Demand for Northern Manhattan development sites reaching pre-crisis levels

Rising rents and increasing condominium prices are pushing up demand for development sites in Northern Manhattan to pre-2008 levels. In the first half of 2012, the number of development sites sold jumped 170%, respectively, compared to the second half of 2011, according to our firm's Northern Manhattan 2012 Mid-Year Sales Report. The area had 14 transactions consisting of 22 development properties in the first half of 2012 compared to five transactions consisting of eight properties in the second half of 2011, and 10 transactions consisting of 16 properties in the first half of 2011. At Ariel Property Advisors, we're witnessing this increased demand first hand. Since the beginning of the year, we've closed on nine development properties in Central Harlem, Morningside Heights, and Inwood, and have 14 development sites in contract in Central and East Harlem, Hamilton Heights, Washington Heights, and Inwood. We're seeing brisk bidding activity on the development properties we're marketing, between 10 to 20 bids per site depending on the location and price. Ariel Property Advisors currently has in contract more than 200,000 buildable s/f at 605 West 161st St., 2630 Frederick Douglass Blvd., 444-446 West 163rd St., 71-73 East 110th St., 5122-24 Broadway, 75-77 East 110th St., 492 Saint Nicholas Ave., 15-19 West 119th St., 1844 & 1848-52 Park Ave., 2183-89 3rd Ave., 1642 Madison Ave., and 166 East 100th St. So far this year, our firm has closed on development sites at 1840, 1846, 1854-56 Park Ave. and 61 East 126th St., 142 West 132nd St., 316-320 West 118th St., 56-58 West 129th St., 42 East 132nd St., and 5048-50 Broadway and 4022 10th Ave. Increased demand for Northern Manhattan condominiums, as well as market rate and affordable rentals, is providing the incentive for developers to return to the market. Condominium prices averaged $604 per s/f in the first half of 2012, which is the highest level seen since 2008, when the average price per s/f was $628. Although sales at some condominium developments stalled during the downturn, these buildings have either sold out are getting close to it. The declining inventory of units should lead to strengthening prices in the near term. Asking rents for free market units in Northern Manhattan are $32 per s/f, which is above average rent per s/f in 2008. Vacancy rates are low, which is putting upward pressure on rents in the area. The recovery of development site prices is becoming increasingly more apparent but remains more muted than the recovery in transaction volume financing remains challenging for many developers and lenders are still requiring large amounts of cash on hand to complete deals. As a result, market prices for development sites in Upper Manhattan are still about 30% lower than what they were at the peak. During the boom years, the price for a development site in Northern Manhattan averaged around $120 to $125 per buildable s/f, but dipped to an average $55 per buildable s/f 18 months ago. Depending on location and size, development sites are selling for anywhere between $75 to above $100 per buildable s/f and all signs point to higher selling prices in the near to medium term. The majority of today's developers buying properties in Northern Manhattan are experienced and have successfully completed other projects. They have established relationships with lenders willing to make construction loans and, in some cases, are willing to make loans to acquire vacant lots. The remaining acquisitions are all-cash deals. One property we recently put into contract at 1624 Amsterdam Ave. has benefited from both timing and location. The vacant, five-story, 11,835 s/f, mixed-use corner property has been on and off the market since 2008 but recently became an even more attractive investment because it's across the St. from City College's newly renovated campus. We're seeing more and more entrants to the development market in Upper Manhattan, largely because of expansions by educational institutions like City College, Columbia University, and the recently completed Hunter College School of Social Work in East Harlem. Development site activity since the downturn has certainly been lacking, but this surge in the development site market strongly suggests a sharp rebound is just around the corner. Shimon Shkury is founder and president of Ariel Property Advisors, New York, N.Y.