Savvy developers and investors are keeping a close watch on land—often referred to as "dirt"—as the foundation for future growth. However, while the allure of untapped land remains strong, the complexities of securing good deals have increased. In today’s environment, characterized by tighter financing and fluctuating demand, understanding the dynamics of land deals, seller motivations, and regional variations is crucial for those looking to capitalize on opportunities.
The Changing Terrain of Land Deals
As construction activity has slowed and demand for land has softened, one might expect widespread price drops for land parcels. However, experts suggest this is not universally the case. Ric Campo, CEO of Camden Property Trust, highlights how many sellers—particularly those holding onto land for years or even decades—are reluctant to lower their price expectations. "Land doesn’t move as fast as you would think," Campo explained. “Sellers of land are unwilling to drop their prices.” This sentiment is especially prevalent among long-term landholders, such as generational property owners, who feel no urgency to sell at lower prices.
In contrast, developers who purchased land more recently are often in a different position. Many of these developers bought land intending to immediately launch projects, only to face an unanticipated hurdle: securing financing. Over the past couple of years, construction loans have become harder to obtain, and many equity providers have pulled back from the market. This has left some developers sitting on idle land they cannot afford to develop. For these developers, holding onto land without being able to move forward is costly, and they may become more motivated to sell at a discount.
This divergence in motivation between long-term landholders and developers creates an interesting dynamic in the market. While the former can afford to wait for the right price, the latter may need to offload their holdings sooner, providing potential opportunities for investors with available capital.
Financing Challenges and Developer Motivation
One of the main factors driving the current market is the challenge developers face in securing financing. The shift in lending conditions has significantly slowed new construction. Apartment starts, for instance, dropped by 21.8% year-over-year in July 2024, reflecting the broader trend of constrained financing options. This slowdown is creating pressure on developers who have land but can’t proceed with their projects due to a lack of funding.
Greg West, CEO of ZOM Living, emphasizes that the lessons learned from the 2008 financial crisis have made developers more cautious about taking on excessive debt for land acquisitions. “The amount of leverage in the land positions has really changed,” West said, referencing how today’s developers are more disciplined compared to the last real estate cycle. However, even with this discipline, some developers find themselves in situations where they must choose which projects to prioritize.
For instance, developers with several deals in the pipeline may only manage to secure financing for a few of them. “They might only get two of those financed,” said David Laube, principal of Noell Consulting Group. “So, what are the two we really want to place our bets on?” This creates opportunities for investors, as some developers may be forced to sell off unfinanced land at discounted prices. According to Blake Schroeder of Leon Capital Group, his firm has been able to acquire land at advantageous prices by stepping in where developers have had to abandon plans due to financing hurdles.
Regional Variations: Coastal vs. Sun Belt Markets
Geography plays a pivotal role in determining whether land prices will drop or remain stable. In coastal markets like California, New York, and Massachusetts, where land is a significant portion of the overall project cost, prices have fallen in response to economic conditions. In some cases, these price reductions are dramatic—AvalonBay Communities, for example, secured land in Quincy, Massachusetts, at 40% below its previous asking price, highlighting the opportunities in these markets for savvy investors.
However, the story is different in the Sun Belt states. In regions like Florida, Texas, and North Carolina, land prices have been more stable. While the post-pandemic boom caused prices to rise dramatically, they have not yet seen significant declines. Part of the reason for this is that land typically represents a smaller percentage of the overall project cost in these regions. As Matthew Birenbaum, AvalonBay's chief investment officer, explained, land in places like Charlotte may only make up 10% of the total cost for a garden-style development. This smaller share means that fluctuations in land prices have less impact on the overall project viability.
At the same time, some Sun Belt markets have started to show signs of softening, particularly in areas where land became extremely expensive during the COVID-19 rush. While there haven’t been significant drops, investors may find more favorable terms as sellers become more flexible, particularly if they are eager to secure deals amid financing delays.
The Long Game for Investors
For real estate investors, patience and strategic thinking are essential in today’s land market. Long-term landowners who have no pressing financial needs are unlikely to lower their prices significantly, making it harder to secure deep discounts on prime properties. However, developers who are sitting on land but cannot secure the financing to move forward may be more willing to sell, particularly if holding the land starts to create financial strain.
Understanding regional differences is also key to success. In established coastal markets, where prices have already softened, there are opportunities to acquire land at a discount. Conversely, in the Sun Belt, where land costs are more stable, investors may need to wait longer for significant price adjustments or find value in acquiring properties at favorable terms from motivated developers.
Overall, the current developer market presents both challenges and opportunities. Investors with liquidity and a deep understanding of local markets will find the best chances to succeed by targeting regions and sellers who are most responsive to current economic pressures. Whether securing deals in a cooling coastal market or navigating the steady Sun Belt, there are opportunities for those ready to play the long game.
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