Terra Firma: Fundamentals Firming Up in Land & Development Sector
“Land is the only thing that lasts,” goes the line from Margaret Mitchell’s “Gone With the Wind.” Well, the land sector was the last to rebound from the Great Recession. Things are looking up though as 2012 finishes up.
The pace of annual starts for single-family detached homes increased in 38 of 40 markets when compared to the third quarter of 2011. This was reported by Metrostudy in its Third Quarter National Housing Audit covering more than 4 million subdivision lots in over 40,000 subdivisions in the primary housing markets in 19 states. Mike Castleman, CEO of Metrostudy, singled out the increase in housing production in the lower price ranges as one of the most important findings. “The bottom line is that home prices are rising and housing production is also rising as lower price buyers are entering the market. Many of the new buyers are coming from the huge amount of pent-up demand in the multifamily for-rent market,” the mid-November report concluded.
Citing Commerce Department figures, CoStar reported that U.S. builders in October began construction on the most homes and apartments since July 2008.
"Apartment developers aren’t going to slow down anytime soon," said Erica Champion, senior real estate economist with CoStar Group's Property & Portfolio Research (PPR) division, which found that multifamily starts have increased by twofold since 2010’s bottoming out, hitting the 50,000 threshold for the first time since 2009. "Next year will be the first year of supply additions at historically normal levels since 2009. So, the ‘reprieve’ in supply has come to an end."
The Federal Reserve’s Beige Book confirmed that construction and commercial real estate activity increased across the country to start fourth quarter. Also, the October Architecture Billings Index, which reflects demand for design services and thus is a key indicator of construction spending 9 to 12 months down the road, increased from 51.6 in September to 52.8. At 59.6, multifamily projects led all architecture index sectors by a wide margin, followed by “mixed-practice” (52.4) and institutional construction (51.4).
“The numbers are starting to get a little better, but as we might expect in this [economic] environment, it’s kind of a mixed bag,” Kermit Baker, chief economist for AIA, told Michael Bull when discussing the ABI on the “Commercial Real Estate Show.” “Overall, the experts we’ve surveyed see non-residential construction up about 6 percent in 2013.”
As for housing, Atlanta still has a ways to go. Zillow projects a -1.1 percent change in home prices in 2012 and 2013.
"Atlanta' s famously beaten-down housing market now has 140,000 vacant developed lots, but only 10 to 15 percent of those are in locations builders want to build," said Brad Hunter, chief economist for Metrostudy, on the Bloomberg Surveillance show, adding that there’s only a 16-month supply nationwide of lots in Class A locations.
On the commercial side, things can be a lot different as long as the top three requirements are met: location, location, location. Bull Realty’s John DeYonker, vice president of Land & Developer Services, brokered the $7.9 million sale of a 1.46-acre redevelopment site in downtown Atlanta. An old Ramada hotel, rental car facility and parking garage on the property will be transformed into a state-of-the-art student housing complex just 100 yards from the future location of Georgia State University’s new business and law schools. The site and sector made for a natural fit.
"For this unique assignment, we had interest from developers all around the country, but the seller chose to work with a Georgia group that had experience in the GSU market," DeYonker said.
In third quarter, most of the Midtown Atlanta city block that includes I.M. Pei’s first office building sold for $6.51 million. Bull Realty Partner Daniel Latshaw represented the joint-venture buyer, which will develop the property into 321 luxury apartment units and 8,600 square feet of retail space to be called 131 Ponce de Leon Ave.
“There was tremendous interest with 10 competing offers,” said Michael Bull, president of Bull Realty and host of the Commercial Real Estate Show. “When you add the cost of demolition to the just over $59-per-square-foot land price, it’s a good sign for the commercial real estate recovery.”
Interestingly, in late November, Tractor Supply received nearly a 50 percent discount off the $5.8 million in normal development fees to locate a new distribution center (and 200 jobs) to Bibb County, Ga. Construction is already underway on the 650,000 sq. ft. facility near Interstate 75 in Macon.
In its November “Business Barometer,” the Urban Land Institute reported that cap rates remain low, a sign of strength in commercial real estate and also an indicator that more construction cranes are soon to appear on the horizon. Of note, 85 percent of the key indicators in the Barometer are better than a year ago. In mid-November of 2011, only 65 percent of those key indicators were better than the prior year.
Bull Realty, Inc., Research