Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674
Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.
What is a good deal in today’s market? While we continue to see opportunities at “distressed” pricing, what exactly does that mean? Real estate doctrine concludes market value is a function of willing seller – willing buyer. In the current market dynamic the willing buyer has been replaced with the “opportunity buyer” (a.k.a. vulture) and while willing sellers exist, the current market is providing a multitude of financially insolvent people or projects that require disposal on someone else’s terms (not willing). The downward pressure on pricing, forced by the financial woes of some, is affecting the value for all. Therefore, can the deals being done in today’s dollars be considered distressed, or rather, should we consider them an indication of market adjustment and appropriately refer to them as today’s value?
The reality is that distressed assets make up a small portion of the total inventory and there are many more factors in determining market value. Just as sales of foreclosed homes are putting downward pressure on median home price thus effecting residential land values, increases in commercial sector vacancy and sublease availability are driving down rents and negatively effecting asset values. Couple that with the underwriting criteria and return expectations of today’s buyer and it becomes a game of “how low can we go”.
For example, a quick review of Q3 2007 commercial land activity shows 16 transactions totaling 403 acres at an average of $201, 609 per acre. Compare that to closings in Q3 2008 (Xanax please) adding up to a paltry 3 for a measly 13 acres at a dismal $92,291.
Since no one is willing to stake their reputation on whether we’ve actually hit the bottom of the current market decline, when is the right time to buy? The reality is that the bottom is not realized until we’ve passed it and are headed back up. For this reason, purchases should not be timed on corresponding to a perceived bottom but rather a fair and objective evaluation of the opportunity in current terms and expectations.
The current market conditions have led to an explosion of private equity opportunity funds creating intense competition. This leads us back to the situation of willing buyer and not so willing seller. Most of the perceived deals currently in the market involve a lender. Therein lies the problem, between loan officers transitioning to asset managers and the fear of a surprise knock on the door by the FDIC, the industry is in flux (understatement). Further complicated by the federal bail out discussions, banks can’t decide what to discount, how much to discount and when to get it off the books.
This uncertainty is leading to a new trend in lender-involved opportunities through loan acquisition. The assumption is that lenders would rather unload the nonperforming loan (at a steep discount) rather than go through the foreclosure process. Once the note is secured, the investor (new lender) then obtains the property through foreclosure while removing any secondary debt and equity on the part of the owner. As it relates to declining land values, this process helps adjacent properties by not actually proving a comparable sale.
Where does this leave us with respect to quantifying market adjustments and current land values? It is nearly impossible to quantify the actual market adjustment in terms of percentage decline per industry sector, however, I offer the following observations: Based on transaction volume, buyers appear optimistic with residential land adjustments while commercial land transactions have slowed considerably as vacancies continue to rise; The rural communities are taking a beating with affordable options returning to the metro area; Land values have become very specific to submarket offerings and activities.
Some would relate the recent land value roller coaster to the stock market (ironic that both are causing such despair); however, I would submit that having a tangible asset in today’s market provides a certain sense of security.
This article was printed in the December 17, 2008 issue of the Nevada Red Report and can be found online at www.theredreport.com.