It is no secret that sales of development sites in Manhattan below 96th St. have slowed significantly in the first half of 2016 – a continuation of the cautious trend seen in 2015 – adding to broader concerns over the health of the borough’s development market.

New York City saw $1.6 billion in development sites trades during the 1H16, a 58% decrease in dollar volume compared to 2H15 which saw $3.7 billion worth of development site sales, according to the latest Ariel Property Advisors research. Transaction volume also declined by 35% from 2H15 levels and in 1H16 transaction volume totaled 34, compared to 52 in 2H15.

Contributing factors include the softening of the condominium market, a lack of conventional construction financing and the expiration of the 421-a exemption, which makes a rental fallback option all but impossible. In light of these conditions, developers are forced to adjust strategy, whether by developing residential units to a lower price point, shifting neighborhood focus, or more likely, a combination of the two.

For instance, in reviewing the number of transactions across Manhattan, three neighborhoods continued to generate activity at a larger rate than others: Upper East Side, Midtown East and the Financial District. As an aggregate, these neighborhoods accounted for 27% of the total number of transactions in Manhattan with an average price per buildable s/f of $633. Each of these neighborhoods is attractive to developers for different reasons. Below we will examine.

Upper East Side

The Upper East Side is a neighborhood that many developers consider an area primed for some of the greatest potential for growth due to a combination of low rents and the imminent opening of the Second Ave. Subway line – two items that are sure to attract new residents.

Compared to the rest of Manhattan, the Upper East Side had 19 development transactions for an average price per buildable s/f of $712. One example of a notable project on the horizon is Extell Development’s assemblage for a potential 20-story condominium that is anchored by the purchase of 350 East 86th St. for $93 million or $725 per s/f.

Midtown East

Midtown East is continuing the trend of being one of the more transactional neighborhoods in Manhattan. This year developers paid an average of $708 per buildable s/f for 17 transactions. Developers view Midtown East as an ideal location for professionals who are seeking a live-work environment. Moreover, activity in this area is showing that developers are looking at smaller sites that may be easier to construct and finance.

Most recently, 140 Lexington Avenue, a vacant development site with approximately 124 feet of wraparound frontage, closed for $9.1 million, which translates to $612 per buildable s/f. Currently a vacant 2,469 s/f lot, the site permits approximately 14,863 buildable s/f, as of right, for residential or commercial use.

Financial District

With a burgeoning population that has risen from 22,700 to 49,000 between 2000 and 2014, the Financial District has seen several large scale transactions in the last 18 months. Since 2015, seven development sales with a total of 1.7 million buildable s/f have sold at an average price per buildable s/f of $480.

In March of this year, the Howard Hughes Corporation sold a development site with approximately 817,000 buildable s/f at 80 South St. to China Oceanwide Holdings for $390 million. Rising 113 stories to a height of 1,436 ft., the proposed building will contain a mix of residential, retail and commercial uses.

Two major transactions also took place near the $1.4 billion Fulton Center transit hub. Crown acquisitions paid $25 million for 144 Fulton St., a souvenir outpost that is headed for redevelopment. Building permits have also been pulled for 143 Fulton St., where real estate developer TriBeCa Associates is planning a new 26-story hotel with 228 rooms and retail space on the first and second floors.

Looking ahead, we expect sales volume and pricing to hold at current levels over the balance of the year. Local and national economic growth prospects remain strong, Manhattan remains a safe-haven for capital from around the world and interest rate increases are expected to be slow and modest.