The dirt on NYC s soaring land values

Transcription

1 April 01, 2015 The dirt on NYC s soaring land values With condo prices failing to keep pace, industry experts worry land prices will hit point of no returns By C. J. Hughes Much ink has been spilled about the skyrocketing price of New York City land. Judged against almost every real estate measure in the market, land prices are through the roof and that s even as values for co-ops, condos, rentals and office space are soaring. But the question now is: How much higher can those prices go before buying land no longer makes sense for developers? South of 96th Street in Manhattan, the buildable price per square foot of sold land jumped a massive 30 percent between 2013 and 2014 alone and has continued to

2 rise since, according to data compiled for The Real Deal by the commercial firm Cushman & Wakefield. To put that in perspective, the average per-square-foot price jump for condos and coops was just 13 percent in Manhattan (with the vast majority of sales below 96th Street); according to the appraisal firm Miller Samuel. Land values do track one key figure: The price developers are charging for new condos. From 2013 to 2014, the price of new-construction units in Manhattan leapt 29 percent to an average of $1,851 per square foot, according to Miller Samuel. But even that rise could not match the 30 percent land-price jump. This month, TRD broke down prices of developable land all lots being marketed as development sites by borough and then compared that to a slew of other real estate metrics (see charts). The goal was to determine how wide the growth margins are between land and everything else, and to pinpoint when, exactly, the growth is no longer sustainable. Some real estate insiders are already sounding the alarm, noting that developers profit margins are being squeezed because they are shelling out so much money on land. Call it the point of no returns, the moment developers can t recoup their investment because the condos they would need to build could not sell for enough to cover their costs. And those points which in the current market are around $1,200 for land in Manhattan and $700 in Brooklyn have already been crossed in some places, or are about to be. The land market hasn t flattened out yet, but I don t know how high it can go, said Peter Hauspurg, the chairman and CEO of the commercial brokerage Eastern Consolidated.

3 At peak land prices, about the only thing that developers can turn a reliable profit on is super-high-end condos, so the top-out point for land largely depends on how high luxury condo prices can go. It s really a question of how deep the luxury market is, Hauspurg said. In addition, banks are starting to be wary of runaway land prices, said Jordan Ray, a managing director with Mission Capital Advisors, which arranges financing for land deals. I can definitely tell you there is concern in the lending community, he said. There are concerns about the long-ter m sustainability of condo prices, which would in turn affect the land prices. Manhattan Too bad financing was so hard to come by in the wake of the recession. There were a lot land deals to be had back then. During the dark days between 2009 and 2011, land prices fell 15 percent, to $322 per buildable square foot, according to Cushman s data. Today that price seems like child s play. Buoyed by a more favorable lending environment, average land prices in Manhattan, south of 96th Street, leapt a stunning 79 percent, to nearly $579 a foot between 2011 and That marks a 53 percent jump from And those are just the averages pricier deals dotted Manhattan last year, including a parking lot and adjacent store on Wooster Street in Soho that sold for $50.5 million, or about $1,375 a buildable foot, the 2014 record for a parcel where a developer is planning a new-construction residential project, according to Cushman s data.

4 The buyer, KUB Capital, intends to construct a mixed-use apartment building, though its proposal awaits final city approvals. Several other recent deals, like at 1865 Broadway on the Upper West Side, where AvalonBay Communities intends to put up apartments, clocked in at more than $1,100 a buildable foot. During that timespan, new-development apartments, almost all of them condos, jumped 49 percent, to $1,851. While that s an impressive jump, it still trails the price of land, a troubling sign for developers. The data also explains why developers are building almost entirely to the top 10 percent of the market. In that rarified air, the average sale price is around $2,500 per square foot, according to fourth quarter from the Corcoran Group. And many of Manhattan s super-luxury condos have, of course, asked for far more than the average. Units at 432 Park Avenue, the new 96-story tower at East 56th Street, for instance, have averaged more than $7,500 a foot, according to listings website StreetEasy. Likewise, prices on closed units at One57, the glassy 90-story spire on nearby West 57th Street, have averaged about $7,000 a foot. But sources say the high land prices are already creating problems. Margins are shrinking, said Robert Von Ancken, a managing director of Newmark Grubb Knight Frank, the commercial brokerage, and a longtime appraiser. Von Ancken noted that the $2,500-a-foot luxury average is a slight decrease from the third quarter. If that softening continues, he said, developers will start thinking twice about forging ahead with land purchases. That s because their margins don t only factor in land; they depend on everything from construction costs to marketing campaigns.

