Robert Grunnah: DFW Land Absorption Report 2015

For many years, our investments/land group has produced a report designed to assist investors in deciding the viability of acquiring undeveloped land for medium- and long-term positive returns. I thought D Real Estate Daily readers would find our latest research of interest. Here is the report, in its entirety.

Inherently, land investment differs greatly from other types of real estate products generally by its inability to produce interim cash flow and its sensitive vulnerability to recurring cycles. The criteria used to determine potential land opportunities, while becoming considerably more sophisticated over the last two cycles, remains principally in implementing four basic strategies.

Perhaps the most important of these is the ability to project and fund ownership long term. Positive liquidity, the ability to sell for an acceptable profit at the optimum market time, can be highly speculative. When the investor is placed in an imposed forced sale position, returns are jeopardized and frequently may result in losses.

We have all learned that real estate is “local” in character. No two markets possess the same dynamics. Location will ultimately best determine value. Values of similar properties will vary greatly in specific submarkets and in different geographical locations. Public perception, while an intangible, plays a large role.

Anticipated use governed by demand, zoning, proximity to infrastructure, interim use, historical absorption, publicly perceived location, and municipal political climate are but a few of the investment points to be considered. Current investment and development activity by informed entities and verifiable market comparables are equally important.

Like most types of investments, real estate is cyclical. Investment success or failure can often solely depend on where the cycle is at the time the purchase is made and the investor’s ability to determine the true state of the cycle. The cliché, “quick to follow, slow to lead”, can prove costly. There has yet to be a final cycle, thus, the ability to hold long term may affect the yield but does offer security.

While the ability to use historical data to project long term value as set out above is logical, many down cycles have been created by artificial, non-real estate related influences that were difficult to anticipate. For example, in the late 1980’s, tax law changes destroyed the market. In the late 2000’s, the subprime collapse did the same. It is reasonable to assume there will be more fragile “bubbles”.

Novus Realty Advisors is a member of the highly respected North Texas Land Council (NTLC), a group comprised of 50 of the most active and talented land brokers in our area. Believing that activity generates more activity, the North Texas Land Council freely shares information with its competing members on a level of professionalism unusual within similar organizations and, as such, is a benefit to all clients. Much of the projected activity displayed on the Novus Land Absorption Map (click on image for larger view) reflects the activities of the NTLC.

The DFW market today is seeing record prices for infill, readily developable sites possessing available infrastructure, permitted anticipated uses, and demand for product. Fueled by extensive population and employment growth, new construction remains at a record pace which is anticipated to continue at least through 2017.

The demand for such sites has not, however, been extended to the outer lying, concentric circle tracts, which remain fairly benign in sales activity and price fluctuation. Understandably, competing investments, oil and gas (until the recent collapse), a vibrant stock and bond market, and the tech world offered a more equitable vehicle to the less patient investor than has investment in raw land as a hard asset. Yet historically, and perhaps ironically, a large number of the most successful, wealthiest investors have made their patient fortunes in land by simply applying these basic techniques.

Our analysis, as displayed on the Novus Land Absorption Map, is principally based on extensive historical data collected utilizing over 100 years of market experience, possessed by NRA’s associates, members of the NTLC, and reliable future projections from sources that have traditionally displayed accurate demographic information.

Depending on which source one desires to use, the DFW market will absorb an additional 1.6 to 2.5 million residents over the next 15 years. Success in real estate investment will be to determine where that growth will locate.

History has taught us that product will be made available and priced based on economics. The cost to provide available product to meet demand will depend on the availability of affordable infrastructure (sewer, water, roads, proximity to employment centers, service commercial, schools, political climate, etc.). Land prices will fluctuate according to such availability. Investing in the right product will produce exceptional rewards.

Some estimate that it requires approximately 12,000 to 15,000 acres of raw land to accommodate one million people in a reasonably confined, socially acceptable, service provided environment. Two million people can’t fit into Uptown.

In conclusion, sophisticated investment must utilize primary criteria, some of which is outlined above. Access to infrastructure—most important water—the admirable effort by our current mayor to utilize available land in our southern corridor, absorption of remaining infill sites, high suburban infill land costs, and the migration of employment centers will all play significant roles in prudent investment decisions. Utilized in the investment process, the only remaining element is patience.