Dirt, Cheap

Opportunistic investors place their bets on land.

Even at bargain-basement prices, most land investments today are a gamble. A land buyer is placing a bet that demand for commercial real estate projects will return before property taxes and other holding costs eat up the potential return to be made from the site’s eventual sale or development. And since the onset of the recession, few investors have been willing to take that risk.

“The land market is dead,” says Dan Fasulo, managing director of Real Capital Analytics. “That said, activity is perking up in a few select markets around the country.” The New York-based research company tracks commercial real estate transactions, but with few land sales occurring, it hasn’t published a land investment report for years.

Though the market for commercial land is weak, U.S. transaction volume in the sector topped $1 billion in both the fourth quarter of 2010 and the first quarter this year, RCA found. That’s up from roughly $500,000 per quarter throughout 2009. During the peak year of 2007, quarterly volume averaged $8.6 billion.

In Manhattan and a few other markets, well-heeled investors are buying and holding land until the demand for new construction returns. And they may not have long to wait. Construction nearly ground to a halt after the collapse of Lehman Bros. in 2008, Fasulo notes, and vacancy rates across commercial property types are declining despite slow economic growth. He predicts that development will come roaring back in primary markets this year as investors and developers race to deliver the first new projects.

“This kind of window with little to no development in the U.S. is almost unheard of in the post-World War II era,” Fasulo says. “I’d be a land buyer right now. As they say, they’re not making any more of it, and prices look reasonable versus a few years ago.”

Commercial Investment Real Estate queried CCIMs across the country to find out where land sales are hottest, which markets offer the best bargains, and what CCIMs are doing to close deals. Our review begins with a surprising success story for one of the markets hardest hit by the housing bust.

Florida Comes Around

Demand is heating up for well-located tracts suitable for apartments or seniors housing in Florida, according to T. Sean Lance, CCIM, managing director and president of Troubled Asset Optimization in Tampa, Fla.

Early this year, Lance brokered an acquisition of a downtown Tampa tract by The Related Group. The Miami-based developer plans to construct a 360-unit luxury apartment complex on the site of a failed condominium project, which had reverted to Regions Bank as real estate owned.

“Half the land deals I’ve done lately have been bank-owned deals,” says Lance, who has land transactions set to close in Orlando and Southeast Florida.

Commercial construction has largely evaporated since 2008, and in Florida, the supply of apartments already had dwindled due to conversions of rental properties into condominiums. As the ranks of renter households have increased, multifamily vacancy rates have been falling across the state, bringing opportunities to boost rents.

“The demand for apartments is never going to be higher than it will be for the next two or three years, particularly in Florida,” Lance says. And with land prices down approximately 50 percent since the peak, by Lance’s estimation, apartment construction is becoming feasible again for urban infill locations and is fueling transactions.

Demand for other types of commercial real estate hasn’t yet recovered. Florida experienced anemic job growth in the past year and the state’s unemployment rate of 10.6 percent in March was well above the national average of 9.2 percent. There is little demand for new office, industrial, or retail space, and Florida’s single-family market remains flooded since the housing bust.

“We are so over-retailed that we are not going to start to see recovery [in retail occupancy] until 2016,” says Bill Eshenbaugh, CCIM, president of Eshenbaugh Land Co. in Tampa.

Yet Eshenbaugh’s company has closed approximately 70 land transactions since the beginning of 2010, all of them cash sales. In addition to apartment developers, buyers have included land bankers — investors who are taking advantage of low pricing to buy tracts for development a few years down the road. Residential land that was priced between $40,000 and $50,000 an acre in 2006 is selling for as little as $10,000 an acre today, Eshenbaugh says.

But don’t expect lenders to finance such risky acquisitions, he warns. “You better be prepared to buy today for cash, and you better be prepared to show your cash when you make your offer.”

Texas Fast Track

While fundamentals in the Lone Star State have suffered since the beginning of the recession, the state avoided a housing bubble and enjoys the nation’s strongest job growth. The Dallas-Fort Worth-Arlington area gained 69,000 jobs from March 2010 to March 2011 to lead employment growth among the nation’s major metropolitan areas, followed by Houston-Sugar Land-Baytown in the No. 2 spot with the addition of 51,800 jobs year-over-year, according to the Bureau of Labor Statistics.

