According to an interview with the Toronto Star, director Eduardo Sanchez revealed the following:

• They’re now at the point where they’re ready to do a “Blair Witch 3“, once again sharing writing and directing.
• They’d pick up from where the original left off, pretending “Blair Witch 2” never happened.
• The duo recently went on a drive through their original “Blair Witch” haunts, about a half hour from Sánchez’s Maryland home, looking for inspiration.
• They’ve worked up a treatment for a new story, which would involve original cast members Heather Donahue, Joshua Leonard and Michael C. Williams, albeit in smaller roles.

Source: Toronto Star