This article first appeared in the May 2009 issue of the Minnesota Real Estate Journal.
While the commercial real estate market has stalled due to the weak economy and credit crunch, investor demand is starting to gain momentum in one sector — land.
Twin Cities land values across all sectors continued to decline, as the land market goes through a major correction following the highly inflated values of the building boom.
Speculative and residential land values have plummeted by as much 80 percent in some areas since the peak, and investors have taken notice.
Buyers are finding many of their land deals through under-capitalized developers and builders, who are looking to liquidate their assets. Struggling developers are removing big portfolios of land from their books at a fraction of their value. As loans are coming due, lenders are readjusting the loan-to-value ratio with their borrowers resulting in liquidations or capital infusions. This is resulting in many opportunities for buyers with available capital and the willingness to purchase and hold the land until the market rebounds.
The best deals locally have been found directly through the landowners. (Most banks that have foreclosed on land are not willing to severely liquidate Some are waiting for the asset to appreciate over the next several years). Local landowners have recently sold two large tracts for approximately $26,000 per acre, and one site is already graded. Similar sites in the area had been purchased for $130,000 to $140,000 per acre during the peak.
Another tract is under contract to be sold for approximately $40,000 per usable acre, while similar sites were acquired for around $160,000 per usable acre during the building boom.
Investors are hoping to invest in land where the next wave of opportunity will be. Land is moving first in primary suburbs like Maple Grove, Plymouth and Eagan and then in secondary suburbs like Blaine, Coon Rapids and Lakeville. Residential land is moving more quickly in areas with limited inventory and good school districts. Activity also is increasing for speculative land closer to the central business districts, because that land will likely be developed next — once the market bounces back.
Today’s buyers are primarily speculative land buyers, who reserved some cash and made calculated decisions during the building boom. Most investors buying land today will hold parcels until the market recovers, and the next sale will be to the builder.
While the steepest discounts are being offered for speculative and residential land, retail land is also seeing some price reductions. A reasonable seller will drop retail land prices by much as 40 percent. However, it must be in a very prime location where the deal would have happened one way or another anyway. The retail market is struggling and most development is on hold. (Although some big national and regional chains continue to look for key sites to expand or reposition current stores).
In the industrial sector, “right-sized” sites are still relatively in high demand and have held their value. There is a modest discount of 20 to 25 percent in prices for an industrial “user” buying these sites.
On the other hand, if a developer is looking to buy a larger industrial site, there is a longer hold time and the discount will be deeper.
The bottom line is investors are starting to snap up heavily discounted land. Land sales are occurring where they weren’t just a couple of months ago, and there are bargains available. With the deep discounts, it is a good time to consider buying distressed land. It is uncertain whether land values have hit bottom; but if land values have not yet hit bottom, they are close.
Jon Rausch is senior vice president of brokerage services at Cushman & Wakefield / NorthMarq.