| Roughly one year after the subprime meltdown, the U.S. housing market remains on life support. Sellers are languishing, lenders are squirming and everyone is hesitant to make a move. Meanwhile, as foreclosure rates continue to climb, it remains virtually impossible to foresee an end to the uncertainty.
While the far-reaching weakness of the housing market is palpable, the impact of the housing market on land and development transactions is still difficult to surmise.
Clearly, the overarching theme in today’s development climate is the flight from rural and less populated markets, such as Southern California’s Inland Empire, to more populous areas, which have proven to be safer development plays.
Additionally, a climate of conservatism has swept across the market, with many preplanned projects being shelved until the developer can gain a better grasp of the market. Thousands of homes are still planned for development, but it will be years before we see shovels in the dirt.
Moving away from the residential market, several commercial product types continue to prove viable, particularly industrial development and some retail projects.
No matter what the project, cash is the most valued commodity across all product types. Larger firms with strong financial statements and a solid cash position are still able to obtain long-term financing, some of which may be needed to for a protracted development schedule. It is these deep pocketed companies that have the autonomy to enter down markets with lenders in disarray and basically take on any project they see that has value.
The prevailing theme of today’s market is “location, location, location.” Unfortunately, the best locations are already built out, with infill often serving as the last viable option.
It is this reality that will encourage many developers to look to brownfield development. Forward-looking developers with the resources to identify and remediate contaminated properties will reap the unique benefit of securing well-located parcels in thriving local markets. And while brownfield development remains a solid strategy for residential development, additional uses such as retail, industrial, mini storage, hotel and mixed use will become more prominent in the immediate future.
Despite the uncertainty in the market, real estate remains the greatest producer of wealth in the United States. Just as it did in the early nineties, the market will correct itself and investment will flow back into the real estate market. Unlike 20 years ago, brownfield development will play a much more prominent role in a developer’s ability to find well-positioned infill opportunities.
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