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Unreal land elevation
COMMERCIAL REAL ESTATE by Jean Gruss | Lee/Collier Editor
Many landowners from Tampa to Naples aren't lowering prices on large residential tracts, despite the sharp drop in new-home construction. Some say it's just a matter of time before they do.
In late June, Morgan Stanley and Goldman Sachs raised $12 billion from investors for global real estate deals.
Is any of that money going to come to Southwest Florida for land acquisition?
Florida developer Syd Kitson, who with Morgan Stanley bought the 91,000-acre Babcock Ranch last year, says prices will have to come back to 2002 or 2003 levels before large institutional investors will spend money to buy large tracts for residential development. He estimates that's a 20% to 30% drop from current asking prices.
"I don't think people understand how bad the market is," Kitson says. "Apart from Babcock Ranch, we haven't bought anything in four or five years."
Surprisingly, even as home sales have plummeted, landowners in general haven't lowered their prices to reflect that reality. Some have even balked at renegotiating land options they sold during the recent boom.
Dennis Gilkey, the former president of Bonita Bay Group who recently formed Gilkey Organization earlier this year, agrees with Kitson's assessment. "The land prices themselves haven't come down any considerable degree," he says. "It's going to be interesting to see over the next three to six months."
It's the same story up and down the coast. "Tampa and Sarasota are right down there on the index of some of the worst markets in the country," Gilkey says.
Bruce Erhardt, a land expert with Tampa brokerage Cushman & Wakefield, says large tracts of undeveloped residential land are now 50% off their peak prices. "Owners are going to have a hard time," Erhardt says. "They're in a period of denial."
Declining forecast
By most accounts, prices should start coming down substantially over the next six months, as some landowners may no longer be able to afford to hold onto their properties.
"Banks will start foreclosing in the middle of next year," Erhardt says. "Banks don't want to broadcast their problem loans, but sooner or later a guy hasn't made a payment and it's going to become a bank-owned property."
Banks typically sell foreclosed properties at substantial discounts because they don't want to be in the real estate business.
"It's going to be a long, hot sweaty summer for subdivision developers," says Jamie Pirello, who engineered the sale of First Home Builders of Florida to Hovnanian Enterprises at the peak of the market in 2005. Pirello has formed a new homebuilding company that will buy lots in subdivisions when prices fall further. "We are getting packages from landowners who are seeing distress," he says.
But the fact is many landowners are long-term investors and many have the wherewithal to weather any prolonged downturn.
Brian Lucas, vice president of the Bonita Bay Group in Bonita Springs, jokes that investors have been scouting Southwest Florida because they heard there's "blood in the streets." But, Lucas says, they have yet to find blood.
"I don't think anything stops appreciating here. It's just timing," says Rich Sommerville, a land specialist with Coldwell Banker NRT in Naples.
Sommerville, who has been through two real estate downturns in Southwest Florida, estimates land prices may decline 25% from current levels in the near term, though he cautions: "Every downturn is different." A few years ago, land prices were rising 1% to 2% a month, or as much as 24% a year, he says.
"If prices do adjust, there will be a lot of funds that jump in," says Gilkey. "But right now, they're backing off. They don't want to do a dumb deal."
Not all landowners are intransigent.
Alico, a publicly traded agribusiness company with extensive land holdings in Southwest Florida, recently agreed to renegotiate terms of a huge land deal in eastern Lee County with Orlando-based luxury residential developer Ginn Development Co.
In that deal, Alico agreed to restructure contracts with Ginn worth $138 million for 5,590 acres in Lee County in exchange for $7.5 million in cash. Alico also agreed to move back the date on which Ginn was supposed to begin making payments to September 2007 and gave the developer options to extend the payments due to as far out as 2014.
Public homebuilders halt land buys
Publicly traded homebuilders are selling the land they own and writing off options for more.
Meritage Homes, the nation's 12th largest homebuilder, says it has been unable to renegotiate options on lots or acquire any new ones that reflect today's market values. "We have found it difficult right now to negotiate with land sellers," says Michael Belmont, division president for Meritage in Southwest Florida.
However, because so many buyers walked away from home purchases and the builder has seen a 70% decline in closings in the Fort Myers-Naples region, Meritage still has substantial inventory, though Belmont declines to say exactly how much. "All that's proprietary," he says. Reports that the builder is exiting Southwest Florida are untrue, he says.
Larger homebuilders have written off even more land. Hovnanian wrote off $90 million for its First Home acquisition, or nearly one-third of the $350 million it paid in 2005.
Land values are at the heart of the valuation of WCI Communities, which has been the target of billionaire investor Carl Icahn. The company says it has enough land to build 17,000 homes in Florida and has one of the largest portfolios of land of any publicly traded U.S. homebuilder.
Icahn offered WCI shareholders $22 a share this spring, but the company's board rejected it and argued that it could get a better price because of its extensive land holdings. But recently the company's shares closed below $15 a share, indicating investors don't believe the land has as much value now that the residential downturn grips the industry.
Most observers believe only a private equity group could buy WCI because homebuilders are unloading land. However, any investor will want to see a return on the horizon and Florida's current slump doesn't have a clear ending.
Kitson readies shopping spree
Syd Kitson is not stopping at 90,000 acres.
The West Palm Beach-based developer bought the sprawling Babcock Ranch that straddles Lee and Charlotte counties last year and sold 73,000 acres of it to the state for conservation for $350 million, keeping the remainder for future residential and commercial development.
Backed by Morgan Stanley real estate funds and the State of Washington public-employee pension fund, Kitson seeks to replicate his Babcock purchase. He's scouting sites all over the state, but won't say exactly where. "We want to do this on a grand scale," Kitson says.
Already, he's got a contract to buy Murdock Village, an 871-acre redevelopment area in Charlotte County for $72 million in partnership with Morgan Stanley.
But Kitson's shopping list is long.
His company already has acquired 1.5 million square feet of shopping centers around the state in recent months, backed by Morgan Stanley and the State of Washington public-employee pension fund. "Retail is nice, steady cash flow," Kitson says. He'll need the cash flow from shopping-center rents because revenue from residential developments such as Babcock Ranch is years away.
In the next two years, Kitson plans to double or triple the portfolio of shopping centers in Florida. He expects prices for retail space will likely decline as interest rates rise.
Meanwhile, Kitson says residential-land prices are likely to decline another 20% to 30% to return to 2002-2003 levels because of the severe downturn in home sales. "I think they're going to have to," he says. That's when he'll start buying, he says.
Kitson says Florida is not likely to see a rebound in residential real estate for another 18 months to two years, pegging the recovery no earlier than 2009.
Still, Kitson and investors have staked a fortune on the state's long-term prospects. Some real estate experts have pegged his Babcock Ranch purchase at $700 million, though Kitson says the price paid for the company that owned the ranch is confidential.
When it comes to residential real estate, Kitson says he prefers to buy raw land. "I prefer a blank sheet of paper," he says.
He hasn't explored the possibility of bidding for WCI Communities, the Bonita Springs-based homebuilder that's for sale.
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