Tertiary markets

On the Edge

Ample Land Offers New Development Prospects Outside Metropolitan Areas.

Commercial real estate professionals searching for land opportunities are finding that the grass is greener on the periphery of major metropolitan areas.

Towns such as Minooka, Ill., and Surprise, Ariz., may not be household names, but demand is rising in these and other emerging markets. The stagnant economy has not stalled land speculation, as developers maneuver for open space on the edges of major cities such as Chicago, Denver, Phoenix, and Los Angeles.

“Development still marches on despite the economy,” says Lynn E. Reich, CCIM, SIOR, a senior vice president at Colliers, Bennett & Kahnweiler in Rosemont, Ill. “You have to move quickly, or you might lose opportunities.”

Developers can anticipate emerging growth patterns by following infrastructure expansion, as existing and new highway systems literally pave the way for edge city growth. For example, interstate improvements drive land opportunities along the Denver Beltway, which consists of interstates 70, 470, and E-470, and will connect with I-25 to the north when complete. “So that whole northern corridor is going to explode, and the area is going to be wide open for growth,” says Dean Insalaco, a vice president of CB Richard Ellis in Denver.

The southeast corner of Aurora, Colo., also is in the path of tremendous growth with the expansion of E-470 to the south. The area has experienced significant residential construction in the past few years, and a large wave of commercial development is coming online soon, Insalaco says. The largest project underway is Southlands, a retail development that spans about 1.5 million square feet. The project's first phase is expected to open next summer.

Likewise, ongoing construction of I-101 in Phoenix has catapulted Gilbert, Ariz., to the top of the country's fastest-growing residential areas. Located about 20 miles southeast of downtown Phoenix, Gilbert's population has surged more than 350 percent during the past decade to hit its current total of 133,640 residents.

Industrial developers often are the first to push into edge cities in their quest for large, inexpensive tracts of land. At the same time, low interest rates and growing metropolitan populations fuel housing demand, and new bedroom communities — residential developments without commercial centers — continually pop up within commuting distance of urban cores. Retail and service businesses follow in the wake of residential growth, while office tenants eventually are enticed by growing labor pools and available land.

“The affordability of the land, the population shift, and the affordable housing creates opportunity in all sectors,” says Joseph W. Brady, CCIM, president of the Bradco Cos. in Victorville, Calif.

Industrial Expansion

Rochelle, Ill., a town of less than 10,000 people 80 miles west of Chicago, appears an unlikely target for industrial development, yet land rapidly is disappearing as developers such as CenterPoint Properties Trust, the Alter Group, and First Industrial Realty Trust lock up large tracts.

Rochelle's big draw is a new rail intermodal, the Union Pacific Global III Intermodal Terminal and Reload Center, which opened this fall; CenterPoint Properties already has purchased 362 acres of land within a mile of the facility. “There have been no announced deals that are kicking off development, but these players are in the process of trying to get synergy going,” Reich says.

A second industrial expansion area in the Chicago metropolitan area is the I-80 corridor, with activity moving as far out as rural Minooka, a community roughly 45 miles southwest of Chicago. “Years ago people didn't even know how to say Minooka, much less want to build there,” Reich says. Catellus Development Corp. is one company that has contracted to buy 400 acres in the area; it already has built a 1 million-sf distribution center for Kellogg U.S.A. Corp.

Residential Sprawl

Thanks to record home buying, residential developers continue to carve out new bedroom communities in edge cities. In Los Angeles, new growth is creeping northeast to the Victor Valley, or Inland Empire North, which includes the cities of Adelanto, Apple Valley, Barstow, Hesperia, Lucerne Valley, and Victorville.

The Victor Valley — as well as outlying areas such as Palmdale and Lancaster to the north and the Moreno Valley to the east — has emerged as a commuter market to Southern California and to San Bernardino, Riverside, and Los Angeles counties. “What drives these outlying markets is the price of housing,” Brady says.

While California's current median home price is about $360,000, the Victor Valley offers affordable housing alternatives with median home prices ranging from about $145,000 to $175,000, Brady says. As a result, the Inland Empire ranks as one of the country's fastest-growing regions. “What drives this remarkable growth is one thing — dirt — and there is plenty of it in the outlying areas and less and less of it in the core areas such as Orange and Los Angeles counties,” he says.

Retailers Chase Rooftops

Retailers are in hot pursuit of these growing residential populations. For example, approximately 4.5 million sf of new retail space has been proposed or is under construction in Gilbert, including a 1.5 million-sf regional mall planned by Westcor Realty.

Along Highway 60 northeast of Phoenix, Surprise is experiencing much the same phenomenon — a residential boom followed by retail growth. First came the grocery-anchored retail centers, followed two to three years later by big-box development, says Chris Gerow, a senior associate in the retail division at NAI Horizon in Phoenix. Wal-Mart, Target, and Kohl's all have announced new developments in Surprise.

The demand for space in edge cities such as Gilbert and Surprise is pushing up land costs. “Pricing is doing nothing but going up on a steady scale,” Gerow says. Two-acre corner lots average $2 million. Developers trying to secure 15-acre to 25-acre retail sites pay about $5 per square foot to $6 psf, while industrial developers pay $2 psf to $4 psf for unimproved parcels, he says.

Unique Obstacles

Although securing parcels amid rural farmland may seem easy, edge city projects come with their own unique challenges. One of the biggest hurdles is city or township restrictions and requirements concerning new development. “Developers are clearly driven by infrastructure, access, and residential growth, but a big part has to do with municipalities and their willingness to work with developers,” Insalaco says.

In addition, edge cities may not be equipped with adequate roads and water and sewer systems. For example, Minooka has only 5,000 residents, and the small town doesn't have the tax base to support large infrastructure projects. “So it is a matter of having developers and partnerships that can fund infrastructure needs,” Reich says.

But perhaps the biggest challenge is getting a jump on the competition. Although the recession has calmed the buying frenzy that existed a few years ago, it still is difficult to find good land opportunities in edge cities. “A lot of the land has been locked up by [companies] with common sense and foresight,” Insalaco says. “That is the hard part, going out and buying years in advance.”

Beth Mattson-Teig

Beth Mattson-Teig is a business writer based in Minneapolis.

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