Vast reserves of oil and natural gas, as well as diverse regional economies in Houston, Dallas, and the Central Texas cities of Austin and San Antonio, have sustained commercial real estate performance in the Lone Star State. While demand is insufficient for more than a select few speculative developments, there is steady activity among companies buying land to construct space for their own use, according to Keith P. Grothaus, CCIM, vice president in the commercial land services division of Caldwell Cos. in Houston.

Most buyers today in Houston are restaurateurs, industrial companies, medical service providers, banks, or other users seeking tracts to build their own space, Grothaus says. And financing is available for many of those deals. “Because our economy is better than most of those around the country, our buyers have the ability to get financed to build some buildings.”

A much smaller group of buyers is picking up land at attractively low prices to hold for resale or development in a few years when demand improves. With the exception of well-located apartment developments, those land-bank plays can’t qualify for financing in today’s risk-averse banking environment. That has resulted in the frequent use of seller financing.

By offering to help the buyer with either a direct loan or assumable mortgage, sellers often are able to garner a higher price than they would get from a cash sale. “There just isn’t any conventional financing for investments,” Grothaus says.

At the top of the cash-buying food chain, real estate investment trusts have been buying land with good access to the expanding Port of Houston, which is expected to experience an increase in consumer goods traffic in 2014. That’s when the widening of the Panama Canal will give larger cargo ships access to the Gulf and East Coast ports.

In Central Texas, a recently completed toll road has touched off a frenzy of land transactions on Austin’s largely undeveloped east side. Texas Highway 130 provides an alternative to a traffic bottleneck in downtown Austin, allowing drivers on Interstate 35 to skirt the metro area between Georgetown, north of Austin, and Buda, a small city south of Austin and north of San Antonio.

Joyce Weedman, senior vice president at NAI REOC Austin, estimates that about 30,000 multifamily and single-family housing units are in various planning stages for development on vacant tracts along a 10-mile stretch of Texas 130, from the municipal airport northward to Samsung’s massive semiconductor manufacturing plant. Other developments planned for the area include an automotive race track where proponents hope to one day host the first U.S. Formula 1 racing event since 2007.

“There are definitely some opportunities in commercial land available for investors in Austin,” Weedman says. “But because of all the considerations having to do with types of soil, environmental issues, and politics, you really have to work with somebody who knows what they’re doing. Any land investor coming to Austin needs to get a good engineer, a good real estate attorney, and a very experienced real estate broker.”

High-Risk Markets

Across U.S. apartment, office, retail, and industrial properties, average asset values were down 42.8 percent in January from the peak of October 2007, according to the Moody’s/REAL National All Property Price Index. With the price of existing space available at such a discount, new construction doesn’t pencil out for most investors or occupiers outside of core locations in primary gateway markets like New York City or Washington, D.C.

Without demand, land values have plummeted, particularly in Las Vegas, California’s Central Valley, and other markets that rode high on the housing bubble. But that very lack of demand has created opportunities for investors with a long-term view.

“The Sacramento area and Northern California have taken a real hit as a result of the economy slowing down,” says Guy Spitzer, CCIM, vice president at the Sacramento-area office of Cornish & Carey Commercial Newmark Knight Frank. “In Sacramento, land that sold for $2,000 an acre [at the market peak] might be $25 an acre now.”

California’s housing bubble inflated fastest in the Central Valley around Sacramento because the market has space for large-scale residential development, which is lacking in the state’s more landlocked cities, Spitzer says. By the same token, California’s population growth will be largely driven by the Central Valley once the state’s economy regains its footing, bringing strong demand for development sites.

That logic applies to the decimated Las Vegas area as well, according to Charlie Mack, CCIM. The owner of Las Vegas-based Mack Realty, Mack relates the example of a well-situated retail parcel with highway frontage that sold before the market crash for nearly $30 per square foot. Today the same site is listed for sale by a bank at a little more than $5 psf, “and my gut tells me it will probably sell close to $4 psf.”

