Lots of Land
The housing recovery is boosting values for parcels in many markets.
Land prices in many areas of the U.S. are on the rise amid
increasing demand, but the level of demand and the reasons behind it vary from
market to market. Land values increased an average of 13 percent in 2012, the
first annual gain since 2005, according to housing research firm Zelman &
Associates. Improvements in the housing market, modest employment growth, and
population expansion in some markets are making land more attractive to
investors than it has been since the housing market crashed more than four
years ago. Housing demand in some markets is the single most important factor
influencing land prices.
Who Is Buying?
greatest demand is for well-located land that is ready or near-ready for
residential development. Most sought after are finished lots for single-family
or multifamily sites that already have roads, sewer, electric, and other
infrastructure in place. Builders often find these properties to be in short
supply as home construction increases.
the housing market improves, retirement markets in the southern U.S. are
heating up as many retirees — who deferred their plans due to the poor economy
— can now sell their homes and relocate to new areas for retirement. For
example, in Hilton Head, S.C., Stratford Land is on track to sell twice as many
lots in 2013 as compared to 2012 — and at higher prices.
U.S. Census Bureau reported in April that builders were on pace to sell 417,000
homes in 2013 and new-home construction rose 13.1 percent in the past year. The
housing market has been in a slow recovery since spring 2012, but the level of
recovery depends on the market.
investors today are combing through inventory looking for off-market
opportunities with infill land for residential and commercial development.
These opportunities often allow for the purchaser to have shorter hold periods
and quicker returns. The Canyon in Oak Cliff, a mixed-use development in the
Dallas area, is a prime example of fast-selling infill land. By proving market
demand in nearby surrounding areas, Stratford Land quickly recruited
multifamily, retail, hospitality, medical, and entertainment developers to
serve the needs of the fast-growing local community.
addition to a rise in homebuilding activity, land prices are being driven up in
some markets by large equity funds and foreign investors. Many foreign and
sovereign funds from Europe, Canada, and China are buying large U.S. land
and timber land prices are also increasing due to renewed investor activity,
and Timber Investment Management Organization groups are emerging to aid
institutional investors in managing their timberland investments. Timber funds
are actively buying up land, particularly in southeastern states such as
Georgia, Alabama, South Carolina, and Arkansas, in anticipation of rising
timber prices as homebuilding continues to increase.
for farmland has been strong in the last year, as high crop prices attract
institutional investors. Buyers are especially interested in midwestern land:
Global financial services company UBS bought 9,000 acres in Wisconsin, and
financial services firm TIAA-CREF now owns 600 farms in a $4 billion fund.
properties are also getting a fresh look from investors, boosting those land
values, albeit more slowly than other real estate. Resort markets continue to
lag behind major population centers, and land values typically remain well
below their boom market peaks, but sales are picking up. The lack of new resort
development over the past few years is helping to aid the more recent increase.
Hot Land Markets
greatest factor influencing rising land prices is housing demand, which is
favoring U.S. Sun Belt cities such as Dallas, Houston, and Austin, Texas, and
secondary markets with strong economies such as Orlando, Fla., Nashville,
Tenn., and Charlotte, N.C.
Texas economy has remained stronger than most of the U.S. throughout the
downturn, and the prospects for land investment offer compelling opportunities
in all the major markets. For example, national homebuilder Lennar is building in
a number of Texas and southeastern markets.
continues to be a winner in all real estate categories, and home building
remains strong. For land buyers who want to hold, well-priced deals are hard to
Worth is experiencing strong demand for well-located land, with 44 commercial
land sales of up to 25 acres during the first two months of 2013. As demand for
single-family housing is strengthening, Dallas has less than three months of
finished home inventory, while Fort Worth has only four months of inventory.
the glow of an energy boom, Houston land prices are high and heading higher,
due to both apartment and single-family home construction in many areas, as
well as the highest rate of 2012 housing starts in the U.S., according to the
Real Estate Center at Texas A&M University. While less robust than other
Texas cities, San Antonio is projected to see significant employment growth.
regional homebuilders, such as Ashton Woods, Taylor Morrison, NVR/Ryan Homes,
and Ryland Homes are active in the Southeast markets of Nashville, Raleigh,
N.C., Charlotte, Orlando, and Atlanta, focusing on major cities that have
stable economies and strong employment. Orlando’s economy is benefiting from a
tourism rebound and the retirement market. For example, Hamlin, a 600-acre
residential development located just north of Walt Disney World, is
experiencing strong sales due, in large part, to a new tollway that provides a
gateway into western Orange County, Fla., for builders and developers.
in the Charlotte market has grown with its improving economy and job growth. In
the past two years, 37 companies have relocated to the city, bringing 8,000 new
jobs. This trend is expected to continue as the city plans to add as many as
30,000 new jobs through 2014.
where the economy has historically been heavily focused on development, is just
now recovering from job losses and a glut of residential inventory. Although
metro Atlanta home prices continue to rise, they have yet to recover to their
pre-2008 levels, creating a strong affordability index for companies choosing
to relocate. In comparison to other cities of its size, Atlanta has not bounced
back as quickly, and more accelerated job growth will be required to absorb the
large supply of lot inventory that remains on the ground.
in the U.S., reports of surging housing prices don’t necessarily signal strong
markets. Cities such as Detroit, Las Vegas, and Phoenix are rebounding from
huge declines but still face challenges with large foreclosure inventories,
high vacancy rates, and slow-to-no growth economies.
even in some of these weaker markets, discerning investors can find pockets of
land value. For example, while the overall statistics show Phoenix as a lagging
housing market, Vistancia, a 7,100-acre development located just north of
Phoenix, opened an additional 3,450-acre section in response to pent-up demand.
Potential buyers are anxious to view new-to-market lots in high-quality
developments that had suspended growth during the bust.
Southern California, good opportunities for longer-term land investments are
possible, but they are rare and require equity positions. For example,
Stratford is the lender for the Blue Sky development, a 440-unit multifamily project
that recently broke ground in downtown San Diego on land the developer has
owned since 2004. In 2011, Stratford became an equity partner with the
developer of Millenia, located south of San Diego, to develop the $4 billion,
210-acre master-planned community over the next 20 years.
Closing Land Deals
investors are cash buyers, closing land deals is challenging. Few traditional
capital sources want to fund land investment, and many banks are still trying
to offload land loans from their balance sheets. Some hedge funds, sovereign
funds, and other institutional buyers are able to buy with all cash. Timing and
availability of capital has been — and continues to be — the best way to
acquire land. The ability to close quickly remains key to purchasing the best
large groups with cash are able to purchase significant tracts of land and
portfolios, local purchasers looking to acquire smaller tracts have a harder
time finding capital. With the absence of adequate capital to finance land
transactions, smaller buyers continue to turn to private debt to close the gap.
Stratford has been able to close this lending gap by providing nonrecourse land
financing to a number of groups that fit this profile.
investing in 2013 will be active primarily for those who intend to begin
construction on single-family residential or multifamily developments. The
demand for these asset classes is strong in most markets, particularly those
that exhibit clear signs of recovery. Land investors who are able to close
sizable acquisitions during 2013 are likely to be cash buyers or the few
well-capitalized investors who can secure financing.
David Moore, CCIM, is
senior investment manager for Stratford Land in the southeastern U.S. and based
in Atlanta. Contact him at firstname.lastname@example.org.