The Dirt on Acquiring Land

 

Sourcing land to developers is changing

 

Land is a hot commodity—whether it's buying a blighted corner in the Twin Cities and redeveloping it into a retail center or snapping up hundreds of acres in a fourth-ring suburb for a massive planned unit development.

 

While land plays a significant role in any new development, striking differences exist between developing in the Twin Cities' inner loop—within or near Interstate 494/694—and developing outside the loop.

 

ISSUES FACING THE INNER RING

Because the Twin Cities is a mature market, there's a lack of developable sites in or around its I-494/694 loop. Take industrial land, for example. The reserves of undeveloped land inside or adjacent to the core have decreased to approximately 70,000 acres, according to the Metropolitan Council, and not all is earmarked for development (some will be parkland and other uses). The metro area, the Met Council reports, has lost 60% of its reserves of industrial land inside the loop compared with 30 years ago as a result of industrial development and parcels being rezoned for residential and retail uses.

 

This shortage of developable land means competition for available parcels is heating up, and the cost of land is rising for all property types and uses.

 

"Land prices are going up in the inner ring," says Mike Sims, vice president, retail leasing at United Properties. "It's a seller's market if you can get people to sell."

 

In retail, Sims says some landowners are negotiating ground leases rather than selling. (A ground lease is building where the land underneath is rented.) "We're doing more ground leases than we've done in years," he says. "There's enough demand that landowners don't have to sell. Although a developer usually prefers to own land, if they don't want to 'play,' somebody else will come along who does."

 

 

WORKING WITH CITIES FOR APPROVALS

In the inner ring, developers also face city officials who are very selective in how development/redevelopment is occurring in their communities. Sims says cities are putting added pressure on developers to build fancier, more expensive mixed-use projects, which may include retail, housing and senior components.

 

"We've seen a dramatic change in the past five years in cities' taking strong positions in how they want developers to incorporate more of an urban, mixed-use, pedestrian-friendly component," Sims says. "They simply won't approve plans for a prototypical, freestanding retail building. They want it to be part of a larger planned unit development (PUD). They're forcing the hand of the developer/retailer to do a little something extra special."

 

Sims points to Wellington's mixed-use project at Lexington and University avenues in St. Paul and Gene Haugland's retail/housing development at 50^th and France in Edina as examples. He also says in St. Louis Park, Excelsior & Grand's second phase will continue to include urban architectural features, and city officials will keep their "feet to the fire" to ensure it ties into what's already developed there.

 

"It's becoming more of the norm rather than exception, and we're seeing that trend all throughout the market," Sims says. "It's not going away. Cities are being tough, and these developments are very expensive." Sometimes tax increment financing is available, but oftentimes it is not, which can make development on certain sites unfeasible if the expectations of cities and market dynamics cannot bridge the gap. (See Community Perspective: Bloomington)

 

 

ARE RETAILERS SUCCESSFUL IN MIXED-USE PROJECTS?

While some may claim that adding a housing component to a retail project provides a built-in customer base, a retailer is not building in a location solely for the 15 units of housing above it, Sims says. "The benefit is minor to the retailer, but if that's what's needed to build a store and if it's a great location, a retailer will bend. It's clearly market-driven."

 

However, he adds that land, project and architectural costs are all part of the bottom line as to what makes a site viable for a retailer. "It's clearly a function of what stores will do in sales," he says.

 

MAINTAINING INDUSTRIAL SITES

Over the years, a significant amount of industrial land in the Twin Cities has been rezoned and acquired for residential and retail uses. However, United Properties sees that trend shifting.

 

One example is in Plymouth where CSM is redeveloping the former Dana-Spicer site at Highway 55 and Vicksburg Lane into Shops at Plymouth Creek. Sims says it took two years to convince the city to rezone the site from industrial.

 

"The city didn't want to lose the industrial zoning because of jobs," Sims says. "They were really reluctant—this is not a trend they're going to support further."

 

Tom Noble, United Properties senior land associate, also sees a shift away from rezoning industrial land in the outer ring. "During the past few years, we have had this attitude that there was pressure to change land from industrial to residential, but I sense the opposite now," he says. "I think cities are more cautious of mass residential developments. Cities don't want to give up their commercial base." (See Community Perspective: St. Michael)

 

 

RESIDENTIAL HAS PEAKED, CORRECTION TO FOLLOW

The Twin Cities residential market has peaked and is flattening out. According to a Star Tribune article(1), home construction activity in August experienced its biggest drop in several years, due to a growing number of homebuyers being "stymied by high land prices and concerns about the economy."

 

This is beginning to cause some housing developers to release some of their more tenuous land positions. One builder, for example, dropped a large deal in Rosemount where the price was nearing $3 per foot and the land was still two to three years away from getting utilities, Noble says.

 

Due to increasing production costs and skyrocketing residential land prices, housing developers often entered into contracts at very high prices, and now there will be a correction as they let go of these sites because they just can't make the numbers work.

 

"The market can't support it," says Jon Barthelme, United Properties land associate. "We will likely see the smarter developers and buyers wait and let the market correct itself. Then they'll jump on the land at a more reasonable price."

 

PUSHING DEVELOPMENT TO THE OUTER RING

The shortage of land inside the I-494/694 loop means developers are expanding into third- and fourth-ring suburbs, where there's excess land. Using industrial as an example, the Met Council reports that industrial land outside the loop increased 15% over the past 30 years, and more than one million acres remain undeveloped.

 

However, while some outer-ring land is served by utilities, large portions are not. "We're very short on development-ready land outside the core—whether it's commercial or residential—caused by the [lack of] delivery of utilities by local communities and the Met Council," Noble says. The Met Council is responsible for delivering regional utilities throughout the seven-county metro area.

 

"The land market for commercial development is still hot," Noble adds. "If market demand remains strong and development-ready land remains in short supply, land prices will stay high."

 

On the perimeter of the Met Council's jurisdiction, some large developers are trying to push utilities through earlier than cities had planned. "When you go beyond the inner-ring of the seven-county metro area, like Dayton, which historically has been rural and adverse to development, it's changing," Noble says. "Developers are buying large parcels of land, which may be years out in front of planned utility delivery. The way they effect change is to get control of key parcels of land, get neighbors involved and go to the city. By their sheer size and expertise, they may influence development and accelerate the delivery of utilities." Noble says that this is happening in a number of communities such as Carver where developers are having success planning about 1,500 acres of mixed-use land.

 

MASTER-PLANNED DEVELOPMENTS ARE POPULAR

Developers who buy large tracts of land in the outer ring often pursue master-planned developments, says Jon Rausch, a senior industrial and land broker at United Properties. "For example, developers would prefer to master-plan 300 acres rather than three acres. Under this scenario they go through the city approval process just once, and there are economies of scale in doing a larger development. Also, 300 acres gets the city's attention a lot more quickly than three acres. Mixed-use projects have grown in popularity. Cities like to create jobs, homes, shopping and recreation in close proximity to one another."

 

With thousands of acres of undeveloped land outside the I-494/694 loop, developers are working to gain land control. "It seems that anywhere there is good road infrastructure and utility capacity is a hot spot for development," Noble says.

 

Overall it's important for developers to work with the city early in the process to determine viable options for any site as well as understand the city's philosophy on its future development plans.

 

 

 

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(1) "High land costs put some buyers on hold"; September 14, 2005