VACANT LAND MARKET OVERVIEW

STATISTICS, NEWS AND ANALYSIS OF CURRENT LAS VEGAS LAND VALUES

Source: Applied Analysis/In Business Las Vegas

The supply and increasing cost of vacant land in the Greater Las Vegas Valley is having a major impact on developers of all types of real estate in the market. A recent article entitled “Land Owners Remain Unwilling to Drop Prices”, In Business Las Vegas, Week of February 2 – February 8 provides insight into the current vacant land market in the valley.

“The demand for land has softened in the Las Vegas Valley as property owners continue to hold out for prices that speculators and developers, especially homebuilders, are finding less and less palatable. That's the assessment of Brian Gordon and Jeremy Aguero, principals of Applied Analysis who this week released the latest figures on land transactions. Demand dropped sharply in the fourth quarter, down nearly 68 percent from the same period in 2005 and off 33 percent from July through September of this year.

But for those properties that are selling, the average price per acre rose 25 percent in 2006. Gordon and Aguero said that kind of continued escalation seems unlikely for now (outside of the resort corridor) because prices and rental rates for developed property make it difficult for developers to proceed with projects at the elevated land prices. Investors and developers are looking for lower-priced, in-fill properties for higher densities in mature parts of the valley, including the northeast, while foregoing higher-priced land in the northwest, southwest and southeast in Henderson, Gordon said.

"I think there is less speculation going on in the market," Gordon said. "It is similar to other sectors of the real estate market. The price points have made financially feasible projects much more challenging. Developers have been forced to sharpen pencils."

Because of the slowdown in the housing market, builders have less demand for vacant land. Many builders announced last year that they dropped out of deals to purchase property. With that, there will be more and more speculators and homebuilders searching for land in outlying areas such as Pahrump and Coyote Springs, where prices could be 10 percent to 25 percent lower, Gordon said. More people are willing to accept longer commutes for more affordably priced homes, Aguero said.

Even though transactions have tapered off, especially in terms of residential property, there still remains a strong demand for land for commercial use, Gordon said. "Speculation, increased development densities and relatively low interest rates in some cases outpaced concerns over a potential housing and real estate bubble," Gordon said.

The $782,300 per-acre price paid for non-resort property between October and December was up 17 percent from the preceding three months and 24 percent from the fourth quarter of 2005 when it was priced at $628,600 per acre, Applied Analysis reported.

Sellers aren't getting the prices, however, that they believed they would get six to 12 months ago, Gordon said. Anyone who bought property recently isn't willing to cut prices to take a loss, but property owners who have a lot less invested have been unwilling to cut prices even though they could do so. "We see a similar concept in the resale home market where home sellers are unwilling to cut prices and buyers are unwilling to pay premiums at the moment," Gordon said. "Over time, that should correct itself."

Several land owners have been seeking high density valuation for their properties, many of which are no longer feasible because only so many mid-rise and high-rise projects can be built, Gordon said. But he added that "reality may be setting in for many of them" over what they can charge.

Vacant property suitable for neighborhood retail shopping centers will see more stable prices given that high-density residential and mixed use isn't feasible at every location where it's proposed and entitled, Gordon said. The price per acre was actually much higher in the fourth quarter at $1.2 million but that number is skewed by the $279.9 million sale price for the former Westward Ho site on the Las Vegas Strip.

Metrostudy, which provides data to the housing industry, reported that while growth slows for the country as a whole, the Las Vegas economic picture looks positive, especially for the long-term health of the housing market. But the company says homeowners shouldn't expect double digit appreciation - a fact much of the decade - won't return anytime soon. The housing market continues to work through high inventory.

Las Vegas added 45,900 jobs in 2006 with growth in those sectors that are higher paying, said Josh Seime, manager of Metrostudy's Las Vegas division. The firm reported that vacant developed lot inventory remained abundant. At the end of 2006, there were 34,066 vacant developed lots, an increase of 11.7 percent compared to 2005. Based on annual starts, that level of inventory represents a nine-month supply of finished lots, Seime said.

Metrostudy said it expects the Las Vegas market will remain highly competitive for the foreseeable future as consumers have many similar options when it comes to purchasing a home. "In the face of reduced demand at current price points, builders have pulled back on production in an effort to move units off their balance sheets," Seime said in his report. "On the bright side, the Las Vegas economy is strong and the fundamentals of demand remain in place - both which are positive indicators for the home-building industry. In order to expand margins from current levels, market strategies will need to evolve to reflect market conditions."

