NEW YORK CITY—There has been a lot of talk recently of how expensive Manhattan land is and if the development market is overheated. There have now been at least three sales at over $1,000/BSF, including 1042 Madison Avenue at $1,704/BSF; 437-39 West 13^th Street for $1,070/BSF; and 16-18 West 57^th Street at $1,062/BSF. These are all retail driven, but surely there are more to come.

In 1Q14, the Manhattan average price per land was $482/BSF which was well above the 5-year average of $363/BSF. This may seem low, but keep in mind this also includes commercially zoned land.

In the last year, RCA tracked $3.11B in development sites sales in Manhattan, with an additional $1.09B in the boroughs, for a total of $4.2B. This compares to Los Angeles's $1.52B, Northern NJ's $879m, and San Francisco's $779m. I couldn't find a metric to compare NYC's land values, but our average development site sells for $41m, almost double SF's $21m and the rest that fall below that.

With all this in mind, how can Manhattan land values continue to rise? Below is a list of reasons why land is selling for such a premium:

1) Land is scarce

Property Shark researched all the vacant land (not including parks) in each of the boroughs and determined the following:

As you can see, there is not much land left to develop in Manhattan, with only 3% remaining, or less than one square mile. Thus, finding residentially zoned, especially larger scale sites in Manhattan, is becoming increasingly difficult. In fact, last year only a dozen sites in Manhattan sold with over 200,000 SF of buildable.

2) Condo Prices Are At Record Levels

Corcoran Sunshine (“CS”) reported that luxury pricing reached $1,784/SF on average, which was a 20% above 2012, the largest annual increase since 2005. There were 900 contracts signed last year for over $5m, more than double the 7-year average.

3) Inventory is at historical lows; Condo sales are brisk

CS tracked the total inventory of Manhattan apartments for sale at only 4,386 units with only about half of those being condo. This is 62% less than the Q1 2009 peak of 11,667 units.

Meanwhile, CS reported that 2013 had 14,700 sales which was 19% more than 2012. CS only estimates 84 new projects coming on line this year for a total of 3,185 units, a drop in the bucket for a City which has over three million housing units.

4) Debt and equity is cheap and plentiful

Experienced developers today have it as good as they have ever had it. There is an abundant supply of private equity trying to find ways to still make 20% IRRs and 2x equity multiples. This clearly isn't possible in cash flowing assets where caps rates average 4%, so development is one of the few other choices.

Debt is cheaper than equity though. Developers are able to secure construction loans at 75% loan to project cost in the high 3% range, interest only. Mezz could take this up to 85%-90% of project cost with rates in the high single digits.

5) Retail Drivers

As shown in the three most expensive land sales above, retail can have a major impact. For example, if retail rents for $500/SF with a 10% expense ratio, the retail component should be worth $9,000/SF once built. Even if a developer assumes $500/BSF all in to build it, it's easy to see why this can really drive land prices. Our firm is about to go to market on a retail site in Williamsburg at over $3,000/BSF.

6) Additional air rights can often times be purchased to blend down the cost of acquisition

Often times air rights can be assembled with adjacent sites at 50-60% of land values. In certain circumstances additional development rights can also be purchased from the City. Finally, there are certain bonuses which can apply if affordable housing is either provided on our off site.

7) Foreign demand

NYC has become a safe haven for foreigners to invest. Our website tracks interest from 131 different countries. NYC's luxury apartments rank only #6 on CitiHabitats list of most expensive apartments in the world, behind London and Hong Kong. Foreign investors will continue to see value and safety in our real estate.

8) Our population continues to grow

New York City's population grew 2.1% in the last 10 years to 8.4m people. By 2030, that is predicted to grow to 9.2m people. Meanwhile, other cities like Chicago's population dropped 6.9% in the same period. With over half a million additional people coming to NYC, there is a great need for housing. According to NYC's website, only 9,455 SF new units were created in 2012 (down from 2007's high of 26,382) throughout NYC for both rental and condo which is shows that there is a woefully inadequate pipeline.