Las Vegas-based LaPour has been purchasing and developing land into offices, industrial buildings and hospitality facilities for 16 years. Yet, the company’s executives have chosen not to purchase property for the past two years because of its high costs.
“It’s a difficult land environment due to pricing and parcels,” said Jeff LaPour, the president and chief executive officer. Like LaPour, many Nevada development firms are holding off on buying land, either because they can get by without doing so, or they can’t afford it. Land owners, on the other hand, aren’t selling or are being forced to sell because of existing debt.
“The land buying we’re seeing is by well-capitalized groups looking for significant discounts on prior land prices,” said Todd McKenzie, a principal with McKenzie Properties, a Reno-based, third-generation family business that does commercial development, property management and construction. Consequently, commercial development throughout the state has slowed dramatically.
In January 2007, sellers of prime commercial land (quality, well located and with freeway frontage) in Southern Nevada were asking about $40 per square foot, LaPour said. Currently, asking prices for similar properties are in the high $20s to low $30s. In comparison, asking prices for second- and third-tier property are about $13 to $19 per square foot.
“The high commercial land prices seen in the past years were overinflated, as were residential land prices,” said John Stewart, a principal of Juliet Cos., a private commercial and residential development firm.
Residential land prices, however, saw a much greater spike. They were as high as $1 million-plus an acre for multifamily housing but since have dropped to about $400,000 to $650,000 an acre, Stewart said. “I think people really thought there wouldn’t be an end to what tenants or home buyers could pay,” he added. Now, prices are dropping slowly for prime properties and more quickly for the second- and third-tier properties. They’re expected to continue to come down throughout the year, experts said.
In Northern Nevada, prices have remained steady in Reno-Sparks since the first of 2008, McKenzie said. Prime property in the area costs about $17 to $19 per square foot, with some in hot locations as much as $20 to $25 per square foot. “I doubt any deals are getting done at those prices,” McKenzie added. “I think the reality is that prices have come down but maybe the sellers are still wishing and hoping for last year’s prices.”
Throughout the state, land purchases are minimal. People who don’t have to sell, aren’t.
“We are continuing to see many landowners realizing, whether voluntarily or forced, that this downturn has much longer legs and will be much deeper than what anybody anticipated,” Stewart said.
Those who are selling are being forced to financially. For example, Tanamera Development LLC closed in late 2007 on a 600-acre parcel in Spanish Springs at a reduced price because the seller was in trouble, said Kreg Rowe, managing partner of the commercial and residential development company based in Reno.
“Many landowners who felt like they could sit on property and hold it for a few years are being forced to sell their property because they have debt against the property,” Stewart said. “I think we’ve seen many cases where landowners are being forced out of their property or to sell at a deep discount to avoid foreclosure.”
At the same time, few developers are buying land. “There is all this speculation and perception about what land is or is not worth, but the reality is there are no buyers,” Rowe said. “There is a lot of money out there floating around, looking for opportunities, but until the sellers get to the point that they have no place to go, they’re not going to sell for prices [developers would pay].”
Those interested in buying land tend to be both well capitalized and seeking price discounts.
“Folks who are actively looking at buying land are doing deals,” Stewart said. “They’re looking at their exit strategy and backing into what they can pay for the property.”
Speculators calculate how long they’ll have to hold the property, what they can then sell it for, the desired return on equity, and determine from those figures what they can and will pay for it now.
Challenges obtaining financing is to blame for stagnant land sales, Rowe said. The capital market is tight following the credit crunch, questionable residential lending practices and aggressive commercial lending practices. With federal regulators pressuring or shutting down banks, many of these institutions aren’t lending money. Consequently, it’s difficult, and at times impossible, to get loans.
“The problem is there’s no permanent financing,” Rowe added. “Unless you have somebody with some cash equity to put into a project, if you can’t get loans, you can’t do projects, and there’s no point in buying land.”
For Juliet Cos., which developed many Target retail centers around the Las Vegas Valley, the easy part of its projects in the past has always been putting together the loans. Today, however, it’s one of the biggest challenges. “Lenders are requiring developers to put much more equity into deals and are requiring more stringent guarantees,” Stewart said. “It really puts a big damper on the ability to do a number of projects.”
The tapering of growth and general economic slowing have also caused land prices to come down. “The economy is slow, and people are afraid of it,” McKenzie said.
The residential real estate market downturn has influenced a decrease in commercial land prices but not as much and not as recently as the current financing situation. A drop in home sales means less growth and fewer rooftops, which results in less demand for commercial development, McKenzie said. With a decrease in demand typically comes a decline in prices.
“The biggest impact of the residential downturn is that it has made everyone a little more cautious,” LaPour said. “It has made people tied to the industry definitely reassess their growth plans in terms of a tenant base.”
The available land market is tight in both Southern and Northern Nevada. In the south, the 21,000-acre Apex Industrial Park, located about 20 miles north of downtown Las Vegas along Interstate 15, has been called the last frontier of available sizable land chunks. That, however, is not the case, according to Stewart. “That was the sentiment 18 months to two years ago when master plans were moving full-speed ahead,” he said. “The best-laid plans of many of these master developers are not going to come to fruition. The truth is there’s a lot of land around the outskirts, a lot closer than Apex, which will develop first.”
Within the Las Vegas Valley, bordered by the mountains and U.S. Bureau of Land Management property, several 2.5- and 5-acre parcels, as well as some 20-, 30- and 50-acre pieces are available. “Given the defaults on loans of many master-planned developments in the Northwest, North Las Vegas and all around the outskirts, I think that land will be available for many years,” Stewart said.
