Land Market Sees Shift from Residential to Industrial Buyers
- Residential land values plummet 30-50%
- The days of the “quick flip” of residential land have ended
- Industrial developers are taking land positions in the next ring of cities
The Twin Cities land market is undergoing major changes. Just two to three years ago, residential developers were aggressively competing for land and driving up land prices by entering into contracts at very high prices to beat out their competitors. However, residential land values dropped 30-40% in the past two years due to the slowdown in home sales, decreasing home values, lot incentives and the hold time of lots or speculative homes for residential developers. And there is no relief in sight. In May, there was a 31% drop in permits and a 28% drop in units compared with the same time last year, reported the Builders Association of the Twin Cities.
Downward pressure on residential land values will continue for at least the next 12-24 months, while lenders continue taking back some properties and liquidating them. Most residential landowners are readjusting their expectations. For speculative investors to become interested in entitled residential land, they expect at least a 50% discount from two years ago.
No More Quick Flips
In the residential heyday, investors re-sold entitled property to builders, making very healthy profits. The housing slowdown means the days of the “quick flip” of residential land have ended.
Demand for residential land has plummeted and will continue to decline in the short-term. After the existing residential land inventory gets absorbed and foreclosures are dealt with, then the residential land market will start to recover.
Liquidation, Foreclosures Occurring
Many of the publicly traded homebuilders are liquidating the lots they have on their books, and some are renegotiating contracts or walking away from deals. Meanwhile, some small and mid-size developers’ land positions will likely be foreclosed upon by banks. These developers need a price reduction to counter the hold cost they are experiencing with slower absorption. The next trend will be bank liquidations as developers burn through their extended due diligence periods and contract extensions. (Land has significant holding costs and little or no substantial revenue.) Residential inventories vary by product and municipality; some homebuilders have an unprecedented 18- to 36-month supply of land, in comparison to the typical four- to eight-month supply.
Industrial Is the Big Story
The industrial market is tightening and speculative development is occurring, resulting in a shift from residential to industrial land buyers. More projects will begin when there are no suitable existing alternatives for users, and users are willing to pay the higher rates necessary to justify rising construction costs. The number of planned/proposed projects increased significantly from last year.
Industrial developers are aggressively looking for land positions in anticipation of this next development cycle. They’re taking land positions in the next “ring” of cities while working to minimize drive times to the CBD. They’re getting out of their historical comfort zones when considering areas like Columbus, Otsego, Blaine, Cottage Grove, Afton, Lino Lakes, Rosemount, Inver Grove Heights, Corcoran, Medina, Chaska, Carver and Shakopee. However, this is where development will occur because of available land, zoning, property values and municipal urban services. In the first- and second-ring suburbs, industrial property often competes with higher-value users—like retail, build-to-suits, or office—who are willing to pay more for the land.
(Click image to enlarge)
Cities Recognize Importance of Industrial
According to the Metropolitan Council, the metro has lost 60% of its reserves of industrial land inside the I-494/694 loop compared with 30 years ago as a result of parcels being rezoned for residential and retail. Today, cities like Minneapolis, St. Louis Park, Apple Valley and Blaine are realizing the importance of protecting their industrial base. The pendulum is swinging toward industrial as that sector’s cycle begins its upward trend. Increasingly, cities are requesting fewer mixed-use developments and realizing they need a strong industrial base.
Office Developers Gear Up
The office market is making a comeback. In the next 12-18 months, there will be more demand for office sites. Recognizing the lack of options, some companies are committing to build-to-suits or considering taking space in single-story, speculative buildings. The demand for both will continue as the market tightens.
Drop in Land Absorption
Absorption of land (undeveloped acreage) will be substantially lower with the office and industrial development cycle than it was with the residential boom because of the massive size of the residential developments. It was nothing for a residential developer to acquire 100 acres and build more than 200 homes, but it would take several years to develop and absorb 100 acres of industrial property.
Retail Sees Slowdown
In light of the housing slowdown and its impact on the sale of retail goods, retailers and retail developers are being more selective when identifying sites. The outer rings are most affected by the residential and retail development slowdown. There are not enough rooftops to support all of the proposed retail development. Vacancies exist in small-shop space, built around big-box retailers. Developers may stop developing side-shop space until demand picks up.
Apartment Developers Looking
The apartment market is seeing benefits from the for-sale housing slowdown, including improving vacancies and fewer concessions. Although few units are underway, more developers are gearing up, looking for well-located parcels in anticipation of future development.
Redevelopment Occurring
Few development sites exist in the I-494/694 loop, forcing developers to get versed in “brownfield” redevelopment to obtain sites in desirable markets. However, redevelopment is often expensive and time-consuming. Interstate Partners is redeveloping the former South St. Paul stockyards with plans for 320,000 sq. ft. of office/warehouse space beginning in 2008. Industrial Equities has plans for a 202,000-sq.-ft. distribution facility at Main Street and 49th Avenue in Fridley.
The Outlook
Residential developers will continue to struggle, and some land foreclosures and liquidations will likely occur. Downward pressure on residential land values will likely continue for at least the next 12-24 months. Land buyers will likely be local investors/developers who know the market and what they can pay to make a profit. Speculative industrial development is taking off, and developers are taking positions in the next ring of cities. Build-to-suit industrial development will be strong as existing space options are absorbed. More demand for office sites will occur in the next 12-18 months. Apartment developers are looking for well-located sites for future development since concessions have disappeared and future rents are increasing.
|