The C B Richard Ellis internet website provided the following additional information regarding vacant land in an internet publication entitled “Market View: Las Vegas Industrial – Fourth Quarter 2006”:

- “Industrial land in the Las Vegas area remains very scarce and expensive. “

- “Land prices will continue to plague us in the upcoming year, until developers in both the public and private sector find solutions to these problems”

- “Most of the remaining land in the valley can be found either in the Southwest along the I-215 and along Blue Diamond Road or in the Northeast around the Las Vegas Motor Speedway and in the vicinity of Nellis Air Force Base.”

- ‘According to Donna Alderson, Senior Vice President for CB Richard Ellis, “This dwindling supply and strong demand for industrial space has pushed the median price of industrial land to more than $10 per square foot increasing more than 150% since 2000.” ‘

- “With the housing slow down there may also be some relief for the industrial market due to the decline in demand for residential land. “

USA TODAY reports that Las Vegas is running out of fee simple land, and that available acreage may be gone in less than a decade at the current pace. Las Vegas, home to 1.8 million residents, will add more than 1 million residents in the next 10 years, the state estimates, and hit 3 million by 2020. Developers who 15 years ago paid less than $40,000 per acre for land are paying more than $300,000 today. A 1998 law that grew out of a legal settlement allowed the BLM to sell land it owns inside Clark County. About 75,000 acres were suppose to last for 30 years, but two-thirds has been snapped up. The rest is being consumed at 6,000 to 7,000 acres a year. As a result, builders and developers are looking farther out toward Mesquite and Kingman, leapfrogging over BLM land and planning mega developments over 50 miles from the strip.

A May 19, 2007 Las Vegas Review Journal article entitled “Land Holds Its Own” provides additional indications of the stable, if not increasing, vacant land prices in the Las Vegas market. Excerpts from this article are as follows:

“Demand for high-density, commercial property has carried Las Vegas land values through a softening residential market, a local research analyst said Friday.

Raw land values in Las Vegas stabilized at an average of $793,700 an acre in the first quarter, up 13.2 percent from a year ago, Brian Gordon of Applied Analysis reported. Property values outside the resort corridor appear to have held their ground after doubling over the past three years, he said.

"Recently, we experienced a shift in market demand for vacant land," Gordon said. "While the residential market is reporting a material slowdown, the commercial market is sustaining development in the office, industrial and retail sectors, which is offsetting some of the slowdown and potential price depreciation in the residential sector."

Industrial-zoned land remains limited and in high demand, while the office market is experiencing its most robust construction of future supply in years, likely outpacing demand, Gordon said.

Vacant property suitable for neighborhood shopping centers may return to more normalized asking prices as high-density residential and mixed-use development is not feasible in every location that's been proposed or entitled, he said.

Land prices dropped from $1.24 million an acre in the fourth quarter when premium prices were paid in several real estate transactions on the Strip. Excluding those deals from both quarters, prices edged up 1.5 percent.

The closing of recent Strip transactions, including the sale of 26 acres to MGM Mirage for $444 million, will likely be reflected in Applied Analysis' second-quarter land report.

"Overall, land prices are holding steady in Las Vegas," said Dennis Smith, president of Home Builders Research. "It is almost surreal because of the softness of the general real estate market. Given these conditions, one would assume land prices would soften. But they aren't. Yes, they have leveled off and some builders have sold some of their lot inventories, but overall, land prices have not declined as many had anticipated."

The valley's restricted supply of land is definitely the primary factor, Smith said. In Phoenix, where land supply is not much of an issue, the price per acre is sagging badly, he said.

Smith showed the price of residential land increasing 67 percent in the past two years to nearly $600,000 an acre, though the number of land transactions has plunged. He counted 192 transactions in fourth quarter 2006, compared with 497 in the previous year's same period.

John Ritter, chief executive officer of Focus Property Group, said very few land owners are willing to discount prices because they know there's limited land available in the valley.

"I honestly expected some moderating in prices, but we're not seeing that," Ritter said. "We're buyers right now and we don't see any deals. They're not going up, but they're certainly not going down. I don't see the market roaring back, but it's not getting worse."

Available land is a "moving target" with conflict arising between speculators, different users and government, a report from the Lied Institute of Real Estate Studies said.

"There is a lot of talk about available land," one developer said during roundtable discussions for Lied's report on office and industrial development, "but in many cases, we can't find any sellers. You can say there are 1,000 acres available right here right now, but I'd like you to show me 15 acres that are for sale at a reasonable price."

Source: Applied Analysis/Las Vegas Review Journal May 2007