Mack points out that deflated land values in his market have lowered property tax burdens — and land holding costs — significantly. “It’s a perfect time for land investors to purchase in Las Vegas because land costs are at historical lows, and holding cost is very low.”

Looking Ahead

Demand for infill sites already is returning in the primary markets, where asset values for stabilized apartments, retail, industrial, and even office properties are approaching pre-recession levels. The question is, when will that recovery occur for the rest of the nation?

Fasulo of RCA advises investors to keep an eye on the spread between current asset values and replacement costs for completed commercial buildings. The wider the spread, the more investors will want to move out on the risk spectrum and build rather than buy. That will put a premium on usable sites.

REITs — especially apartment REITs — will begin a flurry of site acquisitions this year in a race to be the first developers to introduce new projects in primary markets, Fasulo predicts. Other investor types will follow that lead in the ensuing years and in other property types as demand recovers.

With research and a finger on the pulse of demographic trends, CCIMs can help their clients make the right choices for land investments while taking advantage of prices near historic lows. “Some of the land investors that really went out on a limb in 2009 and early 2010 have been vastly rewarded for those purchases already,” Fasulo observes. “The smart money is in land right now.”

Matt Hudgins is a real estate writer based in Austin, Texas.

From Seeds to Solar

There may not be much call for tracts on which to build commercial real estate in 2011, but agricultural land is a different story. From real estate investment trusts to alternative energy providers, buyers are acquiring expansive land parcels that can generate revenue from crops or solar power.

“Wall Street is investing heavily in agricultural land, and there are a multitude of reasons why,” says William Hugron, CCIM, senior vice president of Newport Beach, Calif.-based Ashwill Associates.

In the Midwest, REITs, pension funds, and other institutional investors are buying farmland as a diversification play and an alternative to more volatile property types. Once acquired, these commercial real estate entities bring in professional farm management companies to operate the holdings.

As a result, the wide-open spaces are growing more valuable. In Hugron’s experience, the average price has climbed to between $9,000 and $10,000 per acre from $6,000 a year ago. Productive farms in the Midwest are a hot commodity because a scarcity of water for irrigation has compromised the value of many tracts and raised the value of those with good access to water, Hugron says. And with the weak dollar, exports of soy and wheat are contributing to the demand for productive farmland.

Even timberland is enjoying increasing demand, Hugron says. Indeed, the NCREIF Timberland Index showed total annualized returns for the property type averaged 0.75 percent in the first quarter of 2011, significantly higher than the average return from the same period a year ago, and ending several years of declining returns.

As with farms, the trend in timber is toward professional management companies that can maximize productivity and enjoy economies of scale.

While demand for wood products is down while construction is stalled, the value of timberland should improve once the economy gains traction and construction accelerates, he says.

Hugron has performed land assemblage for residential development and urban-infill land sales in the past. But since the recession, he has applied those skills to assembling tracts in the southwestern and western U.S. for a new type of development — solar farms.

To operate profitably, a solar installation must be near either an electrical transmission line or a power substation with excess capacity to handle the electricity generated by the solar farm, Hugron says. The tract itself must have more than an expanse of sky, too. “What’s important is radiation levels,” he says. “You could be in a hot area that may not have high radiation levels. A dry desert area is going to have higher radiation levels.”

Far to the north, the Canadian city of Toronto is emerging as a global hotspot for solar farming. At the center of that activity is Neil Warshafsky, CCIM, broker of record at Re/Max Commercial Advisors in Toronto, Ontario. Warshafsky represents Quotidia, an Italian company that is seeking large tracts for solar power generation in Canada and the U.S.

“They have completed about 50 projects throughout Europe,” he says. “We are now ramping up a program for them to acquire lands in Ontario.”

Under Canadian law, a tract must be designated for industrial use before it can host a solar installation. And with natural and legal barriers to development in and around Toronto, land is in short supply. In fact another of Warshafsky’s clients, a Singapore-based investor, expects land values in the city to skyrocket over time.

“They’re recognizing there’s going to be a huge shortage of land in Ontario, and my client has bought about $65 million (Canadian) of land over the past year and a half,” Warshafsky says. “Their goal is to invest about $21 million this year.”


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