Some investors expect major opportunity to come out of the current economic disruption, but, at least in terms of land sales, that opportunity might not be as exciting as expected. John Burns Real Estate Consulting expects fewer distressed land sales this year than in past downturns. Builders have been conservative this cycle, keeping little debt on land assets to preserve liquidity, a lesson left over from 2008. As a result, land acquisition opportunities could decrease this year, resulting in smaller adjustments in pricing.
“The residential land market did not have a lot of capital flowing to it and had very limited bank financing in this recovery cycle, given the sector got crushed during the last downturn,” Lesley Deutch, a principal at John Burns Real Estate Consulting, tells GlobeSt.com. “Developers and homebuilders stayed very disciplined with their land purchases in recent years and were careful not to over-leverage. That discipline combined with more than 10 years of consistent price appreciation kept debt levels relatively low on land.” Those low debt levels could mean land owners will be less motivated to sell, preferring instead to hold through the downcycle and recovery period and effectively stabilizing prices.
As of now, the firm hasn’t seen a decrease in land pricing, although it is still early. However, demand has decreased. According to a recent broker survey conducted by John Burns, only 57% of land acquisitions nationwide are scheduled to close on time. “Most buyers are asking for 30- and 60-day extensions on contracts. Builders and some developers seem to have put a hold on new land purchases for now. The overall sentiment is that the land market has paused.” Most deals making it to the finish line are in California and the Northwest. Texas, Florida and the Southwest are seeing a larger number of canceled contracts.
Land pricing could take months to adjust to the market disruption and shift in demand, particularly because the economic shift was abrupt. “Optimism remains high but we caution that the economy is in recession. We are expecting some of the optimism to fade in the coming months,” says Deutch. “I would expect land prices to start falling once the volume of activity stalls. Our forecasts are likely to be out next month, when there is more clarity on the re-opening of the US economy.”
Investors looking for a deal on developable land should look for areas with substantial job loss where the local economy will be impacted in the short-term, Deutch recommends. “I would focus on employment composition of a given market to understand how much the local economy could be impacted,” she explains. “Some markets like Orlando and Houston have more jobs susceptible to the current economic downturn—like tourism, trade and oil—while other markets like Salt Lake City and Atlanta have fewer jobs in the high-risk industries. Markets with higher risk in the short term could potentially provide longer-term opportunities.”