Market America Realty and Investments

Land; What it is Good For?





Today I want to focus on a trend.  This trend has been evident to me since I have been in business, mostly in the manufacturing sector.  In the business of real estate we have deviated from this trend in the United States in a major way a few times over the past 90 years.   There has been, however, a pervasive tendency, a movement in a certain direction, which I have been witnessing and profiting from  since I have been in business.  This trend simply this:  do more with less.





To do more with less has always been a goal in manufacturing. The deviations from this mantra were short lived and no more than fads (remember fins on automobiles?).This is because to do more with less; to value engineer; sometimes is contrary to current fashion, or emotional wants, and occasionally we will see extravagances outside of this trend: In houses, look at the McMansion; in automobiles, look to the Hummer.





I believe we are now entering a more resolute period where the United States residential and commercial real estate markets will rejoin the trend to economize land, resources, infrastructure, and construction materials.  In order to understand the affects of this trend, we need to understand the inner workings of the commercial developer.





How do Commercial Developers Buy Land?





The price per acre or per square foot means nothing to a developer of a commercial shopping center, an office building, or indeed a residential development until there is a definition of yield.  Yield in a shopping center will give the developer an idea of how many square feet of rentable space he will end up with when he is done developing. After he balances parking requirements, city set back requirements, height restrictions, common area needs, and water retention and rights of way, he will come up with a total rentable (or salable) square feet he can build on this property. In order to maximize his profits he must maximize the number of square feet he can build and sell.  What he winds up with is a yield number that is expressed as a land load number.  Every square foot of building will have a land load. The property may have been sold to him for $28 per square foot; but his land load may be $80 per square foot.  Every square foot of salable building has a load factor of $80. This is before he goes vertical.





This load factor is treated differently by different types of developers. The hotel developer want to know his cost per “key”; the hospital developer the cost per “bed”; the residential developers talks of developable units (du’s).  The higher the yield is, the more that the developer can pay in total for the land.





The land comes with other burdens, however, that will come into consideration. Internal infrastructure is expensive as are county and city concurrency issues. The developer must add to the cost of the load  factor such items as impact fees, road construction, utility hook ups, and municipal set-offs such as fire and emergency medical surcharges.





High Density Versus Sprawl





In the spirit of doing more with less, the developer must optimize his yield. This optimization leads him to higher density projects and less suburban sprawl. This optimization will, logically, lead him to where the infrastructure like roads and utilities exist, and where the allowable density is already approved.





Environmentalist and some ill advised county commissioners think that high density is not good for the city or for the environment.  They are wrong.





Consider these two alternatives:





1.       Big Boy Developers can take 100 acres of green space and build a gated single family home community and build these homes on half acre lots. With roads and other amenities needed, Big Boy winds up with 100 acres of land supporting perhaps 60 homes.  Big Boy needs to run sewer, electric, water and phone lines to each home. He needs fire department services for this community and a roving security car and a gate attendant.



2.       Smart Guy Developers, on the other hand, buys the same 100 acres.  He builds three story buildings on thirty of the acres and has 300 living units. Under some of the buildings there are retail stores, others have offices. Seventy of the acres are left untouched and natural.  Smart Guy must build fewer utility lines, less roads, needs no security cars or gate, and because of the mixed use, even  the residents need fewer cars.







Infill Option





In the boundaries of the city there are parcels of land that we can infill.  Infill developers look for parcels of land surrounded by homes. These infill parcels already have the sewer, water, and other infrastructure needed like roads and fire services. I wonderful example of this is the 22 plus acres in Cape Coral at the corner of Aqualinda and Beach Parkway. Property like this is generally a bargain because many of he costs associated with what is called “green field” developments have loads on them for infrastructure that make them cost prohibitive. Furthermore, parcels of property like this already have the entitlements (Zoning, etc) that “Green field” projects do not. This saves money as well as time.  (To see another example of an infill project, look at another project we have in Zephyrhills).  The Shoppes at Diplomat are yet another example of infill – smart development by doing more with less. Certainly the high density projects  IN THE CITY OF FORT MYERS are infill projects that make great economic and environmental sense – but were fought by some of the city officials.   (See last week’s column posted HERE). Some of the densities of these projects in the city are as high as 125 du’s per acre. This is smart growth and should be supported.





Because of the attractiveness of infill economics, you will begin to see tear down developments: developers buying old, rundown areas and rebuilding them. You saw this in East Fort Myers with Oasis  and there are other projects in the same area that are being evaluated for redevelopment.





Land, What is it Good For?





Land; wars have been fought for it, nations built with it, and blood shed on it.  Land gives us fuel, food, water, shelter, and security.  With the return of World War II veterans and their insatiable need for housing, the United States began its long love affair with suburbia. Furthermore, with the decline in agricultural business and the emergence of the automobile as the major source of transportation;  living in the suburbs became the American ideal.  For the United States, at least, this was a reversal of the long term trend of urban growth. The decline of the small farmer and the increase in manufacturing headquartered in the cities brought urban growth in the past, but since mid last century we have seen urban populations decline.   





This decline is reversing with the approach of $5.00 per gallon gasoline, the high cost of infrastructure for development, and the increasing desire by Americans to preserve land while being close to medical and other services.





What Does all this Mean?





Look for the trend back to urban living. Look for smaller homes on less land. (Look for bargains, by the way,  that buck this trend as sellers turn to the cities and higher density living). There will be more infill projects and more homes closer to services like medical facilities, schools, jobs, and mass transportation. Developers and residents alike will be “doing more with less”.  





Look for projects that paid a ‘”high load factor”. The infill projects that overpaid for their land will not come out of the ground; certainly not if the developers bought the land un-entitled for high density and were counting on changing the density to achieve their economics.





Prices on multi family and single family projects continue to drop. Many land parcels were purchased when exit strategies included sale prices that no longer exist.  Load factors of $30,000/du for multifamily are unrealistic except in the most prime of  locations.



The exit strategy for any developer is THE primary consideration. They make their money when they buy, not when they sell, and many developers already blew it with their buy PLUS their exit strategy is out the window.  Furthermore they are clobbered by misguided environmentalists that think high density is bad for Florida, undercutting their economics of scale.





We are in a time of constriction and economizing. But remember, unlike the rust belt states, Florida is still in a net growth mode. Lee County will still have 800 new residents a month.






The Baby Boomers are coming.













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