-condos.”
While Von Ancken agrees that land prices outside of Midtown have fallen in the past few months, he puts the figure at under 10 percent. He also is quick to point out that land values are currently incredibly high — so high, in fact, that developers still would have trouble turning a profit on a newly constructed rental building.
“To build rentals, you really can’t afford to pay more than about $250 per square foot of FAR for the land,” Von Ancken said. “Now, maybe land goes for $350 per square foot. Maybe a few months ago we would have gotten $375. Hard to say.”
However, with land values shrinking, weakening apartment sales prices and a hot rental market, condo developer appetites have lessened while the demand for rental properties has grown. Knakal believes rental developers might soon be able to compete with condo developers.
Von Ancken said that depending on what happens with the condo sales market over the coming months, it is conceivable that some properties now being developed as condominiums might switch — temporarily, and at a loss — to rental buildings.
“It’s like 1985 all over again,” Von Ancken said. “There seems to be a glut of condominiums coming onto the market, which will affect the pricing. There are only so many people that can buy, and if you double or triple the typical inventory, which we are doing now, things are going to slow down. [Developers] don’t want that, so they’re going to lower the price or perhaps switch it over to rental on a temporary basis. That’s what they did in the mid-1980s.”
Both Knakal and Von Ancken agreed that future land values in most neighborhoods will be determined almost wholly by what happens with the sale of new condominiums. The sell-off could be bolstered by predictions that interest rates will fall in early 2007.
On the other hand, Manhattan brokers will face newfound competition from the Brooklyn and Queens waterfronts, where a high-rise condo sells for an average of $750 per square foot compared to $1,100 per square foot in Manhattan. Competition is also coming from the New Jersey waterfront.
What happens over the next year will likely affect not only the price of land, but the type of development to rise, be it hotel, hotel-condo, rental or office.
“The supply side of the equation is what’s really creating the current dynamics in the marketplace. On the demand side, there’s a little bit of a wait-and-see attitude,” said Knakal. “It will be interesting to see what is going to be built on some of these sites for projects that are planned but not yet coming out of the ground.”