Looking for a leading economic indicator? Try the value of dirt 

Posted: 8:00 pm Thu, May 6, 2010
By Richard O. Samit

I believe that the economy ultimately follows what happens to the value of dirt — after all, you can’t create more land.

I sit at ground zero, as CEO of a land-services firm in the region. Having weathered three very down years in the land space, I decided to use this opportunity to offer some insight into land and some of its related value-influencing factors, to demonstrate to market watchers that land, as a bellwether, is already on its way back.

Land supply: Watch for the falling knife

I view land supply in two categories: Raw land that is in the various stages of entitlements, and land available for sale to builders as finished lots. Raw ground is generally never a serious problem, and it is found in increasing abundance the further you travel from the urban core.

Land available as finished lots for builders is another story. There is the process to deliver land from its raw state to finished lots, which requires time, expertise and capital. In our region, there is a constrained supply — and shrinking supply — of quality single-family and town home-finished lots. The projects that have the best locations and ease in development get the attention first.

We have already seen more demand in 2010 for quality opportunities, and because the standing finished-lot inventory is sparse at best, except in some secondary markets, sales of raw land for single-family and townhome deals have begun to occur, with multi-family raw-land sales to follow.

Land earmarked for commercial development is not in short supply. With vacancy rates across the region predicted to approach 14 percent, even in some downtown markets, the market is like a falling knife. I believe that there will be dramatic pain this year, and it is likely to continue in 2011 as demand for existing space finds a way to meet supply.

Land Demand: Builders in buying mode

The biggest demand for land consumption is from the national homebuilders, and they are back in buying mode because they have to feed the machine to not only survive, but also grow.

Their lot inventories have dwindled, and they are feeling good about new home appreciation in 2010 and beyond. Regional homebuilders will become more aggressive as well this year, as they feel more comfortable and also feel compelled to keep up with the competition from the national builders.

Apartment developers, too, will begin to come out of hiding. As housing demand increases, the need for close-in and first-stage housing will naturally follow along.

Commercial real estate: Open the credit doors?

Long-term lending on commercial real estate has long been a secondary-market business. With fewer and fewer credit tenants, declining values and even declining or stabilized rents, borrowing on the secondary market has dramatically slowed.

Investors in 2010 will begin to open their credit doors to stabilized projects, particularly in the few “Tiffany” markets like our region. The only question is how wide the doors will open.

Many of the larger community and mega-regional banks have taken advantage of the secondary market’s shyness and made loans on great buildings in prime locations with good spreads — for the banks, that is. The problem with this activity is that there simply isn’t enough liquidity or loans-to-one-borrower capacity in the banks to accommodate the demand coming in the next 36 months, as conduit financing comes up for renewal.

The outlook on retail real estate is not as good. Strip centers are filling up with “C” and “D” credits, and retailing in general in the U.S. is boring and undifferentiated. The drift toward buying online, and the lack of unique retail experiences, will carry on, and the retail real estate market, with a few exceptions, will continue to look weak.

One of the positive effects of this trend is that locally owned retailers will find new opportunities to grow, as landlords are focusing on the needs of mixed-use projects and less on “brand” names, particularly since many of the “brand” names are, or have been, in a contraction mode.

Acquisition, development and construction lending

Recent media reports have showed that some banks appear to be lending more in the acquisition, development and construction (AD&C) areas. There is some new activity and a few new projects that began in late 2009.

However, the main reason for the increase in AD&C lending is because existing projects are now seeing some movement, and advances under existing commitments are now possible.

For AD&C borrowers, expect a cold-to-modest reception at the bank when you make your loan request for land. Bring plenty of equity when you come and have a clear exit strategy. Oh, and if you don’t have a fat balance sheet, expect your personal guarantee to be required.

The last few years have proven challenging to say the least, but I’m excited about our prospects, and the region’s growth, in 2010 and beyond. Survival was the name of the game for a while; now we turn our attention to expansion and success.

Richard O. Samit is the CEO and co-founder of McLea, Va.-based Fraser Forbes Real Estate Services. He can be reached at rsamit@fraserforbes.com.