The problem, however, with land in the Valley is the cost. “For the most part, along the western beltway [in Southern Nevada], you have a very difficult time buying land that’s priced correctly for the product that belongs on it,” LaPour said.
In the state’s northern region, available well-located commercial land in Reno/Sparks is scarce, Rowe said. “Most of the good commercial got eaten up during the good times,” he added. “There hasn’t been a whole lot that hasn’t been entitled.” Available land tends to be further out from Reno-Sparks, in places such as Spanish Springs, Fernley and Stead.
Along with land costs, construction costs overall tend to be down a bit, particularly those associated with labor. “As the number of projects has declined, many contractors and subcontractors are more hungry to find projects, and that’s caused them to reduce their quotes, bids or numbers,” Stewart said.
Whereas labor costs have decreased, materials costs have remained, for the most part, steady. Yet, the prices of some are rising and expected to continue to rise. For example, the prices of any materials related to petroleum-based products, such as asphalt and polyvinyl chloride (PVC) piping, are increasing, due to oil prices.
Effect on Developers
Given the current land prices and financing issues, few developers in either the northern or southern regions of Nevada are developing land. “Compared to a year ago, there is less commercial development and less land being purchased,” McKenzie said. “Developers are shelving projects or delaying because of uncertainty.”
The current development climate has prompted LaPour to alter their business practices. “It’s forced us to be a little bit more diligent, and it’s forced us to diversify quicker than we may have if we had plenty of inventory,” LaPour said.
Similarly, Juliet Cos. continues to develop large land tracts it acquired several years ago. The company did, however, recently close on a piece of land it negotiated in early 2007. “We’ve been generally conservative or more conservative than other developers,” Stewart said. “We also are being more conservative in our rent and sales price projections.”
Developers have been building more industrial and office buildings for sale to end users, LaPour said. “There’s been good demand, but also it’s sometimes the only thing that works [cost-wise], with the land prices out there today,” he added.
In Northern Nevada, commercial development practically is at a standstill, Rowe said. His company, Tanamera, however, has commercial and residential projects lined up for which it already has obtained financing. In addition, the company has expanded its services, doing general construction work and helping banks manage some of their assets, for example. “I wouldn’t say we’ll go unscathed, but we’ll be fine at the end of the day,” Rowe said.
McKenzie Properties also is developing. Its current project is South Creek, a nine-building, mixed-use project located on an 8-acre south Reno parcel McKenzie Properties purchased in March 2005, when land prices were on the rise. The development company paid about half the asking price, as the property, while in a prime location, was subject to a homeowners association’s Codes, Covenants and Restrictions agreement prohibiting any type of commercial development on the property. Had the company not gotten a deal on the price, it still would have purchased land to develop. “We build no matter what’s happening because it’s a long-term game for us,” McKenzie added.
What is Needed
For the commercial real estate market to pick up in Nevada, “banks need to let loose,” Rowe said. “If the banks are unable to start putting some money back into the system, I think you’re going to stay slow for a long time,” he added. “That’s the real key piece of the puzzle.”
In addition, the existing housing inventory needs to be absorbed. “The region is still growing, there is too much of a supply of homes out there,” McKenzie said. “Once demand catches up to that supply, it will strengthen the housing market and people will be more confident about building.”
Southern Nevada seems headed in that direction as home prices in the Las Vegas area have undergone a correction, making them more affordable. In Northern Nevada, home prices overall are coming down but some builders are still selling homes for drastically reduced prices. Until this practice ends, Rowe said, the market truly won’t shift. “When that stops, then we will hit bottom and, candidly, I think we’re pretty darn close to it right now.”
In addition, Northern Nevada needs to attract more businesses with higher-paying jobs, to stimulate the economy, McKenzie added. Jobs are less of an issue in Southern Nevada. The explosion of jobs there, particularly as a result of the Strip developments, will continue to fuel growth, fill homes and help turn around the market.
What to Expect
In Southern Nevada, land costs likely will remain static or continue decreasing slowly throughout 2008. “I think things are going to deteriorate further, and land prices will continue to drop through 2008,” Stewart said. Land prices may even decline further than they should due to people being overleveraged, undercapitalized and struggling to hold out through the downturn, he added.
In the next year or so, Southern Nevada won’t see a lot of new retail development, Stewart predicted. The shift from soft goods retail (clothing and luxury items) to hard goods (necessity-based such as grocery and drugstores) will continue. New industrial will continue to be built, however, a shift from spec building to more pre-leasing will likely occur. Office product development will continue to decrease.
The commercial real estate market likely will rebound in the next three years. “There will be more land activity as development kind of kick starts again,” LaPour said. “I think for the time being we’re probably at a pretty good place.”
During 2008, Northern Nevada land prices likely will follow a pattern similar to that in its southern counterpart. “Throughout the next year, I think land prices will stay the same, maybe slightly dip,” McKenzie said. “Some of the land in the $20- to $25-a-square-foot-range will come down in price.”
Commercial development likely won’t pick back up until the end of 2009 or the beginning of 2010, Rowe predicted. “The market’s office and industrial segments likely will slow. However, we’ll see some development in terms of traditional business hotels,” he said.
“I’m thinking that we’re getting close to the end of the downturn, at least on the residential side,” Rowe said. “I believe it’s going to be slow coming back, but every downtown seems to work its way out.”