After years in a deep freeze, both the single-family and commercial development markets are showing some signs of a long-anticipated thaw.
That was one of the observations of a panel on a recent episode of the “Commercial Real Estate Show” radio program. The show provided an enlightening look at the land and development market; topics included home-sale trends, commercial zoning tips and construction costs.
Home Market on the Rise – At Last
An improving residential market helps jobs, consumer spending and the economy. The housing sector’s impact on our industry and on the economy as a whole is undeniable. Fortunately, the single-family market is finally producing some good.
Some markets such as Phoenix and Las Vegas have experienced whopping 60 percent increases in single-family construction starts over the past year, and sales of existing homes are beginning to pick up velocity across the nation, particularly in close-in submarkets, said Brad Hunter, chief economist with MetroStudy.
As single-family-home construction begins to ramp up, the supply of developed lots is declining, Hunter added. “Nationwide, you’ll see that there’s a 55-month supply of vacant, developed lots, but there’s only a 15- to 18-month supply” in certain submarkets in the Atlanta, Phoenix and South Florida areas, he said. “We have a very tight supply of lots [in those areas], and prices are going up very sharply as a result.”
These trends will continue in the months ahead, Hunter predicted. “I think there’s going to be increased home construction, increased home sales and increased prices throughout 2013,” he said.
More Commercial Development Activity, Too
Commercial development is picking up steam as well. “It’s no secret that during the downturn, development was completely dead … Planning and zoning boards weren’t even meeting because there was nothing on the agenda,” said commercial real estate attorney Stephanie Toothaker, a director with the Fort Lauderdale, Fla.-based Tripp Scott law firm.
However, Toothaker and Michael Kaufman, CEO of Boca Raton, Fla.-based Kaufman Lynn Construction, both said they’ve recently seen an increase in rezoning applications for and the new construction of a variety of property types, including apartments, hotels, senior housing and even country clubs.
Despite the dramatically slower pace of new construction, constructions costs are higher now than before the recession, Kaufman noted. The increase stems in part from the rising costs of commodities such as steel and PVC, and also from the higher wages contractors must pay to employees because of the smaller supply of construction workers. “We’re going to see construction costs continuing to rise,” Kaufman said.
Even though real estate activity is beginning to quicken, lenders still remain cautious, Toothaker and Kaufman added.
“From a development perspective, what my clients complain about is not that financing isn’t available,” Toothaker said. “It’s that the terms are not acceptable or that the banks will only lend on something that they perceive as a completely safe.”
Do Your Homework
For those industry players wading back into the land purchasing, rezoning and development waters, Toothaker had some clear advice: do your homework. Before you close, find out from a zoning expert if the site you want to purchase is zoned for your planned use and, if it isn’t, obtain some analysis from the expert on the likely success of a rezoning request.
“A lot of times, by the time someone hires a zoning lawyer, they’ve already closed on the property, and then they find out their zoning is not compliant with what they want to do,” Toothaker said. “Then they have to go through a lengthy process to do what they want to do, and I’ve actually seen instances where ultimately they can’t.”
Kaufman also cautioned construction contractors to be careful about sub-contractors, many of whom are in tough financial shape after the past few years of economic havoc.
“The way to avoid [trouble with subcontractors is] is pre-qualify, pre-qualify, pre-qualify,” Kaufman said. “Understand your sub-contractor’s capacity, labor force, financial position and bonding capacity.”
The entire episode on the U.S. land and development market is available for download at www.CREshow.com.
Michael Bull, CCIM, is the host of the nationally syndicated "Commercial Real Estate Show" and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.