Take a look at the New York City skyline. Construction is booming throughout the five boroughs. Hundreds of residential units are being developed, and the majority of them are condominiums. Due to the astronomical cost of land, construction, and other costs, less than 2% of all new residential developments are being built as rentals. The director at Eastern Consolidated Properties, Alan Miller, said, “Exorbitant construction costs for high-rise residential development make building a rental tower prohibitive for nearly all ground-up projects in the city. Unless land has been owned for five to 10 years at a minimum – which can be a lifetime in New York City – the lid will remain on any substantial number of new construction rental housing units in Manhattan. Even with city and governmental incentives that may be available today, the high barriers to entry in the N.Y.C. marketplace will limit the amount of new rental product that comes online for the foreseeable future.”

The two largest components of residential development are the cost of land and cost of construction. Industry leaders say construction costs have risen more than 30% over the past year. Construction costs in Manhattan today range from $275 to $450 a square foot, depending on the complexity of the project and the finishes within the units. In certain instances, the cost of construction for ultra-luxury condominiums is nearing $750 a square foot. In Brooklyn and Queens, construction costs range from $200 to $300 a square foot, depending on the project, its location, and whether the building is being constructed by a union contractor. The president of Triangle Equities, Lester Petracca, said, “Combined with increased construction costs, sometimes to a level nearing $300 per square foot for hard costs only, the high cost of land has prohibited rental development throughout the outer boroughs.”

Mr. Miller said, “With the intense competition to secure land in the Big Apple from local, domestic, and an increasing number of international companies seeking a piece of the rock to construct the best new condominiums, high land prices prohibit new rental product coming online in the near term for the city.”

He added, “For the best locations, like corner properties in Midtown – for example Macklowe Properties’ recent purchase of the Drake Hotel – the market still seems never-ending.With a strong retail component, you can average down the cost to $300 to $400 a developable foot after carving out value of retail.” The cost of the actual land sold for $942 a developable foot.

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In certain neighborhoods, such as TriBeCa and Chelsea, developable land is selling for more than $450 a foot. Mr. Miller said, “I have under contract a development site on a corner location in Chelsea at $440 and another site selling for in excess of $500 a developable foot, side streets still attaining prices of $300 a developable foot and there are as many new buyers to the market as ever.” A partner at a prominent investment sales brokerage company said, “What I’ve been hearing from developers is that they only want prime locations, in such locations as on West 57th Street. In that way, when the condo market continues to soften, their locations will differentiate their product.”

Cost of developable land in Brooklyn is ranging from $125 to $200, with prices of $225 to $250 for waterfront views. A principal at Muss Development, Jason Muss, said, “Land is hovering in the $80 to $120 per square foot range in Brooklyn and Queens neighborhoods that offer reasonable access to mass transit into Manhattan and that have enough FAR to allow for efficiencies of scale. Land in areas that are considered hot, such as DUMBO or Flushing, might go for $150. I don’t believe people are actually attaining the $200 per square foot price thrown around for Brooklyn and Queens, but everyone wants to start there. As such, those deals won’t happen and that land will sit until the given landowner becomes more realistic.”

Mr. Miller said that his firm recently sold 447-49 Fulton Street for more than $200 a square foot. Prices in prime Long Island City locations are ranging from $150 to $200 per developable foot and have increased significantly since a city rezoning. Mr. Miller said that in July 2004 his firm sold a site at 45-56 Pearson St. off Jackson Avenue across from Citicorp Tower, for $65 a developable foot. He said that only six months after the closing, the property was resold for more than double the price. “Waterfront sites are selling for 25% to 50% higher,” Mr. Miller said. In the Williamsburg section of Brooklyn, 60-90 Metropolitan Ave., on the former site of the Old Dutch Mustard company, sold for $25 million, or nearly $200 a square foot.

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The chairman of Massey Knakal Realty Services, Robert Knakal, said, “We have seen a noticeable flight to quality in the development business. Only the most prime sites are holding their value. Sites in secondary and tertiary locations are seeing reduction in pricing of 5% to 20%.” The president of the City Investment Fund, Thomas Lydon, said, “Overall, land prices are stable to trending downward. There is more flexibility on the part of sellers of land. Construction cost increases and rising interest rates should continue the downward trend – perhaps 10% to 15% – over the next 12 months. Developers are monitoring current sales prices of projects being delivered to see if condominium sales prices can allow them to pass on construction increases. If it stays fairly strong, then landowners will continue to have good liquidity. However, any hiccups in absorption will have direct negative impact because construction lenders are tightening up their underwriting, and will reduce land draws.”

The managing partner of the Clarett Group,Veronica Hackett, said, “Lenders are tightening their underwriting for new residential condominiums.”A senior broker at Besen & Associates, Larry Ross, said, “Sellers still have unrealistic expectations based on what they have seen over the last year, so much so that they are reluctant to reduce their asking price. This disconnect has slowed down the overall pace at which development sites are trading.What you see are still high asking prices with much lower bids that reflect the increase in construction costs and interest rates.”

Mr. Miller summed up the general feeling of industry leaders on the state of the market when he said, “The city has unbelievable resiliency on this limited island, and in my opinion will definitely be facing some resistance in the next six to 12 months. Rising interest rates, end unit condo sales stabilizing, and the meteoric rise in construction pricing will definitely lead to a softening in land per square foot sales. Nevertheless, benchmark pricing records continue to be set for every available buildable site that comes to market.”

Mr. Stoler is a TV broadcaster and senior vice president at First American Title Insurance Company of New York. He can be reached at mstoler@firstamny.com.