Just as topography varies across the country, so do market trends and land values. Largely a regional business, development land sales are often linked to the local economy and driven by population growth, with values varying widely depending on the location, size, zoning, and potential for development. And yet, despite today’s current economic headwinds, the sector has proven its resiliency, with many markets across the Unites States thriving in a time of economic unpredictability.
Where Money Flows, Demand Persists.
The Sunbelt’s ongoing rapid population growth — particularly from non-Sunbelt businesses and individuals seeking to take advantage of the growing economic opportunities, lower cost of living, and refuge from high tax states — has been a key driver for maintaining the positive momentum seen in the region’s land sales and development. This surge in population coupled with lower taxes has investors and developers keen to place their capital into development opportunities. With nearly 50 percent of the country’s population living across the Sunbelt’s 18 states, it’s no wonder multifamily development has maintained its momentum.
Texas and Florida are both experiencing unprecedented residential development of multifamily and single-family homes to support these fast-growing states. And while multifamily has recently slowed a touch due to the market’s current uncertainty, it’s more a pullback on the sector’s accelerated expansion, bringing it back to historical norms. In the three years preceding the pandemic, 4.4 million new multifamily units were delivered across the U.S. Over the past three years, new construction deliveries increased by 16 percent to over 5.1 million units. The increase is even greater in parts of the country with particularly strong net domestic migration patterns: deliveries in Florida and Texas are up 43 percent and 20 percent, respectively.
The region has also seen an influx of tech firms, startups, biotech, pharmaceutical, and renewable energy companies relocating to the sunny states to take advantage of the lower taxes, favorable business and regulatory environments, proximity to ports and transportation hubs, and access to top talent, all of which has been driving significant industrial and life science development.
The Sunbelt's ongoing rapid population growth has been a key driver for maintaining the positive momentum seen in the region’s land sales and development. In 2022, there was 505.0 million square feet (msf) of new industrial deliveries. One-fourth occurred in just four markets: Dallas/Ft. Worth, Atlanta, Chicago, and Indianapolis. Nearly half of all industrial space currently under construction is in the South region, led by Dallas/Ft. Worth at 75 msf, Atlanta at 36 msf, and Houston at 33 msf, with these three locations together accounting for 22 percent of the national pipeline.
Life sciences markets are more clustered and lab space construction continues to be driven by a handful of large hub markets. Currently, there is 32 msf of lab space under construction in the nine largest life sciences markets, led by Boston at 14 msf, the San Francisco Bay Area at 6.6 msf, San Diego at 4.7 msf, and Raleigh-Durham at 2.2 msf. Renewable energy has further benefitted from the Fed’s Inflation Reduction Act, driving momentum for this alternative asset class. The IRA expanded tax credits for a range of clean energy projects:
- Solar generation projects saw investment tax credits grow from 22 percent in 2023 to 30–50 percent for 2024–2033, depending on emissions measurements.
- Wind generation projects will see production tax credits rise from historical levels of 60 percent back to 100 percent.
- The IRA also added standalone energy storage facilities as a category eligible for investment tax credits, ranging between 6 percent and 30 percent.
Additionally, the LPO’s existing loan program for renewable projects will increase by $100 billion, while there will also be a $5 billion program for updating or replacing existing energy infrastructure. Ultimately, this results in over a sevenfold increase in the typical annual budget for LPO renewable energy loans.
Life sciences markets are more clustered and lab space construction continues to be driven by a handful of large hub markets. With national attention and growing concern around affordable housing, this niche asset class is also gaining traction in spite of the current economy. Regulatory changes and monies are becoming available from the Feds to support improved zoning, enabling more density and removing hurdles to develop housing.
Over the past three years, 160,000 affordable units have been constructed, up 29 percent from the 124,000 completed in the three years prior to the pandemic. All regions have seen significant upticks in affordable deliveries, led by the 35 percent increase in the South region, where 51,000 units have been constructed since Q2 2020.
The Tipping Point
However, like anything else there’s always a tipping point, and in today’s unpredictable economy, even development land is facing its own set of challenges. There are several factors impacting land today, most notably interest rates.
