McAlister: Look for changing land strategy plays.

HOUSTON-In the first of a two-article series, Rockspring Capital CEO Jim McAlister IV shared his views about land prices and their impact on development. In this installment, McAlister discusses land buying strategies, lender trends and hot spots with GlobeSt.com’s Amy Wolff Sorter.

GlobeSt.com: What types of land plays are we seeing these days?

Jim McAlister: The days in which investors were buying land to hold are ending. What was going on prior to the financial downturn is that developers would say “I’ll take that 500-acre piece; I only need 100 acres of it now, and develop the remainder over the next 15 years. The bank’ll give me the whole thing.” Now banks are saying no way on that – they’re only issuing loans for bite-sized pieces.

That’s good news for our company, because those guys are going back to being developers rather than land owners like us. They were competing directly against us before the downturn. What we do is buy that large piece at a discount, sell it in phases, then get out relatively quickly. It reduces the developer’s risk and makes it easier for them, and it give us a built-in exit strategy.

GS: Speaking of lenders, what are they requiring for land buys these days?

McAlister: They’re requiring more equity than they did before. Many times, for a new project to get the green light, a developer will need to come in with a whole lot of equity. That means getting a mezzanine lender involved. A lot of non-traditional lenders are stepping in and either doing the whole deal with the developer or working with the banks.

Lenders are also being thorough. For example, it’s hard to get a loan to build a class B apartment because the demand is for class A apartments. But one thing to keep in mind is that anything dealing with real estate of any kind is very geographically oriented. What could be true in one submarket might be different in another.

GS: Where are the hot spots in Texas; the places were there is more land demand?

McAlister: I’d rank it in this order; the Houston area is number one. Even though the Eagle Ford shale play is south of San Antonio, most of the companies doing the operations are Houston companies. Houston is in the process of morphing into the next global city. So much synergy here and growth, and for next 10 years it will be spectactular.

I’d rank Austin number two. The drive there is from California; people from there realize they can run a business in Texas with half the overhead, fewer regulations and taxes, and they can live here for half the price they can out there. The most desirable city, as far as aesthetics, for a lot of people is Austin. Austin has its challenges, though – traffic problems and lack of infrastructure. That’s what’s holding it back from more growth, and is causing the growth of satellite cities there.

San Antonio is third; the dynamics there are strong, people love the Hill Country type of living and the Eagle Ford shale is important there as well as in Houston.

GS: So the Dallas-Fort Worth area comes in fourth.

McAlister: Well, the region is still a tremendous growth region, among the top in the nation. But I give it a lower ranking because it got more overbuilt than the rest of Texas. There’s some excess inventory to burn through, though they’re working on that. Still, all four metropolitan areas are doing incredibly well.

GS: What’s your prediction for the coming months and years?

McAlister: I’m seeing a massive land play; a rush to buy and develop on land. Over next three years, the cities will look radically different from where they are now. We’ll also see a continuation of first-class, infill urban developments – and in many cases, redevelopments.  The trend of class A urbanization will continue. We’re seeing that in Houston – for example, industrial product inside the (Interstate) 610 loop is being bought up by investors, who are tearing it down and putting up class A developments. As far as the pathway of growth, urbanization of farm land will also continue. We’re basically playing catch-up for five years of stagnation.