Timing the Market
Mar 1, 2009 12:00 PM, Jennifer Popovec
The cost of land has dropped precipitously as commercial property values slump. Today, retail developers and investors can pick up land at prices not seen since the late 1990s. Sellers, too, have also relaxed their requirements and terms favor patient investors.
As both residential and commercial developers pull back on new projects, land prices have decreased by as much as 40 percent in some regions of the country. The caveat: interested investors must put up a significant amount of cash and be prepared to hold onto the parcel of land until the market recovers. In the worst-case scenario, they could end up owning the land for several years and not derive any income from it.
“Today you have the ability to buy land at below-market and distressed prices,” says Derek Thornhill, managing partner of Longview Capital Group, a Fort Worth, Texas-based private equity firm that is raising money from individuals to acquire land across the nation. The strategy, he adds, affords opportunistic developers and investors the chance to “get out in front of the next wave of development.”
For much of this decade, land was in great demand. From suburban greenfields to urban tracts, land prices increased as development boomed across the United States.
In the three years between 2005 and 2008 more than $80 billion in land sales of more than $5 million each were closed in the United States, reports New York City-based research firm Real Capital Analytics. While most of the transactions were for suburban greenfields, prices for urban parcels were much higher.
In 2005, the average price for a tract of urban land was $137.50 per square foot compared to $65.50 per square foot for suburban acreage. The price for land in the suburbs peaked in 2006 at $97.50 and then fell as single-family home construction ground to a halt. In contrast, urban land plots continued to rise until the fourth quarter of 2007 when they peaked at $302 per square foot. In 2008, the total volume of land deals over $5 million dropped significantly — only $8.3 billion in deals closed compared to $35.4 billion in 2007.
“Land prices got too hot,” says Jeff Fuqua, president of the Sembler Co., a St. Petersburg, Fla.-based developer with several projects under construction in the Southeast. Fuqua doesn't expect prices will inflate for some time because of the abatement in retail development.
“If you're doing any land deals, you're probably using mostly cash,” says Fuqua, “and you really have to feel good about the real estate to do that.”
In Southern California land prices are 25 percent to 40 percent lower today than they were a year ago, says J. Scott Fawcett, a principal with Marinita Development Co., a Newport Beach, Calif.-based firm that specializes in grocery-anchored centers. “Sellers who haven't come down on the price for their land aren't able to generate any interest,” he says.
Sellers are even willing to renegotiate deals that are already under contract, Thornhill says. Moreover, sellers are willing to extend the time for buyers to close a deal. Today, buyers are asking for 18 to 24 months to close, whereas in the past they were given as little as three months, and sellers are more than willing to oblige.
In fact, some sellers have decided to make it even easier for buyers and offer financing, says Thornhill. Longview Capital Group is also involved in the acquisition of a large tract of land in California and the seller has offered to finance the deal for three years, citing the income to pay the interest is better than none at all.
Buyers have not been able to command this degree of concessions in years. Sellers have realized buyers, retail developers in particular, cannot pay the prices they did 12 to 18 months ago. The drop in land prices doesn't automatically translate into better returns for developers as more retail tenants demand increased rent reductions, says Fuqua. “If land prices hadn't decreased, you wouldn't have a chance of making the deal work.”
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