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Overview of Multifamily Developer Land Rush

12/23/2014

In certain parts of the country there is a definite land rush for multifamily developers. New York is a prime example of this, with close to $2 billion of land being purchased in Brooklyn alone in 2013 in an effort to meet growing demand.

Brooklyn Property Sales

Year-over-year, sales for development site in Brooklyn have increased 21 percent but in addition, properties that traded was up 35 percent to 520 and dollar volume pertaining to those trades climbed 45 percent to $1.8 billion. However, in addition to Brooklyn, other nearby neighborhoods also experienced growing demand.

As indicated in Real Estate Weekly, multifamily transactions for Brooklyn year-over-year jumped 44 percent to 657. For the number of properties that were sold, an increase of 36 percent to 760 was recorded. Also rising was dollar volume of trades to $1.9 billion, up 29 percent. Because of increased demand, pressure was put on pricing that in turn caused average cap rates to drop last year 5.75 percent.

Multifamily Rent Increasing

Gross rent for multifamily properties also rose in New York, going from 9.26 to 11.24. Overall, emerging areas in Brooklyn during 2013 led to a sharp increase of price, which for 2014 has not let up. Of course, New York is not the only state experiencing a land rush by multifamily developers. States like Colorado, California, and even Delaware are in much the same situation.

It appears that collectively, banks, builders, and developers believe that prices for land will not decrease or if they do, it will be minimal. With current prices still low enough to make money, even on lower priced homes, the rush to snatch up land has become intense.

Is Buying Land Risky?

Historically, buying land has been a better proposition during times when home prices could bail out a deal. However, the risk is that after these homes hit the market, builders lose pricing power since existing home prices keep dropping in many areas of the country and the number of foreclosures is still going up.

Regardless, buying may be the only option some builders with little land and those interested in building homes have. Leading the recent charge are public builders who wasted literally billions of dollars during the recent financial crisis. Now, some of them want to restock the supply of land.

Finished Lots

For the majority of builders, finished lots are more appealing than raw land is which is causing these plots to gain more attention. Many of these parcels are perfect for building starter homes but also near to employment centers but along with these are stifled subdivisions.

For example, in the Inland Empire, 30 companies bid on 96 prepared lots, each sold for the asking price of $105,000. Another deal involved 77 lots in Sacramento California that received so much attention that after getting an offer of $103,500 per lot, the developer decided to build homes after lots nearby went for just $67,000 each.

Throughout 2013, developers experienced a land rush specifically for multifamily properties with the same trend occurring in 2014. While there has been some income gain, currently people do not make enough money to save for the down payment needed to purchase a home, leaving them with the only option of renting.

Developers are aware of this and to secure land needed the rush in on. This includes virtually every level from lower end to expensive rental properties.

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