5 If a unit sells for $2,500 a square foot, Von Ancken said the developer needs to subtract $900 for hard and soft costs, like construction and advertising campaigns, and about $375 for the cost of common spaces, like lobbies and hallways. Once that s done, he said, a developer is left with about $1,200 for the land. So the margin, often 10 to 15 percent, is dangerously thin. There is just so much indetermination going forward, Von Ancken said. Yet $1,200 a foot for land could soon seem cheap. According to Eastern Consolidated s Hauspurg, a Lower Manhattan site will soon hit the market at $1,400 a foot. He said, however, he s doubtful that there are enough luxury buyers left for that deal to pencil out. How many people are out there who can spend $6 million for 2,000 square feet? he said, noting the implied $3,000-square-foot price tag. Besides, the absorption rate of four-bedroom apartments, he said, has recently started declining. As for rental projects, unless developers can secure tax credits to offset costs, or lease the land instead of buying it like the Related Companies did at its 312-unit Abington House in Hudson Yards they might be out of luck. To add salt to the wound, average rents actually declined to $52 a square foot in 2014 from $53 in 2012, according to Cushman s data. Meanwhile, with the exception of high-profile projects like Hudson Yards and Manhattan West, both on the Far West Side, office developments have been rare, too. But there have been exceptions. Last year, SL Green Realty paid $41.1 million to acquire 719 Seventh Avenue, at West 48th Street, in Times Square. The REIT paid a record $1,462 per buildable square foot, Cushman said. But what really attracted the company, analysts told TRD, was not the 28,000-square-foot-building it can put up, but the Times Square signage that it can install there and charge big-time for. Brooklyn While buying developable land in Brooklyn is still a lot cheaper than it is in Manhattan, prices in Kings County are rising at a faster clip.

6 The price of land in Brooklyn jumped 96 percent during the five-year stretch from 2009 to 2014, to $183 a square foot from $93, according to Cushman s data. The 36 percent rise between 2013 and 2014 to $183 was the steepest gain of any borough between those years. But developers paying through the nose for land could be in trouble soon. That s because while new condo values are rising, they aren t rising fast enough. Between 2009 and 2014, new condo prices in Brooklyn jumped 67 percent, to $836 a foot from $502 a foot, Miller Samuel said. But they are a lot higher in prime neighborhoods, like Williamsburg. Williamsburg s bustling Bedford Avenue offers up some of the most eye-popping land deals in the borough. At 169 North Seventh Street, for instance, a 5,000-square-foot parcel with a likely-to-bedemolished six-unit apartment building, is under contract for $3.4 million, or $680 a buildable square foot. That s more than the average price of developable land in Manhattan. If it closes at that price, it would likely set a Brooklyn record for developable land, said the broker marketing the property, Shaun Riney of the commercial firm Marcus & Millichap. A developer who expects to reap a 10 percent profit at the most-prime Brooklyn sites appears to have very little wiggle room. New luxury condos in Williamsburg today sell for about $1,200 a foot, according to StreetEasy. To clear a margin of about $120 a foot on that kind of project, a firm that spends $680 a foot on land is left with only $400 a square foot for hard and soft costs, less than half of what Von Ancken had estimated above.

7 But Mission Capital s Ray noted that developers don t plan for today s market; they are betting on what the economic landscape will be two years out. So, he said, $1,400 a foot for condos may be the benchmark. I m long on Williamsburg, he said. Even at lower land prices, which exist farther away from Williamsburg, don t expect to see ground-up rentals or offices. With development sites above $300 or $350 a foot, Riney said, you have to go condo to make the numbers work. To be fair, $680 a foot for land is an outlier at this point. A nearby deal at 585 Manhattan Avenue in Greenpoint was more typical: The site, once home to the Warsaw Bakery, sold for $350 a buildable square foot last year, according to brokers. And there are Brooklyn neighborhoods where land trades in the double digits. In East New York, it s about $60 a square foot. But once-far-flung areas are, literally, gaining ground fast. On the eastern edge of Bed- Stuy, near Flatbush, Riney is marketing a 37,000-square-foot dirt site for $110 a buildable foot, he said. And in January, in Crown Heights, Adam America Real Estate Investment paid about $225 a foot for a gas station at 1525 Bedford Avenue, a value that factors in the amount of extra square footage that could be awarded by the city if the project creates some affordable housing. In addition, Prospect-Lefferts Gardens saw the biggest Brooklyn jump of the last year. Land there climbed to about $150 a foot in 2014, from about $70 in 2013, said David Junik, a partner with Pinnacle Realty of New York, a brokerage involved with land deals in Brooklyn. Still, what I am seeing now is that the market is beginning to stabilize, Junik said. There is still a big demand, but there are definitely signs of caution. Queens

