Depressed land prices still haven't recovered

  • Article by: DON JACOBSON , Special to the Star Tribune
  • Updated: June 13, 2010 - 3:53 PM

There still aren't many buyers for large land tracts, though inner-ring areas are hurting less than those farther away.

Landowners holding parcels suitable for commercial and residential development used to be treated like royalty. At the height of the real estate boom, builders with pockets bulging with cash beat paths to their doors and got into bidding wars that propelled prices to astronomical heights.

It wasn't unusual in those days to see national home builders and deep-pocketed "spec" commercial developers offering up to $200,000 per acre for prime land. It was a golden era for landowners with valuable deeds.

But like so many other aspects of the real estate industry, the reality of 2010 is far different. Landowners -- even those with parcels whose locations put them squarely in the path of development corridors -- are getting far fewer inquiries these days. And even when offers do come in, they're at a fraction of what used to be considered fair.

Complicating the picture for them is that many are debt-laden and facing higher property taxes with no endgame in sight. Thus, land foreclosures that have become more common are likely to continue to this year, according to a report issued by Northmarq Commercial Real Estate Services.

Twin Cities-area land prices in recent months have "remained under significant downward pressure" and will continue that way until at least next year, the firm predicted, saying that many speculative landowners have seen the value of their holdings drop 75 to 80 percent since the 2006-2007 peak of the market.

As opposed to the old paradigm of playing developers against each other in hopes of getting the highest prices, Northmarq said distressed landowners are now resorting to giving single developers long-term, low-cost options on their parcels in hopes that they can find prospective tenants. Under this kind of scenario, developers are able to secure control of key parcels for little or even no upfront costs.

One landowner feeling the pinch of the market is Richard Fischer of Shakopee, who owns what to a layman's eye would seem to be a prime piece of vacant real estate in the heart of Apple Valley's business district along County Road 42, east of Galaxie Avenue.

Fischer's 5-acre parcel is the last remaining patch of vacant land in the Pinnacle Ridge retailing block, which it shares with a Home Depot store and a 25,509-square-foot shopping center that includes a T-Mobile, Anytime Fitness, Milio's and Discount Tire. In the old days, would-be buyers for such a parcel would have been plentiful, but not so now, he says.

And he's dropped the price of it by half. Still "there's not too much action on it," Fischer said. He points to the new White Castle going up in Apple Valley that was four years in the making. "Buyers are still not out there, and with the taxes you have to pay, you can't hold onto the land forever."

The lack of buyers for such a parcel is especially telling of the land market given the upswing in the rest of the area, added Bruce Nordquist, Apple Valley's community development director.

"There are a lot of financing challenges out there now," he said. "What we have observed is that there's been a moderate amount of interest that has cropped up over a long period. In the last year or so, different users have taken a look but have decided, 'No, I don't think so.'"

Meanwhile, landowners hoping to sell to residential home builders -- many of them holders of agricultural land -- are also mainly out of luck, at least compared with the salad days of the housing boom. But there are a few signs that things are improving.

Northmarq noted that in the second half of last year prices for such land were still depressed, predicting, "it will be several more years before there is any significant new speculative housing development -- especially in the formerly fast-growing outer-ring suburbs such as Otsego, St. Michael and Lakeville."

In one such purchase, the firm said, 79 acres of future residential land in Big Lake Township that sold for $40,000 per acre five-plus years ago recently changed hands in a foreclosure sale for $5,000 per acre.

Land broker Brent Hislop of Chanhassen-based Synergy Land Co. said that in some of the more popular Twin Cities markets such as Chanhassen, Plymouth and Maple Grove, the hits to land prices haven't been as severe as in farther-out towns such as Watertown or Elko.

"In the closer-in areas, the land markets are fairly tight and deals involving both national and local home builders are happening," he said. "While the prices aren't as high as they used to be, they're not down by anything like 80 percent. I'd say it's more like 15 percent."

Hislop said home builders in those parts of town are making land buys despite the still-suffering new housing market because their long-existing inventories are finally beginning to dry up.

"The national home builders dumped a lot of contracts in 2007-09 and now they're looking to 2011-12 and realize they're going to have to feed the machine, even if it's only half of what they used to do," he said.

Most local real estate industry players and experts, however, don't believe such hyper-distressed land prices are likely to last forever, according to a recent survey by the University of St. Thomas.

The survey's findings indicated the industry is expecting land prices to rise between now and 2012, which may be good news for landowners but bad news for the prospects of new speculative development.

Don Jacobson is a freelance writer in St. Paul.

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