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

Even more, the property tax abatements offered by the Affordable Housing New York Program do not offer enough value to offset lower rents for required affordable units. As a result, developers are forced to choose between residential condominiums or commercial uses such as office or hotel, and herein lies the problem.

According to a StreetEasy analysis published by the New York Times, one in four residential condominium units constructed since 2013 has remained unsold. Homebuyers are growing more and more hesitant to pull the trigger in what is perceived as a deteriorating market. They remain patient and shop around searching for the perfect fit at the best price possible. As a result, prices continue to fall and days unsold units are on the market grows.

This slowdown in sales velocity coincides with elongated high carry payments and increased incentives to buyers, which cuts into profits. Our team at Avison Young has sold 47 development sites over the last five years. Over this period, we have found that while developers continue to factor the price per buildable square foot into their analysis, they are now placing a far stronger emphasis on project elements such as light and air, layout efficiency, location and nearby supply.

Developers cannot easily attract buyers or get by on pricing residential condominiums at lower values in today's market. They also have to offer a special product in the best possible location to account for increased competition. It is the only way they can attract qualified buyers faced with countless options until more units are absorbed. As a result, there has been extreme pushback on sites by cautious developers, making it very challenging to maintain sales velocity in this segment.

Although there are struggles in the development market, there is a silver lining. The rise in sales and ground leases fit for commercial developments has helped offset the drop off in sales that rely on residential condominium exits, in particular, in locations such as prime Midtown South where new office supply is lacking and rents have climbed well into the triple digits.

Moreover, when calculating square footages for office properties, a loss factor – the amount of communal space for which a tenant pays, but is not included in the actual size of their office – allows owners to artificially increase the rentable square footage of the property. These two factors have helped more office projects to pencil out, which allows more transactions to take place.

Progressing into 2020, we expect the development market to remain flat unless pricing adjusts another 10 to 20 percent, depending on the quality of the site. Once this takes place, we expect residential condominium developers to get back into the fold with the expectation that a substantial number of units will get absorbed by the time the project is completed. We also expect more office developments to take place while Manhattan office leasing remains robust. Finally, in certain locations, we may even begin to see residential rental projects finally pencil if pricing gets closer to $250 buildable per square foot. It sounds farfetched, but then again, one of two December land sales took place at $297 buildable per square foot.

Brandon Polakoff is senior director of the Tri-State Investment Sales group of Avison Young's New York City office