A lot of developers and other landholders got caught holding the bag on properties when the recession enveloped the country, but now buyers are returning and land sales are starting to increase. Both residential and commercial markets are seeing an uptick in activity and experts are crediting optimism in the recovery as much as the recovery itself. Land sales are often tied closely to development and the health of the region as well as the overall economy play a role in stoking transactions, which may mean that things may continue to look up for the U.S. land market. For more on this continue reading the following article from National Real Estate Investor.
Developers, owners and lenders who found themselves stuck holding land when the development spigot shut off are beginning to see a welcome return of buyers.
“Without a doubt, there are more land sales occurring in almost every single market in the nation as we are coming out of the recession,” says Davis Adams, a managing director at HFF in Houston. During the worst of the recession in 2009 and the first half of 2010, there were virtually no land sales trading at all unless they were at very steep discounts related to distress, he adds.
As both the commercial and residential markets continue to improve, developers are increasingly shifting attention back to new construction, which is providing a much needed boost to land sales. Approximately $6.4 billion in land sales occurred during the first half of the year, which is up 18 percent compared to the same period in 2012, according to Real Capital Analytics.
“What has changed in the last 12 months is a sense of optimism that we can rely on what little economic growth that we are feeling today as, not just a blip, but steady improvement,” says Thomas C. Kirschbraun, a managing director at Jones Lang LaSalle in Chicago. So, even though job growth is not as robust as some people would like, the 150,000 to 175,000 per month gains is enough to create optimism and spur demand for land that has been sitting untouched for some time, he adds.
Yet the climate for land sales is far different than the heyday that existed back in 2005 and 2006 when developers and investors were building up inventories of land with an eye on the future—banking land for future projects or speculating that values would rise. These days, land sales are largely motivated by immediate plans to put shovels in the ground.
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The demand—and pricing—for land today it is all about location and how that land site can be quickly put to use. As such, it remains a highly bifurcated market that is split between land parcels that are selling quickly at a market rate and those that have been languishing on the market for years. For example, JLL listed a large tract of land earlier this summer in Conroe, Texas north of Houston. The former Boy Scout camp had multiple bidders and was on the market for just three months before it was under contract.
In contrast, JLL just closed a 20-acre land sale on the Boardwalk in Atlantic City at a significant price discount that the team had been working to sell for three years.
Land sales and development are very much intertwined, and whether a land site sells in three months or three years is dependent on the economic health of a particular city or region.
“You are seeing different levels of development in those different municipalities or marketplaces, as well as the different asset classes,” says Adams.
Texas has had strong economic growth and land sales are robust in many areas of the state. Demand, particularly for high-quality multifamily sites, is pushing land prices higher. For example, a multifamily infill site in Houston that would have sold in 2010 for $50 per sq. ft. is now selling for $100 per sq. ft., notes Adams.
However, other areas of the country are still battling a sizable amount of land foreclosures. Although 44 percent of the land that became distressed has been worked out, there was still an estimated $24.7 billion in distressed land still outstanding at mid-year, according to Real Capital Analytics.
“Yes, there are still distressed deals in the market. But that distress is moving into the seventh or eighth inning,” says Malcolm Davies, a principal at George Smith Partners in Los Angeles. At the same time, the latest wave of development is in the first or second inning, he adds. In particular, developers want to be the first out of the gate, which is why there is a premium on land that has entitlements, infrastructure and permitting in place.
Davies was working with a client that had acquired a 23-acre parcel in Vista, Calif. in northern San Diego County. The land was originally zoned industrial and the client worked for a year to get the land entitled to build a 407-unit apartment project. As they were preparing to put financing in place to start construction, a large development company stepped in with an aggressive bid to buy the property. Davies’ client ended up earning 50 percent of the profit that they had anticipated doing the development themselves—just from the sale of the land. “That example really articulates the strength of entitled land, particularly in California,” says Davies.
Land isn’t like income properties where cap rates shift to reflect pricing and values. Land prices are all about future use. If a developer can’t see a future use for that property, then that land is worth nothing. “Now that you can see a future, there is a spike in activity,” says Kirschbraun.
This article was republished with permission from National Real Estate Investor.
