Time to look at land?
December 16, 2013
Smart investors often buy when everyone else is selling and sell when everyone else is buying. In effect, they are ahead of the curve. The commercial land market in our Sierra Foothill region has, for all intents and purposes, been nonexistent over the past several years, even while many other sectors of the commercial real estate market — industrial, retail, multifamily, etc. — have seen increasing activity and recovery.
This lack of buying, selling and development of commercial land stems from the real estate bubbles created prior to the start of the Great Recession. When the subprime mortgage crisis hit, the run-up of real estate and economic activity came to a screeching halt, real estate values plummeted and vacancies skyrocketed. Once "improved" properties could be purchased for much less than they could be built, the bottom fell out of the land market.
Based on analysis of data from the Nevada County Association of Realtors MLS, as well as our proprietary database, during the five year period from January 2008 to January 2013, only three "commercial" land sales occurred, and two of them were for the development of special use buildings — a school and a medical clinic — for which there were no existing replacement properties.
Recently, however, we have begun to sense a slight resurgence in the land market. In 2013, we note that western Nevada County has registered two commercial land sales — only one short of the previous five years' total. Further, readers of The Union newspaper may have started to notice a subtle uptick in reporting about commercial land development.
Such recent rumblings are due to the fact that vacancies in certain product types (for example, light industrial) have fallen, most of our distressed property inventory has been sold, and sale and lease pricing of improved property has started to recover, thereby allowing land development to begin making some sense.
If you are interested in purchasing or developing land, the following issues should be considered:
• Use, location and zoning: In years past, certain investors would purchase land with the goal of flipping the property in a few years after inflation and appreciation had garnered them a profit.
This practice has lost favor in recent times due to low or negative rates of appreciation, higher holding costs and much greater risks of property devaluation due to ever-changing governmental regulations, increasing permit and construction costs and political/NIMBY ("not in my back yard") pressures. These days, when purchasing land, it is advisable to have a specific use and a development plan in mind.
• If you run a manufacturing company, M1 (light industrial) zoning will typically be required. A retailer will look for C1, C2 or C3 (commercial) zoning. Even more important, however, is to check the underlying "General Plan Land Use" designation to make certain it is consistent with the zoning. If not, the General Plan designation will typically prevail. The local jurisdiction's zoning ordinance will specify principal permitted uses, businesses requiring a subjective "use" permit and nonpermitted uses. Do not expect approval of a "spot zoning" change where only one parcel is rezoned.
• Development constraints: A "Phase 1" review should be conducted to determine if there are any suspect areas of environmental concern (e.g. mine tailings). Site drainage and wetland areas must be investigated (a requirement to add a drainage culvert could destroy an entire project budget). The impact of a proposed development on traffic must be studied, as expensive traffic mitigation fees could be imposed. Might the site contain cultural items (e.g. Indian grinding rocks, burial grounds)? Is the parcel encumbered by municipal bonds (which could more than double your property tax bill)? Does the parcel have sufficient water, sewer and power services? Are these located on site, across the street or two miles away?
• Purchase and cost factors: When figuring your project development costs, there is much more to the equation than the land and building shell costs.
Depending on the parcel's topography and drainage requirements, site-work costs could approach or even surpass your land cost. Permit fees from various agencies must also be considered. Other "soft costs" such as engineering and architectural expenses will require estimating. How long will planning and building approval take? Could inclement weather delay your completion date?
Timing issues will affect carrying costs such as interest expense, opportunity cost, property taxes, bonds, etc., which accumulate daily.
While the timing may be right to once again consider purchasing land, please do so with your eyes wide open to these issues.
Sperry Van Ness – Highland Commercial specializes in the leasing and sale of commercial properties, and they specifically track the Western Nevada County market. Their quarterly "Commercial Property Review" newsletter, full of current market trends and specific property details, is available at http://www.svnhighland.com or by calling Lock Richards at 530-470-1740.
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