Owners of land and developable sites earmarked for residential development may be in for a big surprise in 2007. Instead of riding the crescent of record sales prices, land in many of the city’s submarkets will drop by as much as 20% to 30%.

“Undoubtedly, the most important variable to watch in 2007, which will have the most significant impact on land values, is the performance of the consumer condominium market,” the chairman of Massey Knakal Realty Services, Robert Knakal, said. “Land prices are very sensitive to condo pricing and the perceived direction of the market. While there has not been a tangible reduction in condo values, the slowdown in the velocity of sales, which is normally a precursor to lowering values, has had a negative impact on land value.

“Land prices in secondary locations are off 10% to 20% from their peak, and land’s future will be dependent on the performance of the consumer condominium market more than anything else. The delta between land values for condominium construction and rental construction is such that significant reductions in value would be necessary to make rental construction feasible.”

Another factor fueling the fire in the prices of land is the City Council’s planned overhaul of the 421-a tax abatement program.

“The biggest issue the industry is currently facing is the proposed limitations on the 421-a program,” Mr. Knakal said.

“This legislation will exacerbate the problem in building new construction rental projections, especially in the borough of Brooklyn,” a principal at the Hudson Companies, David Kramer, said. “In today’s economics, even with the benefit of tax exemption, it’s extremely difficult to develop rental housings due to the construction cost environment. The legislation, which impacts numerous Brooklyn neighborhoods, will make it impossible to develop rentals unless they have 80% market rate and 20% affordable components.

“I fear this legislation will lead to an abrupt reduction in the amount of development activity in many Brooklyn neighborhoods. If a property is fully accessed at $70 per square foot, that should lead to a reduction in land value of $100 per square foot. However, this could easily lead to a standstill between owners and developments.

“My bet is that most owners of land will not be taking $100 per square foot less for their land any time soon,” he said.

Over the past few years, parking lots and garages have been sold to make way for luxury condominiums. One example is the vacant land adjacent to the former Mayflower Hotel, which was sold at a record price to make way for 15 Central Park West.

Parking lots in Times Square and Midtown have fetched close to $400 a developable square foot. A number of parking lots in Brooklyn have also fetched close to $200 a developable foot.

“If a guy with a parking lot is told that his land that was worth $150 per building square foot … is now worth $50 per square foot due to the proposed changes in 421-a, I think he will continue to park cars there and nothing will get built,” the executive director of sales at Halstead Brooklyn, William Ross, said. “Due to the proposed 421 a changes, land prices in the affected parts of Brooklyn will be worth one-third of what they are selling for today.”

Affected sections of Brooklyn include parts of Bedford-Stuyvesant, Red Hook, Fort Greene, Clinton Hill, Carroll Gardens, Cobble Hill, Sunset Park, Brooklyn Heights, areas along the Gowanus Canal, and Bushwick.

Over the past five years, the price of land north of 96th Street has increased by as much as 300%. Nevertheless, many industry leaders are very fearful in light of the proposed legislation. Earlier this month, in a column I wrote for The New York Sun, I addressed the three distinct sections of Harlem: West, Central and East, some of which have undergone major changes.

“In the planned changes of the 421-a program, Harlem has been included in the expansion of the 421-a exemption zones, and this reform may have a negative impact on land prices for two main reasons,” a managing partner at Massey Knakal Realty Services, Shimon Shkury, said. “First, if a developer chooses to take the tax exemption, they will effectively reduce their market rate buildable area by 20%. Assuming all the costs remain constant, this will limit the potential prices for the development, then the reform carries the potential for a parallel drop in land prices of approximately 20%.

A number of owners and developers says they think that land prices in Manhattan will not adjust as much as in Brooklyn and the Bronx as a result of the loss of the as-of-right 421-a benefit. One developer, who prefers not to be identified, told me “the value of the lost tax exemption is actually so great that sellers will simply not want to hear that their land is suddenly worth $100 per developable foot less than it was before the change in the law.”

Manhattan has a limited number of parking lots, and the owners can keep the land as lots in an area where parking costs in excess of $30 a day and $500 a month. Many of these parking lot owners have owned the land for many years and can afford to wait until the market adjusts.

Office buildings and hotels are in demand in Manhattan, and many industry leaders expect developers to build office towers and mixed-use properties.

Specifically, a developer from Rome who purchased the vacant site at 400 Fifth Ave. on the west side of 36th Street, which was earmarked for a residential condominium, is now planning a 550,000 square foot mixed-use development with retail on the first and second floors and in the basement, a hotel component, and condominium units above.

Nevertheless, developable land in prime locations will continue to sell at record levels. Perhaps the highest price ever paid for a developable site will be recorded in the first quarter of 2007, when the New-York Historical Society accepts a bid for a site adjacent to the facility.

The New-York Historical Society wants to begin a $20 million renovation of its landmark building at 170 Central Park West that would also allow a developer to build a 23-story glass apartment tower that has 18 floors of condominium apartments behind the society’s museum and library. The master plan calls for 70,000 square feet of new program and office space for the society, as well as 120,000 square feet for residential use.

Earlier this month, a group of New York’s most prominent developers submitted proposals to investment banker reviewing bids for the site. Industry leaders expect the site to fetch as much as $1,100 per developable square foot.

Cooper Union is hoping to receive a $60 million upfront payment for a 100 year land lease at 51 Cooper Square, where a large office development could be built to replace the existing building. The new 270,000 square foot office building would include 40,000 square feet of educational community space. The site is bounded by Third and Fourth avenues, East 8th Street (aka Astor Place), East 9th Street, and Wanamaker Place.

Land continues to sell at record prices in West Chelsea, where the zoning changed in the summer of 2005 to residential from manufacturing. Prominent residential developers — including the Related Companies, Douglaston Development, Avalon Bay Communities, Taconic Investment Partners, Edison Properties, Madison Equities, Cape Advisors, Alf Naman, Boymelgreen Developers, Moinian Group, and Atlantic Development — have broken ground or secured sites in this very active pocket of Manhattan Island.

Eastern Consolidated Properties is marketing a site at 537 W. 27th St. between 10th and 11th avenues that allows as-of-right for a 130,000-square-foot residential tower. It could be expanded to approximately 180,000 square feet through the acquisition of Highline development transfer rights.

On the Upper East Side, Eastern Consolidated will be marketing an excellent residential development site on the corner of East 85th Street and Second Avenue.

“With vacant possession of the site and advanced drawings in place, allowing a developer to begin construction in the spring, our company and the present owners of the property are seeking and expecting offers that will represent benchmark pricing for a developer that is chosen after the auction process,” the senior director and principal at Eastern Consolidated Properties, Alan Miller, said. “The right product in the right market will always sell at a price; however, with keen competition in the near future in residential home sales due to the amount of product coming to market, it is paramount for a developer to distinguish itself with the right mix of units that suits its neighborhood.”

A number of development sites are being marketed by Massey Knakal Realty Services in Manhattan. A 44,586-square-foot developable site, which is presently a two-story warehouse on the north side of West 36th Street between Ninth and Tenth avenues, is on the market for $15.5 million, or $347 a buildable square foot. A 50,000-square-foot building is being marketed for $18 million, or $360 a developable square foot, at 227-231 E. 44th St. between Second and Third avenues.

Prices for developable land for condominiums in Williamsburg, Long Island City, and certain sections of Brooklyn are beginning to decline. New condominium units and a slowing of sales are causing owners of sites to reduce their expectations on what they can actually achieve for the land. One thing is certain: 2007 is going to be a very interested year for the market for developable land for residential housing.

Mr. Stoler, a contributing editor to The New York Sun, is a television broadcaster and senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.