Market Report: Lay of the Land & Development Insights
In the recovery phase, land has been the last sector to rebound. When you can buy existing properties below replacement cost, there is not much demand for land. We have even seen some outlying residential tracts with negative appraisal values.
Thankfully, some light can be seen at the end of the tunnel. Investors and developers are becoming more bullish on the market. Cap rates for leased properties continue to compress, causing the construction cranes to appear again. Commercial land, industrial tracts and even some residential developments are beginning to see more demand.
All Bull Realty land listings in the U.S. are seeing increased activity. We just closed the sale of a 812-acre tract of residential land, located east of Atlanta near Lake Oconee, for $5.2 million. Another recent sale closed by Bull Realty: a 2.5-acre, nearly entire city block in Midtown Atlanta that traded for $6.51 million. The site, which received a lot of interest from multifamily developers, is slated for development of 321 apartments and 8,600 sq. ft. of retail space.
Not altogether surprising given the health of the apartment sector was Real Capital Analytics' report that multifamily developers acquired more than $2 billion of significant development sites in the first half of 2012, almost double the volume of all last year.
The multifamily momentum is “on track to reach peak levels soon,” the independent research firm noted. Manhattan, San Francisco, Seattle and Raleigh have already rebounded past peak pricing, according to RCA. “Moreover, in San Francisco, Seattle and Raleigh transaction activity over the past 18 months is greater than during the entire 2005-2007 peak period,” the firm’s July special report stated.
The switch from condo values to rental values as the main economic determinant -- the average price of a new rental apartment is now approaching peak condo levels, noted RCA -- and developer concentration on core sites versus the marginal plays leading up to the peak of the last cycle are serving to bolster recent price averages, while distressed sales work against that movement, although troubled totals have decreased somewhat and only account for approximately 15% of recent transactions.
RCA did put special emphasis on the overall distressed development picture: the outstanding total of all such development sites “currently exceeds $8 billion which could temper commercial land prices for quite a while as it is liquidated.”
The most active purchasers of multifamily development sites include several REITs and marks the return of some of the merchant builders, RCA reported.
Across all sectors, sales of development sites totaled $4.9 billion in the first half of the year, up 66% year over year with two times the amount of sites trading, according to RCA’s “Mid-Year Review.”
Urban Land Institute recently shared key development insights from several industry leaders.
“I learned from a merchant builder’s standpoint, you should not acquire land with debt. If you can’t buy it with equity, you should wait to buy until you are ready to build on it," Ron Terwillnger, chairman emeritus, Trammell Crow Residential, told Richard B. Peiser, the Michael D. Spear Professor of Real Estate Development at the Harvard Graduate School of Design.
Demographics and “psychometrics” are variables that are never easy to project, but, as for the latter, Jim Chaffin, chair of Chaffin/Light Associates, told Peiser that college towns with their communal activity and connections will be more and more popular. Communal ties beget and feed off sustainability. “Whatever you can do to weave social and environmental responsibility into a community, it gives people more reason to be there," Chaffin added.
Bob Engstrom, president of the Minneapolis-based Robert Engstrom Companies, hit on a well established trend, which is the appeal to young and old alike of mixed-use offerings in walkable neighborhoods. On the walkability theme, Terwilliger added that the much talked about return of residents to cities will occur more in inner-ring suburbs where smart redevelopment has made core areas more accessible and multi-faceted.
Relationships find more fertile ground in such close-knit communities. And their importance in the real estate world is more evident now than ever.
“Owner/developers will not be in the driver’s seat over the next few years,” Lynn Thurber, chair at LaSalle Investment Management in Chicago, told Harvard’s Peiser. “Younger developers who commit to being good partners with their sources will do better than those who do not put time and effort into their capital sources."
The good news is that all property sectors are experiencing positive absorption, some rent growth and increased transaction volume. Construction levels are increasing and more land is selling. The light at the end of the tunnel is a ray of sunshine.
Bull Realty, Inc., Research