For REITs, September was the month for building collections. No, not in the form of assets, portfolios, or properties, but in land.
Early in the month, San Francisco-based BRE Properties announced that it had acquired 2.4 acres for about $19 million. It plans to build 280 Class A units on the site. A week later, Alexandria, Va.-based AvalonBay Communities bought a 2.64-acre property in Tysons Corner (McLean), Va., for $13.3 million. The site will eventually house 354 luxury units and will begin leasing in spring 2012.
The fact that BRE, AvalonBay, and other REITs are scouring for land shouldn’t come as a surprise, but it is a sign that, at least for well-capitalized companies, the development recovery is entering a new phase. Apartment development site sales, including those under $5 million, peaked in the third quarter of 2006 at more than $1.8 billion, according to New York-based research firm Real Capital Analytics. By the first quarter of 2008, site sales had dropped a whopping 77 percent from the previous quarter’s $1.6 billion mark.
Now, the land market seems to be making a comeback, as REITs and some private players turn away from building out their existing pipelines in favor of buying up undeveloped land. After totaling just $53 million in land sales in the first and second quarter of 2010 combined, the third quarter saw $88.8 million in sales, according to RCA. Despite the new interest in dirt, however, locational issues, a lack of financing, and further price declines will continue to keep the land market a tempered playing field.
REITs get in early
By most accounts, the public REITs are in the best position to both buy and build right now. For starters, they can tap their balance sheets for debt without having to turn to banks.
“They’re flush with capital either from having fixed their balance sheets over the past couple of years, or they have superior access to capital,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York. “They have functioning debt capital, which allows them superior access to capital than their peers. For the near term, the apartment REITs are clearly in a superior position versus their private peers.”
And no one is being left out this time around. St. Juste says BRE, Chicago-based Equity Residential, and Palo Alto, Calif.-based Essex Property Trust have stated in earnings calls that they want to purchase new land upon which to build. He says that Birmingham, Ala.-based Colonial Property Trust, Atlanta-based Post Properties, and Houston-based Camden Property Trust are also actively monitoring conditions in a number of their core markets to start projects on land they own.
Earlier this year, Equity laid the groundwork for more land transactions when it secured a land lease on a parcel in Manhattan’s Chelsea neighborhood. It started construction on that project, a 111-unit Class A high-rise, in the second quarter, and is now seeking straight land buying opportunities in other high-barrier markets such as Northern California, Southern California, Washington, D.C., Manhattan, and Seattle.
“We continue to be very active underwriting new development opportunities, certainly looking at our own land inventory first, but we’re looking at other sites as well, and we could see an increase in this segment of our business in the months ahead,” said David Neithercut, CEO of Equity, in the company’s second-quarter conference call. “But like everything we do, it’s extremely capital-intensive.”
Others need to buy simply in order to fill their pipelines, especially those in land-constrained markets. “BRE and Essex are in the same position,” St. Juste says. “They would like to grow, but land is hard to find in their markets, and it doesn’t always pencil out. It’s something they’ve been keeping their eye on.”
Piquing Private Interest
But it’s not just the public firms that are looking for land. Some private players are as well. In July, Atlanta-based Wood Partners purchased a 2.5-acre site in Sandy Springs, Ga., where it plans to build Glenridge Springs, a 168-unit community funded by CB Richard Ellis’ Strategic Partners U.S. Opportunity 5. In August, Wood purchased a 5.9-acre, fully permitted apartment site in the Spectrum Center business park in San Diego, where it plans to develop a 379-unit luxury apartment community. It started construction on the project, whose construction debt was provided by Chase Bank on Sept. 1.
Other private companies are also on the hunt for land. Frank Apeseche, managing partner and CEO for Boston-based Berkshire Property Advisors, says the company is close to signing one land deal and is seeking others. “What we see is that the cost to build in high-barrier-to-entry markets right now is lower than the cost of acquisitions,” Apeseche says. “That’s a result of cap rates coming down. If you have the development capability and you’re smart about value engineering, you can buy land in core Class A markets and build cheaper than you can buy [existing assets].”
Still, not everyone can get the construction debt necessary to move ahead with land deals. While the REITs can essentially write a personal check for development, and privates like Wood and Berkshire are backed by deep-pocketed firms such as CBRE and The Berkshire Group, others are facing a tougher time securing debt. “Banks fared pretty poorly throughout the downturn and aren’t inclined to rush out and put capital out,” St. Juste says.
Meanwhile, other private companies simply want to work through what they have, unless it’s a great opportunity in a coveted market. “We have enough opportunities within our own land bank,” says Dawn Severt, CFO of Atlanta-based Gables Residential. “We’d like to get that under way before we start rebuilding a land bank. We do have some sites under control, and we’re maintaining control over those. If we put seven sites in production over the next six months, I don’t expect us to buy seven more pieces of land.”
Location, Location, Location
As the land market begins to perk up, the key to finding the right transaction is, like with most real estate, location. In the rebirth of any segment of the transactions market, it’s usually the prime pieces that go first. And that’s definitely the case with land.
For instance, AvalonBay’s parcel, which broke ground this month, will be near two D.C. area Metro stations on the Silver Line extension currently under construction. And BRE’s 2.4 acres is “a transit-oriented site centrally located in downtown Sunnyvale, Calif.,” says Stephen C. Dominiak, BRE’s executive vice president and chief investment officer. “The parcel is within one block of the CalTrain station and adjacent to the Sunnyvale Town Center, which includes a Macy’s department store, a newly constructed Target, and Sunnyvale’s historic Murphy Street retail and dining district.”
That’s the kind of dirt that draws the greatest interest. “[These deals] have been in higher-barrier-to-entry markets,” St. Juste says. “In [those locations], prices may have come full circle and are back to or very close to where they were before the decline.”
But in other regions, such as the Sun Belt, land prices have not recovered to the same extent. That difference in pricing presents buyers with a dilemma as they try to figure out where prices are and whether they could fall further. “The other piece is trying to figure out where land prices are relative to their peak, depending on the market,” St. Juste says. “Having an accurate sense of that is tricky. Is it 10 percent, 20 percent, even 30 percent below peak? It depends on the location, proximity to the core, and a number of other factors.”
Even Equity, which is in one of the better financial positions in the industry, won’t be pursuing every opportunity. “I think it would be some time before we ratchet that business up, but we’re certainly looking, and we think it’s a good way to add value,” Neithercut said in the earnings call.
