Last year, Doug Jorritsma, senior marketing consultant for Park Place Partners, a large residential land realty firm in Irvine, Calif., thought he found a way around the morbid Southern California residential land market.
Instead of trying to sell into a dismal residential market, Jorritsma brokered the sale of two tracts from Young Homes, a custom builder based in Rancho Cucamonga, Calif., to industrial buyers for three to four times more than he may have otherwise gotten from residential buyers. In the first deal, Jorritsma sold 725 lots in Oakmont; in another, he sold 1,154 lots in Hillwood.
"There have been no residential buyers since late 2005 to early 2006," Jorritsma says. "Where else would you find a 200- to 400-acre site that could go as industrial and wasn't in traditional industrial neighborhoods?"
On the surface, it seems like an obvious way out for many residential developers. The single-family housing market has come to a grinding halt, with land now being sold for 10 percent or 20 percent of what it was once worth. Left with the choice of either accepting the lower price or holding the land indefinitely, many developers are drawn by the appeal of converting lots or selling them for some other use, particularly in light of the fact that the commercial and industrial sectors are foundering far less than their residential counterparts.
"In today's market, if it's close-in industrial, there's absolutely an exit strategy," says Richard Gollis, principal for The Concord Group, a land advisory firm based in Boston. "There is no homes market. It's a move toward the highest value, if you can change the zoning."
Unfortunately, no matter what the current or future use of land may be, a sale may never take place. In this economy, any kind of land deal is difficult.
In many ways, rezoning today is easier than ever, thanks to local governments eager to support new revenue-generating or job-creating projects. With the residential run-up, Paul Grover, managing partner of Strategic Land Advisors, a land advisory firm in Irvine, Calif., says many cities have had to adjust.
"Now that residential land values have collapsed, a lot of land use plans need to be revisited," Grover says. "The market originally entitled is not there."
Changing the zoning will be substantially easier in cities desperate for tax revenue. "Cities like retail because of the taxes off of sales," Grover continues. "Cites will probably embrace retail because most of them are looking for job creation. It makes the general plan look good."
What's more, since cities have less to spend on support and infrastructure services, any development that alleviates pressure on the local government will be welcomed. "If you're not impacting residences, you have a good chance of getting the city to agree," Grover says. "The impacts would be less traffic, less fire, and less police [than in a residential zone]. You're creating jobs that the cities want to provide."
The reality is that, at a local level, the only real hurdle may be neighborhood groups. Business parks mean trucks on the road, which can frustrate nearby residents. "If you have land that's zoned industrial and it's surrounded by residential, the people who live there will be opposed to the change, primarily because of noise and traffic," says Barry Gross, another partner at Strategic Land Advisors.
As such, Gross recommends reminding those citizens that new out-of-town workers could actually add to their tax base and contribute to the local economy. "If you have people who work in your town, they shop in your town," he says.
Although more and more municipalities seem amenable to the idea of rezoning residential lots to other uses, there are dozens of hurdles today. And getting the lion's share of the blame is the economy.
In fact, with job formation slowing and economic growth stagnating, there may be little need to deliver retail, office, or industrial space. "You end up with too many commercially zoned properties," Grover says. "In my opinion, there's been more commercially zoned property than the market would allow for."
Jorritsma believes the residential land market plummeted 18 months to 24 months prior to other sectors of real estate. Now, he's even seeing some of his rezoned deals fall apart. The reason? The capital markets clogged up and Wall Street panicked, making financing for any land sales difficult.
"It was a fun little run there for awhile," Jorritsma says. "Absent this meltdown, we were poised to be doing a lot of activity."
Jorritsma's only consolation is that he was able to close a couple of deals before the financial market missteps. "Others had the same idea [to rezone] later, but by the time they got around to it, the bloom was off the rose," Jorritsma says. "We count ourselves as fortunate that we could get them done. We couldn't get them done today."
Before You Act
Four steps to take prior to rezoning in today's market.
Rezoning your residential property as commercial, office, or industrial use may look enticing-especially with growing government support. But before you make the jump, Paul Grover, managing partner of Strategic Land Advisors in Irvine, Calif., says there are four things you need to do.
1) Quantify Demand. Commercial and industrial uses may look appealing, but you need tenants. "Before land owners decide to go from residential to a business park, they need to make sure the demand exists," Grover says.
2) Know the Competition. Even if there's demand in the area, there may be a backlog of supply at other business parks that will doom a transition. "You need to back it up with the rents that will be there relative to other existing areas with established business parks," Grover says.
3) Sign Tenants. The best way to ensure you have tenants when you open is to have them when you break ground. "You want to sign up your tenant, get them committed, and then submit applications for zoning changes," Grover says.
4) Don't Count on the Chains. Just because you have land at good prices, it's not a given that major chains such as Home Depot will be interested. "Tenants don't look at land prices," Grover says. "The last thing a retail tenant would do is buy land at a price they thought was a good deal and then see their competition buy a superior location."
Les Shaver is a senior editor for DEVELOPER magazine.
Learn more about markets featured in this article: Los Angeles, CA.