Perhaps the market segment most difficult to understand, particularly if we examine recent market data, is the development land market in Manhattan.
For the purposes of this discussion, we will consider the Manhattan submarket to include sites south of 96th Street on the East Side and south of 110th Street on the West Side. In 2009, the average price paid per buildable square foot was $374. In 2010, this average dropped to $326, a 13 percent decline. In 2011, the average dropped again to $311, a 5 percent slide and a number which is 17 percent below the 2009 average, which was the peak during the past cycle.
Most participants in the market would think there must be some mistake with these numbers as it has been clear that a tangible increase in the health of the development market has been present since the disillusioned days of 2009. Actually, if we examine the data closely, this trend becomes easy to understand. And the conclusion is that the development land market has been improving and, today, is one of the better performing market segments.
The main factor impacting the land market has been volume. The year 2009 was probably the most challenging in which to obtain construction financing. For sure, better sites with strong sponsorship could obtain construction loans and several good-sized financings were made at that time. Due to the challenges of obtaining construction loans at the time, and the heavy equity requirements appurtenant to the loans that were available, the perception was that the value of land had fallen dramatically. Sites that may have been worth $400, or more, per buildable square foot during the boom years of 2006 and 2007 were receiving offers of just $100 or $150 per buildable square foot. The result was that sellers simply did not capitulate. (It must be noted that there were still very prime sites that still commanded lofty offers and transactions occurred.)
This dynamic left the land market in a position where we saw only a few trades. For some relative perspective, in 2006, which was the year in which we observed the most activity in the land market, there were 186 development sites traded. Everyone during these years, it seemed, was a “real estate developer” including many first timers who had been architects, plumbers, doctors, brokers and just about anyone else who could spell real estate. Remarkably, construction financing was available to these novices. Not surprisingly, the overwhelming majority of stalled sites and foreclosures seen in subsequent years were on the backs of these inexperienced developers.