Just a few years back, the appetite for land acquisitions hit a fevered pitch. The rush was on to acquire sites for a variety of new developments both residential and commercial.
Highest and best use assumptions were aggressive, underwriting was far from stringent and financing was bountiful. The result was rising prices at a torrid pace. It did not take long, even given the best scenario, for pricing to no longer make economic sense.
“The demand and competition for sites was so intense that expectations and pricing were almost impossible to track,” says Jarib Rodriguez, accredited land consultant (ALC) and land specialist in Tampa with CB Richard Ellis. “Land positions were pushed farther out both in terms of geography and time to development. When the financial pipeline was shut off, the long range plans quickly became short-term challenges.”
Smart Business spoke with Rodriguez about where land prices are today and why this reset in pricing is generating renewed interest in site acquisitions.
What drove such intense competition for sites?
There actually were a number of factors that drove demand. Primarily, it was the explosive growth of the residential market. People were working, demand for housing was outstripping supply, financing was readily available and the boom began. This happened not only in the suburbs but also with the new interest in urban living. When you develop or redevelop new communities, the commercial sector will soon follow in support. Shopping centers, banks, offices and industrial properties were also vying for their position in these rapidly growing market areas. The common factor was always the land and so the competition drove demand and pricing upward.
When did it become apparent that things where changing?
As mentioned, it started with the residential sector — the end became apparent the same way. Supply now outstripped true demand, the ills of speculative buying reared its head, and the search for the value of the collateral that backed financing soon began to unwind. The change was subtle in the early part of 2007, but by year-end, it became very apparent the problem was much larger.
It did not take long before most realized that their high cost basis and in many cases the huge leveraged positions in properties and land where not sustainable. By early 2008, we saw the first real signs of pricing starting to fall as entities tried to unload their positions.
So where do we stand today with land?
Well, land certainly is the basis for all development but the issues involved can be very complex. As such, it is more than just trying to find a common place for a buyer and seller to meet. There are a host of regulatory issues that have to be considered and existing obligations that may run with the land. In addition, there are new market demands for what may now be the highest and best use of the property. For example, at one time commercial land was often sold to residential developers who could afford to pay more based on their expected returns. Today, much of that land has reverted back to its original use. With this ‘reversion’, prices have fallen dramatically. This fluctuation in use and pricing fosters another challenge: establishing a basis for value. With few arm’s length sales comparables, user demand at its lowest and a variety of investor groups with different hold and exit strategies, establishing a well-underwritten basis for value can be very difficult.
Has this new pricing been the key to renewed interest in land?
It certainly plays a large part. A few years ago, aggressive pricing caused real challenges to almost any development pro forma. Today, a number of very attractive sites, both residential and commercial, have become available at substantially reduced prices. In many cases, the sellers are individuals or firms looking to pare down their positions as well as banks and government agencies dealing with distressed or foreclosed assets. A reduced cost basis can now help support the underwriting for potential development as new demand may dictate. For all that has changed in the past few years, it seems the basics have remained the same. A good location purchased at a responsible price will be the foundation for good long-term investment. As they say, under all is the land. <