Doing More with less

Dated: September 15 2019

Views: 312

Land; What it is Good For?

 

Video Introduction by Gregg

http://vid.us/nxhmgr

 

Today I want to focus on a trend.  This trend has been evident to me since I have been in business, mostly in the manufacturing sector.  In the business of real estate we have deviated from this trend in the United States in a major way a few times over the past 90 years.   There has been, however, a pervasive tendency, a movement in a certain direction, which I have been witnessing and profiting from since I have been in business.  This trend simply this:  do more with less.

 

To do more with less has always been a goal in manufacturing. The deviations from this mantra were short lived and no more than fads (remember fins on automobiles?). To do more with less; to value engineer; sometimes is contrary to current fashion, or emotional wants, and occasionally we will see extravagances outside of this trend: In houses, look at the McMansion; in automobiles, look to the Hummer.

 

I believe we are now entering a more resolute period where the United States residential and commercial real estate markets will rejoin the trend to economize land, resources, infrastructure, and construction materials.  Indeed there are  companies that HAVE NO PHYSICAL OFFICES AT ALL,  like EXP Realty.   In order to understand the effects of this trend, we need to understand the inner workings of the commercial developer.

 

How do Commercial Developers Buy Land?

 

The price per acre or per square foot means nothing to a developer of a commercial shopping center, an office building, or indeed a residential development until there is a definition of yield.  Yield in a shopping center will give the developer an idea of how many square feet of rentable space he will end up with when he is done developing. After he balances parking requirements, city set back requirements, height restrictions, common area needs, and water retention and rights of way, he will come up with a total rentable (or salable) square feet he can build on this property. In order to maximize his shareholders profits he must maximize the number of square feet he can build and sell.  What he winds up with is a yield number that is expressed as a land load number.  Every square foot of building will have a land load. The property may have been sold to him for $28 per square foot; but his land load may be $80 per BUILDING square foot.  Every square foot of salable building has a load factor of $80. This is before he goes vertical.

 

This load factor is treated differently by different types of developers. The hotel developers want to know their cost per "key"; the hospital developer the cost per "bed"; the residential developers talks of dwelling units (du's).  The higher that the yield is, the more that the developer can pay in total for the land.

 

The land comes with other burdens, however, that will come into consideration. Internal infrastructure is expensive as are county and city concurrency issues. The developer must add to the cost of the load  factor such items as impact fees, road construction, utility hook ups, and municipal set-offs such as fire and emergency medical surcharges.

 

High Density Versus Sprawl

 

In the spirit of doing more with less, the developer must optimize his yield.  He must, for example, build more dwelling units per square acre.  This optimization leads him to higher density projects and less suburban sprawl. This optimization will, logically, lead him to where the infrastructure like roads and utilities exist, and where the allowable density is already approved.

 

Environmentalist and some ill-advised county commissioners think that high density is not good for the city or for the environment.  They are wrong.

 

Consider these two alternatives:

 

•1.       Big Boy Developers can take 100 acres of green space and build a gated single-family home community and build these homes on half acre lots. With roads and other amenities needed, Big Boy winds up with 100 acres of land supporting perhaps 60 homes.  Big Boy needs to run sewer, electric, water and phone lines to each home. He needs fire department services for this community and a roving security car and a gate attendant.

•2.       Smart Guy Developers, on the other hand, buys the same 100 acres.  He builds efficiently designed four-plexes thirty of the acres and has 300 living units. Under some of the buildings there are retail stores, others have offices. Seventy of the acres are left untouched and natural.  Smart Guy must build fewer utility lines, less roads, needs no security cars or gate, and because of the mixed use, even the residents need fewer cars.

 

 

Infill Option

 

In the boundaries of the city there are parcels of land that we can infill.  Infill developers look for parcels of land surrounded by homes. These infill parcels already have the sewer, water, and other infrastructure needed like roads and fire services. Property like this is generally a bargain because many of the costs associated with what is called "green field" developments have cost loads on them for infrastructure that make them price prohibitive. Furthermore, parcels of property like this already have the entitlements (Zoning, etc) that "Green field" projects do not. This saves money as well as time.  IN THE CITY OF FORT MYERS are infill projects that make great economic and environmental sense - but were fought by some of the city officials.   Some of the densities of these projects in the city are as high as 125 du's (dwelling units) per acre. This is smart growth and should be supported.

 

Because of the attractiveness of infill economics, you will begin to see tear down developments: developers buying old, rundown areas and rebuilding them. You saw this in East Fort Myers with The Oasis.

 

Land, What is it Good For?

 

Land; wars have been fought for it, nations built with it, and blood shed on it.  Land gives us fuel, food, water, shelter, and security.  With the return of World War II veterans and their insatiable need for housing, the United States began its long love affair with suburbia. Furthermore, with the decline in agricultural business and the emergence of the automobile as the major source of transportation;  living in the suburbs became the American ideal.  For the United States, at least, this was a reversal of the long term trend of urban growth. The decline of the small farmer and the increase in manufacturing headquartered in the cities brought urban growth in the past, but since mid last century we have seen urban populations decline.   

 

This decline reversed with the approach of $5.00 per gallon gasoline, the high cost of infrastructure for development, and the increasing desire by Americans to preserve land while being close to medical and other services.

 

What Does all this Mean?

 

Look for the trend back to urban living. Look for smaller homes on less land. (Look for bargains, by the way,  that buck this trend as sellers turn to the cities and higher density living). There will be more infill projects and more homes closer to services like medical facilities, schools, jobs, and mass transportation. Developers and residents alike will be "doing more with less".

 

 

Greg

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Gregg Fous

Real estate has been my passion since I took my first Al Lowery class on real estate investing in the 1970’s. I vowed during that class that I would buy one property a year. Over the next five ....

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