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
eventual sale or development. And since the onset of the recession, few
investors have been willing to take that risk.
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
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.
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.
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.
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.
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
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
risk-averse banking environment. That has resulted in the frequent use of
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
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
In Central Texas, a
recently completed toll road has touched off a frenzy of land transactions on
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.
are definitely some opportunities in commercial land available for investors in
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.”
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
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.
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
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
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
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.
Street is investing heavily in agricultural land, and there are a multitude of
says William Hugron, CCIM, senior vice president of Newport Beach, Calif.-based
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
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.
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