3rd Quarter Report: Land & Development Gains

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Not long ago the words strong, surge and land were only used for hurricane reports. Certainly not for the land and development sector, which was hit with Category 5 force by the Great Recession. In 2005, 43,000 houses a year were being constructed in the Atlanta metro area, but then the financial crisis hit and many developed lots were taken back by banks. Finally, the weather ahead looks much brighter.

Mike Cahalan“Subdivision lot sales in the metro Atlanta area continue to be on the upswing,” said Mike Cahalan, vice president of Land & Developer Services at Bull Realty. “Now a strong surge in purchases from builders has left fewer and fewer lots to be acquired. Time is of the essence for investors and builders to take advantage of remaining product available to the market.”

Based on a strong multifamily market and the stabilizing single-family sector land sales are rising for the first time in seven years, CoStar reports. Nearly $11.9 billion in land sales occurred in the first half of 2012 compared to $9.9 billion the year before -- a 20 percent increase. While nowhere near the $62 billon in volume witnessed in 2006, this year’s sales total could surpass $23 billion, much closer to the $27.8 billion 5-year average.

Real Capital Analytics reported that developers purchased $2 billion in new development land in the first half of 2012, putting the industry on track to return closer to 2005–2007 peak buying levels by the end of the year. The most prominent buyers have been REITs, along with a few merchant builders, focused on finding land in the most stable major metros.

According to UCLA’s Anderson School of Management, housing starts will increase 112 percent between 2011 and 2014. Starts will increase by nearly 25 percent in 2012 to 763,000, then grow by more than 70 percent during the next two years to eclipse 1.3 million in 2014, according to David Schulman and Jerry Nickelburg, senior economists at Anderson. More than 400,000 of the housing starts two years from now will be multifamily. It’s important to note that, as reported in Builder magazine, the economists’ projections are conservative and indicate movement from “depression level” starts in 2011 (612,000 units) and “recession level” starts in 2012 to “what’s been the 20-year normal” in 2014.

Large national, publicly held, single-family homebuilders Lennar Corp., KB Home, Hovnanian Enterprises and Toll Brothers together already have invested more than $313 million for more than 598 acres this year, reported CoStar. Tricon Capital Group is the biggest buyer of all though, having snatched up more than 2,500 acres around Dallas and Houston at a price tag exceeding $138 million. Leadership at the Toronto-based firm has called U.S. distressed real estate, for which it has raised $125 million in a new fund, “once-in-a-generation” investment opportunities.

In announcing that real estate has finally begun to add to the Golden State’s economy rather than detract, Beacon Economics expects California home prices to grow approximately 7 percent in 2012 and at roughly 5 percent in 2013, before settling out in the mid-3 percent range in 2016 and 2017. Regarding multifamily in California, the Anderson School’s Nickelburg projects annual increases of 19, 29 and 100 percent in permits pulled by builders and developers, to 69,100 in 2014, which would exceed the 60,200 single-family permits he forecasts for that year.

CoStar spotlighted Carmel Partners, The Irvine Company and Interland Corp. as highly active multifamily developers, each having invested approximately $75 million in land so far this year.

The National Multi Housing Council reported in July that only 10 percent of the 82 C-level executives of apartment-related firms nationwide surveyed indicated that construction financing was available across all markets. About 32 percent said that capital is widely available in primary markets, but only for top-tier properties. It is still constrained for other properties in primary, secondary and tertiary markets. But the good news is that 57 percent of the executives surveyed said that third quarter was a better time to borrow than in April.

The fall issue of The Land Report 100 reports that the total acreage owned by the 100 largest private landowners is up by 18.6% in the past five years, from 27.2 million acres in 2007 to 32.3 million in 2012.

“Look at farmland prices. Look at energy assets. Look at the rise in minerals and commodity prices. Each of these elements is tied to the land, which is why so many savvy investors are anchoring their portfolios with this asset,” said Eric O’Keefe, Land Report editor.

While it’s not quite heady times yet for the land sector, the fierce headwinds of the recession are gone and momentum is building.

Bull Realty, Inc., Research