8 As prices in Brooklyn have shot up, both developers and buyers have flocked to Queens, particularly in the neighborhoods close to Manhattan along the East River. That increased interest is, not surprisingly, reflected in land prices. Average prices for development sites soared 104 percent between 2009 and 2014, to $137 a foot from $67, according to Cushman s data, the highest increase in any borough during that time. Between 2013 and 2014, prices jumped 17 percent. But for developers, Queens might not be such a bargain anymore. That 2014 land price of $137 is not too far below Brooklyn s $183 from the same year. But there is more upside in Brooklyn. Relatively speaking, sources noted, developers can t get the same haul in Queens as they can in Brooklyn. The average sale price of new-development condos in Queens averages around $900 a square foot in Long Island City, but goes as high as $1,200, said Junik. In hot areas like Long Island City, which has seen a spate of new high-rise towers in recent years, especially in desirable micro-neighborhoods like Court Square, Queens Plaza and Hunters Point, prices for developable land now average $200 to $250 a foot, said Edward DiTomasso, a senior associate at Modern Spaces, a brokerage that opened a commercial division last summer to take advantage of an increasingly active investment sales market. The amount of space is really tightening, he said. DiTomasso is currently listing a mixed-use parcel in Court Square for $41.5 million, or $250 a buildable square foot, and is involved in the sale of a site in Astoria asking $141 a square foot. The latter site, which sits near a 22-building housing project known as Astoria Houses, will be home to a new residential project, he said.

9 In Queens Plaza, along Jackson Avenue, meanwhile, Tishman Speyer Properties has planned a massive three-tower project, which will include 1,800 apartments and will reportedly cost $875 million to build. Based on the reported size of the project and the $221 million price tag recorded with the city, Tishman appears to have paid about $160 per buildable square foot for the property. Tishman is also hoping to get a $200 million 421a tax break, but needs to pour the foundations by June 15 in order to qualify. That potential tax break is already creating controversy because the firm does not have plans for any affordable units. On Vernon Boulevard north of the Queensboro Bridge, meanwhile, prices have remained fairly flat, at about $100 a buildable foot, brokers say. But when Cornell Tech opens its Roosevelt Island campus in 2017, this part of Long Island City, which is zoned for manufacturing now, should thrive, as tech start-ups set up camp nearby. At that point, some of those factories may give way to office buildings, said Evan Daniel, a commercial agent with Modern Spaces who works in the area. It won t jump to $200, but you will see a gradual increase, he said. Bronx In the Bronx, home to the poorest congressional district in the country, land prices have been mostly flat for the last several years. Unlike in other boroughs, land actually seems to be underperforming in the Bronx. In fact, at nearly $49, the average buildable per-square-foot price in 2014 was only 8 percent higher than it was in 2009, when it logged in at nearly $45. While there are plans afoot for some new developments, there are not a lot of comps for new condo

10 projects, and many of the rentals that have gone up like the Atlantic Development Group s 419-unit Bruckner by the Bridge in Mott Haven have income restrictions. Yet the Bronx is undoubtedly becoming a hotter investment play (see related story on page 72). The Chetrit Group, for example, bought a $32 million Mott Haven site in December with plans to build six residential towers. But brokers say there are challenges to building in the borough. Developing buildings that currently have rent-regulated units would require ousting tenants, a laborious and often futile task. In addition, numerous city-owned housing projects, which can t be bulldozed, also discourage development, brokers added. The market isn t strong enough for demolition and rebuilding, said Charles Brophy, a residential broker with Douglas Elliman who has listings across the borough. The average price per square foot of for-sale properties in the borough was $201 in 2014, according to Miller Samuel, up from $166 in But the South Bronx appears to be on the rise. The Hunts Point Terminal Produce Market recently re-signed a lease through 2021, and grocery delivery service FreshDirect is building a 500,000-square-foot headquarters that s set to open in Both should mean more jobs, which will ultimately mean more housing. Housing follows jobs, Brophy said. Staten Island Bucking an upward trend in the rest of the city, land prices have actually softened in Staten Island, despite renewed interest from developers in and around the St. George area.

11 But housing prices have improved. That s a good combination for developers looking to buy land low and sell homes high. Between 2009 and 2014, land prices dropped 21 percent, to roughly $38 per square foot from nearly $46, according to data compiled by Richard Mohr, the controller at the Staten Island Board of Realtors. That was for the actual dirt (estimates for buildable prices were not available). At the same time, though, the cost of new development has risen, for some property types. Between 2009 and 2013, new-construction one- and two-family homes, for instance, jumped 6 percent, to $273 per foot. But on the condo side, prices have slipped. During that same time frame, the average sales price for new condos dropped a hefty 36 percent, to $211 a foot, Mohr said. Still, the land-price decline is likely being skewed by several polluted brownfield sites. And in more prime submarkets, like the St. George waterfront, the market is strong and getting stronger. Plans to build a 630-foot Ferris wheel, as well as New York City s first outlet mall, Empire Outlets, are moving forward. Plus, soon to break ground on the other side of the ferry terminal is Lighthouse Point, a $200 million mixed-use project that will add 100 rentals, a hotel and stores. About a mile south, the Homeport a massive mixed-use conversion of a decommissioned Navy base on the Stapleton waterfront promises to bring 900 rental apartments and stores, from Ironstate Development. Construction has started on the first of two buildings. Leasing starts this summer. The efforts to revive the waterfront used to be city initiatives, said Mohr, a longtime Staten Island resident. But this time, a lot of private money is coming in.