Stable interest rates provide certainty in underwriting and inform the cost of development and how much it can sell for once completed. But in the present interest rate environment, it’s difficult for developers, homebuilders, and even individuals, to make informed, long-term decisions to commit to large investment opportunities.
Developers are having to make concessions, drop prices, and get creative in their financing, plus be in constant communication with their lenders because as interests rates rise, so do the debt coverage ratio and yield required to achieve outcomes that make a project financeable and worthwhile.
Also, as interest rates continue to rise, the pool of developers able to weather this turbulent market is shrinking, leaving only the most experienced and well-positioned developers. These seasoned buyers have deep pockets, years of experience and expertise, access to capital and borrowing power, and a long track record of success. These are the players in the marketplace today who are gaining market share and winning the bulk of the deals — and will continue to do so until inflation and interest rates stabilize.
Wave of Distress: Obsolescence = Opportunity
In a typical market cycle, land would be the first to feel the market downturn and the last to recover. Instead, it’s the office sector and especially obsolete buildings that are feeling the immediate wave of distress. Driven in part by the troubled financial environment, changing workplace dynamics, and aging office product, this era of uncertainty is creating new opportunities.
As interest rates continue to rise, the pool of developers able to weather this turbulent market is shrinking, leaving only the most experienced and well-positioned developers. In a recent study, Cushman & Wakefield uncovered an unprecedented imbalance between supply and demand, predicting a surplus of 330 million square feet of vacant space by the end of the decade. This imbalance, supported by hybrid working and accentuated by a growing quality gap among office assets, is exposing new, alternative opportunities for a path forward, including valuating the land of outdated assets for potential redevelopment opportunities.
On a site-by-site basis and depending on municipality, zoning, and what the future land use will permit, the underlying land value of many of these outdated assets, particularly in the suburbs, will determine the viability for redevelopment into one of the more thriving sectors such as multifamily, industrial, or even mixed-use.
Despite the economy’s current instability and recent banking turmoil, industries will continue to grow, people will require homes, and development of land will inevitably persist and be viewed as a smart hedging strategy in an inflationary environment. It’s ultimately about having staying power, and for those who can weather the storm, reaping the benefits of the sector’s long-term growth potential.
Matt Davis has been with Cushman & Wakefield since 2008 and during that time has primarily focused on assisting clients with the disposition and acquisition of their land and investment assets. He is an Accredited Land Consultant (ALC) through the Realtors Land Institute (RLI) and specializes in the sale of large complex land holdings and surplus land portfolios throughout North America. He has transacted over 138,000 acres for diverse uses ranging from production agriculture and energy to conservation and master-planned community development.Matt is the platform leader of Cushman & Wakefield’s Land Advisory Group, a national team of land specialists that work across disciplines to provide creative solutions to clients with land assets. He graduated Cum Laude from San Diego State University with a Bachelor of Science in Real Estate degree.
John McWilliams is a senior research analyst for Cushman & Wakefield, supporting research for niche asset classes and practice groups such as land, data centers, healthcare, life sciences, legal services occupiers, and financial services occupiers. Joining Cushman & Wakefield in 2022, he has authored multiple thought leadership pieces and worked on several different projects synthesizing and visualizing data on the land, data center, healthcare, and life science markets as well as the overall U.S. economy. He has a deep knowledge of the commercial real estate industry across a variety of asset classes and has previously worked as a research analyst, regional research manager, and consultant within the industry. Currently, John is a member of a team of analysts to ensure the firm’s practice groups and clients are provided the best-in-class market intelligence across all global regions. John is a member of Cushman & Wakefield’s VIP (organization of Veterans) and holds a BSc in Economics as well as a MSc in Economic Development & Entrepreneurship from the University of Houston.
Andy Slowik leads Cushman & Wakefield’s Florida Land Brokerage Team, along with partner and Managing Director Margery Johnson, and co-chairs the C&W’s National Land Advisory Group. Since joining in 2011, the team has completed 125+ land transactions, spanning an array of developments, including single and multifamily residential, global headquarters, hotel, retail, industrial, hospital site selection, office and medical office, and ground leases. Andy holds a Bachelor of Science in Finance and Real Estate from the University of Central Florida.