Falling rents have put the squeeze on landlords. Scarce financing has iced capital markets transactions and hamstrung new construction. And at the epicenter of those trends lies the most troubled real estate transaction in the marketplace today: land.
Land sales have stalled as buyers and sellers hit a stalemate. Sellers want cash up front, but buyers are unwilling to commit to that demand. They’re preferring to take out long-term options, for short money. What’s more, land transactions have become nearly impossible to price. Rents are moving downward rapidly, making revenue forecasts difficult at best. Where rents can be forecast, they don’t justify the cost of development. And all of that assumes a lender will underwrite a speculative, non-income producing venture.
So what can land be worth, developers are asking, if it’s not worth building on?
“It’s a problem buying property right now, and it’s worse for non-income-producing property that, normally, doesn’t have the immediate cash flow,” said David Begelfer, CEO of NAIOP Massachusetts. “It’s hard to get a good valuation, and get a loan. It’s clearly harder to sell, and there’s a greater degree of difficulty to get limited money for something that’s more speculative.”
“You have to have incredible faith in the future, or an incredible amount of patience, to buy land at this point,” added Jonathan Davis, CEO of the Davis Companies. “Acquisition and development loans are trading at 20 cents on the dollar, if they’re trading at all. I’m hearing people say there might be an opportunity in land, but that’s very much the exception. People are focusing more on the nearer term.”
‘Haven’t Turned The Corner Yet’
The pace of commercial and industrial land sales in Massachusetts has slowed dramatically over the past two quarters. That slowdown has deepened in the first three months of 2009: The state has recorded just six industrial land sales and three commercial land sales since Jan. 1, according to data from The Warren Group, publisher of Banker & Tradesman. The past two quarters have seen land sales transacting at a rate that’s one-third the rate the state had been registering since 2005.
“The short answer is, land deals are not getting done in the near term. They’re not going to get done,” said Jay Doherty, CEO of Cabot, Cabot & Forbes. “What’s fundamental is the level of financing available now. We haven’t turned the corner yet on knowing what kind of financing the marketplace will make available, even for existing real estate. There are projects that [should be proftable] by any historical standards. That doesn’t mean much now.”
The most recent run-up in rents spurred new development in Boston and across Route 128, Begelfer said, as developers bet with relative surety that their investments would appreciate in value. That wasn’t the case across wide swaths of Route 495, though. That’s because, Begelfer said, stagnant rents often didn’t justify the costs of construction.
“Rents stayed quite low. There was limited development, even in the good days, unless it was build-to-suit.”
Begelfer now sees that phenomenon spreading to encompass much wider portions of the commercial market, as rents, battered by lackluster demand, dampen enthusiasm for new construction. That’s not good news for land owners, he said.
“There’s money available on the sidelines, but it’s not rushing in. There’s the sense that there’s a lot more room for the market to drop. The drop is going to come in the softer markets, and on land. If you’re a land owner now, you’re not sitting in a position of strength – especially if you have to sell.”
Retail developer Len Bierbrier, president of Bierbrier Development, sees buyers for land today demanding significant discounts.
“There are risks to taking title now – permitting risks, financing risks, leasing risks – and you need to be compensated for those risks,” Bierbrier said.
More often, he said, prospective buyers are optioning property for two or three years while they seek permits, tenants and financing, and look forward to better days.
“You’ve got to believe that things will get better,” he said. “If you don’t, you might as well close your doors.”
