LAND for Development Purposes since 1970

Land is being taken off the market every day and for many reasons. Successful real estate projects hinge on land. Land prices didn’t reset during the recession. What happens now?

Over the past 45 years, the US population has increased by 100,000,000 people. Over the next 40 years, our population is expected to increase by 120,000,000.

With land being a limited resource, where will all of the people live? How will they live?

We must reflect first on land as the key to answering these questions.

In most markets, “all” of the good land* is gone. So now what?

* Good land in my definition is land void of regulatory constraints. It may have physical constraints and land form characteristics which makes development difficult but we find ways to resolve these issues. We are however allowing government to restrict the use of land through regulation.

The land area is used for a variety of uses. But let’s begin with the fact that the Federal and State governments own about 39% of the land in the United States.

The Departments within the Federal government include:

Department of Agriculture i.e. National Forests
Department of Defense i.e. Military Bases
Department of the Interior i.e. National Parks
Department of Justice i.e. Prisons
Department of State i.e. International boundary between the US and Mexico
Department of Transportation i.e. FAA

About 60% of the land is privately owned; 1% foreign ownership

The U.S. land area totals nearly 2.3 billion acres. Land cover in 2001 included:

Source:

Multi-Resolution Land Characterization (MRLC) consortium (a group of federal agencies)

                                                                        Percentage

Water                                                              5.2%

Perennial Ice snow                                         0.02

Low Intensity residential                             3.2

High Intensity residential                            1.39

Commercial/Industrial/transportation        0.54

Developed high intensity                            0.19

Bare rock/sand/clay                                      1.19

Deciduous Forest                                        11.05

Evergreen Forest                                        12.11

Mixed forest                                                  2.12

Shrub/scrub                                                 21.24

Grasslands                                                  14.31

Pasture/Hay                                                  6.8

Row Crops                                                   15.54

Woody wetlands                                           3.88

Emergent Herbaceous wetlands                  1.24

Today, do you have the impression that we are running out of land for real estate development projects serving the population? If you do; you are wrong. We have plenty of land but government is slowly removing land from real estate use.

 

The changes from decade to decade:

 
 

1970’s  - no problem finding land in urban, rural or suburban locations at reasonable prices and with reasonable land owners because government oversight is only beginning. Reston, Columbia and Irvine Ranch started the planned community approach and branching away from Levittown which moved the homeowner to the suburbs but left the commercial/retail/office in the city.

During the 70’s, the biggest problem was sewage treatment plants and the moratoriums established by government until the Clean Water Act amendments passed.

The most important due diligence issue was the availability of public water and sewer.

The Federal Water Pollution Control Act of 1948 was the first major U.S. law to address water pollution. Growing public awareness and concern for controlling water pollution led to sweeping amendments in 1972. As amended in 1972, the law became commonly known as the Clean Water Act (CWA).

The 1972 amendments:

·    Established the basic structure for regulating pollutants discharges into the waters of the United States.

·    Gave EPA the authority to implement pollution control programs such as setting wastewater standards for industry.

·    Maintained existing requirements to set water quality standards for all contaminants in surface waters.

·    Made it unlawful for any person to discharge any pollutant from a point source into navigable waters, unless a permit was obtained under its provisions.

·    Funded the construction of sewage treatment plants under the construction grants program.

·    Recognized the need for planning to address the critical problems posed by nonpoint source pollution.

 

Each of the above amendments changed our real estate development patterns.

 

The motto for builders was “Where will our Children Live” – the home builders piled 2 x 4’s on the corner of 15^th & M Streets NW Washington DC with the slogan. Also because of the wastewater treatment plant issue, there was a movement to find alternative sewer solutions which led to a concentration on private systems. This opened up more land for development since home buyers had limited choices in some markets.

As you know, I follow new housing starts as my guide to assess the health of the economy. As each decade unfolds, the economy ebbed and flowed. However, to give you a benchmark, in the 70’s, we were in a recession, however, at the peak:

Prime Rate                            12%

SF Housing Starts               888,100

US Population                      213,300,000

Home Ownership Rate          64.4%

 

1980’s - not much changed in land at the beginning of the decade. We were in another recession with and suffering from “stagflation”. Regulations were only ramping up and with 18% interest rates, building homes became problematic. The recession in the early 80’s was the worst for home building and real estate development until NOW. 

As the Regan administration changed course, we started to see the home building industry blossom more from a cottage industry to regional and national builder presence – more than any previous decade. Land availability and restricting the use of land were not an issue.

Prime Rate                            20.50%

SF Housing Starts               705,400

US Population                      229,500,000

Home Ownership Rate          63.9%

The industry started to see product changes i.e. zero lot line housing, small lot single family detached homes but land availability was not an issue. However, the implementation of the Clean Water Act amendments started to infiltrate into local jurisdictions through government regulations. The expansion of wastewater treatment plants and the extension of sewer trunk lines opened up areas in and around most major markets.

In the early 80’s, the housing market was at a virtual standstill but as the decade progressed and the housing market started to heat up.
 

Another major component in developing land is access. The authorization of the Interstate Highway System in 1956 opened up locations otherwise bypassed. It took awhile to achieve results. It was not until 1974 did the first state complete their interstate highway system. In the ‘80’s, the funding for interstate highway construction was close to a trillion dollars setting the stage for developing land  

Unfortunately, as the housing market started to gain traction, the financial meltdown of the Savings & Loan industry was setting the stage for another recession.

