Though much has been written about commercial real estate development in Texas, not much has been said about the land supporting this development. In this first of two articles, Rockspring Capital’s Jim McAlister IV talks to GlobeSt.com editor Amy Wolff Sorter about land prices, what’s hot when it comes to land, lenders’ views and more.
GlobeSt.com: I keep hearing that land prices are on the rise, especially in so-called “hot” markets. Are we seeing this in Texas?
Jim McAlister: We’re seeing a significant rise in land pricing. But it’s been an unusual market for a number of years. When Texas went into the downturn at beginning of 2008, single-family residential developers were so clobbered in other parts of country, they were in poor financial shape; they wouldn’t consider doing developments in Texas or anywhere else. As developers improved their positions during the following two or three years, land still wasn’t moving in Texas; lenders weren’t lending and developers can’t operate on an all-cash position.
Well, about 1.5 years ago, lenders starting lending to developers building class A, multifamily infill in super urban areas; then we started to see some class A retail going up in highly urban areas. Because of that, it’s only been very recent that we’ve seen pathway of growth land sites move.
Now, when I say land prices have gone up significantly, this is based on almost no sales happening during the downturn, other than some distressed seller selling to an investor at $.25 or $.50 on the dollar.
GS: Are prices going too far, then?
McAlister: Well, unlike the rest of the country, Texas land prices never really got overheated before the downturn. We didn’t have the run-up in pricing like we saw in area like California, Nevada or Florida. In those locations, land traded at price points that didn’t make sense. But in Texas, nothing was priced above reasonable. Then things went down for five years, and the only people buying land were investors. Now land is trading at prices that are at around 20% higher than before the downturn, but at realistic numbers that make sense.
GS: Then it’s safe to say that increasing land prices in Texas won’t slow down development.
McAlister: Not at all. What’s happening with development is similar to what happens when you throw a rock in a pond – you get the ripple effect. The land sales and development started in the inner cities of Texas and now it’s rippling to the suburbs. Pathway of growth land, generally speaking, sees more of a movement in single family residential first, then retail. What we’re seeing now is that mass movement toward single family residential.
GS: What do you mean by “pathway of growth?”
McAlister: Well, if we look like a city of Houston, under normal circumstances, that will urbanize at least 10,000 acres a year; this is land that goes from farmland to finished, developed communities. The land mass of all the cities in the Texas triangle continue expanding and, unlike other areas of the country, Texas has lower density. So as we grow, we expand on the land.
GS: Is there enough land to satisfy that demand?
McAlister: That’s one of the beauties of Texas – plenty of land and water. What allows the Texas cities to keep growing is that they’re forming a bunch of large submarkets. Getting back to Houston, that might as well be about 10 different cities. People who live in various quadrants stay there. Those who live in The Woodlands won’t come to downtown Houston to do anything. That’s the way Texas continues to grow; edge cities growing and little shortage of land and water.
To view the GlobeSt.com story, click here.