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Countless real estate professionals have pointed to the majorblow the multifamily middle-market took with the enactment of the2019 Housing Stability and Tenant Protection Act, but have notemphasized how poorly the Manhattan development market continues toperform and the effects.

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To put this in perspective, according to Avison Young's Q4 2019report, the development market dipped to near 10-year lows, withdollar volume dropping around 65 percent off the 10-yearaverage.

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In December alone, we only saw two development sales, bothcorner lots and well located along busy thoroughfares, of which oneis adjacent to the Fulton Street transit hub that traded under $300buildable per square foot and the other sits at the intersection ofMadison Avenue and East 86th Street.

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The major challenge Manhattan faces is the price of land and theoptions available to developers. Land is currently selling for $606buildable per square foot on average. At this level, it isimpracticable for developers to build rental properties due toproperty tax implications, which range from 30 to 40 percent ofeffective gross income on new construction.

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Even more, the property tax abatements offered by the AffordableHousing New York Program do not offer enough value to offset lowerrents for required affordable units. As a result, developers areforced to choose between residential condominiums or commercialuses such as office or hotel, and herein lies the problem.

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According to a StreetEasy analysis published by the New YorkTimes, one in four residential condominium units constructed since2013 has remained unsold. Homebuyers are growing more and morehesitant to pull the trigger in what is perceived as adeteriorating market. They remain patient and shop around searchingfor the perfect fit at the best price possible. As a result, pricescontinue to fall and days unsold units are on the market grows.

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This slowdown in sales velocity coincides with elongated highcarry payments and increased incentives to buyers, which cuts intoprofits. Our team at Avison Young has sold 47 development sitesover the last five years. Over this period, we have found thatwhile developers continue to factor the price per buildable squarefoot into their analysis, they are now placing a far strongeremphasis on project elements such as light and air, layoutefficiency, location and nearby supply.

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Developers cannot easily attract buyers or get by on pricingresidential condominiums at lower values in today's market. Theyalso have to offer a special product in the best possible locationto account for increased competition. It is the only way they canattract qualified buyers faced with countless options until moreunits are absorbed. As a result, there has been extreme pushback onsites by cautious developers, making it very challenging tomaintain sales velocity in this segment.

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Although there are struggles in the development market, there isa silver lining. The rise in sales and ground leases fit forcommercial developments has helped offset the drop off in salesthat rely on residential condominium exits, in particular, inlocations such as prime Midtown South where new office supply islacking and rents have climbed well into the triple digits.

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Moreover, when calculating square footages for officeproperties, a loss factor – the amount of communal space for whicha tenant pays, but is not included in the actual size of theiroffice – allows owners to artificially increase the rentable squarefootage of the property. These two factors have helped more officeprojects to pencil out, which allows more transactions to takeplace.

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Progressing into 2020, we expect the development market toremain flat unless pricing adjusts another 10 to 20 percent,depending on the quality of the site. Once this takes place, weexpect residential condominium developers to get back into the foldwith the expectation that a substantial number of units will getabsorbed by the time the project is completed. We also expect moreoffice developments to take place while Manhattan office leasingremains robust. Finally, in certain locations, we may even begin tosee residential rental projects finally pencil if pricing getscloser to $250 buildable per square foot. It sounds farfetched, butthen again, one of two December land sales took place at $297buildable per square foot.

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Brandon Polakoff is senior director of the Tri-StateInvestment Sales group of Avison Young's New York Cityoffice

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