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Interest from land investors gains traction
July 21st, 2009
“Now that we know the world is not coming to an end, let’s do some business.”
That’s what a New York private equity executive said to Land Advisors Organization CEO Greg Vogel in April, and now Vogel’s hearing similar chatter around town.
Vogel said such comments are indicative of a re-emerging investment market. Investors are returning to Phoenix and snatching up undeveloped land at prices not seen for at least a decade.
At current prices, raw land can bring three to seven times the initial investment over four to seven years, Vogel said. Finished lots — land zoned for residential homes with infrastructure such as water and electric lines — can bring double the return over about two years, he said.
Between April and May, Vogel said he had about 80 bids for two sets of residential lots — about twice as many offers as he would have seen six months ago. The parties were investors looking for two-to-four-year holds and builders looking to begin construction in the near future.
“We’re approaching near the midpoint of the transfer of lots to investors,“ Vogel said. “Over the next 12 to 18 months there will be 12,000 to 16,000 additional lots that will trade hands to investors before (the trend) reverses itself back out to builders.”
Since 2007, more than half of lots traded were purchased by local investors, Vogel said.
Carter Froelich, the managing principal of real estate services and consulting firm Development Planning and Financing Group, said he has seen great investment activity in the market for finished lots, especially in Pinal County and Buckeye.
“Right now you can pick up ... finished lots for below their replacement costs,” he said. “If we’re not near the bottom, we’re very close to it.”
In the Phoenix area, declines in home prices appear to be slowing, with a projected decrease of 33 percent from May 2008 to May 2009, according to the latest Arizona State University Repeat Sales Index. That’s less than the estimated 35 percent decline from April 2008 to April 2009, and the 37 percent drop from March 2008 to March 2009.
Karl Guntermann, an ASU W.P. Carey School of Business real estate professor, said in a news release that the figures suggest a “turning point” for the housing market.
“This indicates the rate of decline is slowing, and even though actual home prices continue to drop, they’re falling by much smaller amounts than they typically have during the past 18 months,” he said.
According to the National Association of Realtors, existing home sales nationally grew by 2.4 percent from April to May. In the West, existing-home sales decreased by .9 percent in May but were 11.8 percent higher than May 2008, according to NAR data. The median price was $197,700, down 30.6 from last year.
Many deals that Development Planning and Financing Group is involved in are still in process and details could not be disclosed, Froelich said. It’s difficult to time the market, he added, but the time feels right for many.
“As long as you’re near the bottom, they feel comfortable in buying,” he said. “The vast majority of the transactions that we’re seeing are speculators, for lack of a better term.”
Froelich said the trend has been toward residential real estate near the “ring of reality” — where growth heads to first. For instance, properties near the Loop 101 are seeing more attention, he said.
Jim Belfiore, president of Belfiore Real Estate Consulting, attributes a lot of the recent purchasing to psychological reasons — good real estate news in the media, widely available information that pricing may have bottomed and other factors.
“I wouldn’t call it a purchasing frenzy, but if you were comparing it to the last three years, it’s probably a purchasing frenzy,” he said. “If you’ve been in the industry for a couple years, it almost makes you giddy.”
He pointed to Blandford Homes buying 229 developed residential lots at Tuscan Villas in Mesa in March and 86 developed Chandler residential lots in April.
According to his estimates, investors purchased about half of distressed Phoenix-area homes in June, compared with about three-quarters over the past several months prior, he said. The increased activity among non-investors is due to entry-level buyers motivated by the federal tax credit and signs of the market coming close to bottom, he said.
“As a percentage of overall buyers, I’m hopeful that the percentage of investors will decrease,” he said. “I think (when) prices go up you’ll have fewer investors as a percentage of overall buyers.”
Scottsdale-based real estate development company Laguna Pacific Cos. announced in March plans to acquire $94 million worth of developed and undeveloped land in Arizona, California and Nevada within the next 18 months.
Paul Charles, vice president of site acquisitions and development for Laguna Pacific, said the company expects an upswing in the real estate market over the next two to seven years, and investments looked to gain a minimum 18 percent annual return.
Nate Nathan of Scottsdale land brokerage firm Nathan & Associates said he has seen much more investment interest lately.
“There’s a lot more activity than people realize,” Nathan said. “It’s from billionaires to hedge funds to investment funds — local developers that are connected with some of these outside monies, (a) lot of foreign investors.”
Nathan said he expects activity to pick up soon.
“Do I think the volume of deals is increasing? I think it will be, yes,” he said “Has it? It just started.”