 

1990’s – the era of regulation!

                              

                                              Early in Decade                    End of Decade

Prime Rate                            10.00%                                   4.75%

SF Housing Starts               840,000                                  1,300,000

US Population                      253,000,000                          288,000,000

Home Ownership Rate            63.9%                                   67.5%

 

It was clear at the beginning of the 90’s, the economy was in a serious recession but by the end of the decade, real estate development was at full throttle. I will talk more about the regulatory change in a subsequent blog post but during the decade, there were three national policies that significantly affected our industry for years to come…….and still are!

1.  The Urban Homestead initiative is part of the National Homeownership Strategy launched by President Clinton in 1995. The strategy brings all levels of government, the housing industry, lenders and non-profit groups together to increase the national homeownership rate.

2. The President's Council on Sustainable Development (PCSD) was established by President Clinton in June 1993 to advise him on sustainable development and develop "bold, new approaches to achieve our economic, environmental, and equity goals."

3. The United Nations Conference on Environment and Development (UNCED), also called the Earth Summit, took place in Rio de Janeiro, Brazil, in June 1992. Agenda 21 addresses the critical issues we face as a global community: continuing damage to ecosystems, the worsening of poverty, hunger and ill health, increasing world population and illiteracy. Agenda 21 is composed of 40 chapters that identify each challenge and propose simple realistic solutions towards sustainable development.

 

The Savings and Loan disaster was handled by the Resolution Trust Corporation in disposing of land assets held by S & L’s. From the perspective on Main Street, this approach worked well.

With the population increasing exponentially and with the policy to increase homeownership, the real estate industry started to gain traction. The baby boomers were also in full force during the ‘90’s buying homes, changing jobs to climb the corporate ladder, moving from location to location and expanding our non-residential real estate needs. Everything was good as we entered into the new millennium.

 

 

2000 – 2010 – we started the decade with optimism but everything changed on September 11, 2001. The country stopped. We entered a sharp but brief recession.  Housing hesitated but continued to thrive.

 

Year                            Single Family Housing Starts

2000                                       1,230,900

2001                                       1,273,300

2002                                       1,358,600

2003                                       1,499,000

2004                                       1,610,500

2005                                       1,715,800  (the peak and then the fall)

 

2012

Prime Rate                            3.25%

SF Housing Starts               800,000

US Population                      314,000,000

Home Ownership Rate          65.3%

 

In my opinion, housing did not reset during the recession and the ‘bubble” was magnified with a “false” market fueling builders to build.

Every previous recession reset housing prices and families were underwater but it was not an issue because homes were purchased as a home to raise a family and become a member of a community. This decade, being underwater meant the loss of equity and a destroyed investment.

Land remains plentiful but regulatory policies are taking hold at all levels. Also, land prices did not reset after 2005 except for those land owners that needed to sell. Since the mid-90’s, land has become a diminishing resource as a direct result of government interference and regulation. Since 2008, the real estate development industry has come to a virtual standstill. Of course development continues because that is what developers/builders do but at greater risk and uncertainty.

So, we do not know as yet the full affect government has had on the industry and land while the industry strives to survive. And, now the future

 

2010 – and beyond – if you have been following my blog posts over the past two years, land is available and well located property will sell.

My guess:

1. there is an over-supply of “finished” lots in subdivisions which will satisfy the housing demand in the short term. The need for land to fuel new projects will be minimal in the short term. Companies without the financial capabilities or vision will not be in the best position when the economy improves

2. there are plenty of “approved” housing projects on the shelf but many may lack updated permits or not be in marketable locations. The regulatory process will change adding more time from acquisition to being shovel ready.

3. housing prices will continue to rapidly escalate

4. building materials and labor shortages will be problematic for the industry

5. government regulations restricting the use of land have been increasing while the industry has been striving to survive

6. inflation is here and will become more of a significant problem forcing an interest rate dichotomy.   

7. pent up demand exists today

8. housing demand will escalate as family formations increase and as more jobs are created

9. the current lack of supply of existing homes on the market and the lack of new home construction will further stress the industry

10. the role of government in real estate development will change as the decade unfolds

11. the foreclosure shadow inventory will continue to be problematic for the industry and affect prices

12. the Fed has indicated the prime rate will stay low through 2015 --- really!

13. non-residential projects will still follow roof tops

We are entering into uncharted territory.  However, the history of the housing industry and the economy gives us a glimpse of what could occur during the balance of this decade.


Here is my guess:

 

Land will be further restricted by government

 

Land prices will increase

 

Home prices will increase

 

Demand will increase

 

Inventory will remain low

 

Interest rates will rise

 

Material and labor shortages will hinder the industry

 

New home starts will not be able to keep up with the demand

 

Inflation will continue to rise

 

The economy will improve slightly but still stress all of the above

 

In my opinion, as housing goes so goes the economy. Thus, in my opinion, the future is not so bright in the real estate development industry. This is opinion is completely contrary to my outlook coming out of the last four recessions.

However, it is an excellent time to buy real estate; especially land!

Plan for the worst and pray for the best.