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Commercial Land Investment in The Golden Rectangle

Posted by Lance Langenhoven on July 13, 2013
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There are so many projects & developments & roads being planned & constructed that it’s a very encouraging sign for the local economy.

I was meeting with an older gentleman yesterday evening…. he was 81 years old & wanted to sell some commercial land on FM 2978. Around 0.75 Acres & he wanted around $350,000 for it and I think he will get close to that. He had purchased this land originally for less than $10,000. He mentioned another tract across the road that he’d bought for $16,000, sold for $45,000 & those owners resold it for around $450,000.

Land…. it just keeps going up in price. I’ve been watching land prices now for quite a while & I think it’s the fastest appreciating asset out there if you buy in the right area. Now, the example above took place over many years but still, it’s a great return. In the last few years I’ve seen clients buy land, hold it for a few years & then double their money as developments get closer to them.

Why would land prices appreciate faster than a fully leased shopping center for instance? 

It’s not an easy answer but I’ll take a stab at it….
# 1. A fully leased shopping center has an income and once a property has an income that income governs the value to a large extent. As rents don’t fluctuate too much too often the value of the property doesn’t fluctuate very much i.e. once income is established, value tends to stabilize around that income.

# 2. Vacant land usually has no income. So, value can fluctuate dramatically. When everyone thinks it’s not a useful piece of land the price is usually very low. However, when eyes start focusing on a particular area  for development, the perceived value of a piece of land can often double within a year. Basically, when there is nothing on a piece of land, it’s options are almost endless. For example, if we had a 5 Acre piece of land, nice regular shape. You could build a 2,000 sf warehouse on it & create outdoor storage & lease it out for $9.60 p/sf or $19,200 per year & the value of the property would be roughly around $192,000.  Or, you could put a 20,000 sf warehouse on it & lease it out for the same rate & the value of the property would be $1,920,000. Or, you could build a 20,000 sf retail strip center on it & lease the spaces out for $15 p/sf which would push the projected income to $300,000 per year & the value to about $3M USD.

If this area was really hot one could possibly put a 10-story 200,000 sf office building on it with retail shopping below…. the property’s value could be pushed to $50M USD.

So, the value of the land can, in the eye of the beholder, change dramatically based on their vision for that land. However, once that land is developed, value tends to find it’s anchor & does not fluctuate much from that point on.

Who should NOT invest in commercial land? 

Good question. Land is not an investment for everyone. Primarily because it usually has no income. Secondly, because the holding period until it becomes popular & worth selling might be longer than you might initially expect & you don’t want to have an additional liability to take care of. So, unless you can buy land with cash it would be better to stick to a more conservative investment like a fully leased shopping center.

Who should invest in commercial land? 

If you have enough income or reserves to be able to purchase land for cash and hold on to it indefinitely, then you are a candidate for being an investor in land. An extreme example is the European family that sold the land to ExxonMobil & that is now developing the “Springwoods” subdivision right next to it…. they have owned that land for just over 50 years!!! As I said, that’s an extreme example…. that kind of timeframe would not work for most of us! It’s the same old thing…. those with enough funds can afford to reach for the higher risks AND higher returns that land investment can bring.

What are the other benefits?

Well, your management of the land is usually fairly minimal as you don’t have tenants…. also, you can go & walk on it whenever you want! Maybe it’s next to a river & large enough that you can go horse-riding there.

Where should one buy commercial land?

This is a good question….. you need to buy in the path of growth. You could buy somewhere out in the country and in twenty years growth will most likely reach you anyway so if you’re 30 years old this is probably not a bad idea as you can afford to wait! But, if you’re 50 or older and most likely have more funds available, it’s better to buy a little closer to the action i.e. where growth will be in the next 5 to 10 years.

Our area has been blessed with incredible growth in the last 10 years…. with ExxonMobil arriving it’s ratcheting up even further. But, ExxonMobil is not the only component in the growth fundamentals…. there are a number of drivers and I’ve highlighted an area below that are essentially going to result in virtually guaranteed growth in an area that I’ve called “The Golden Rectangle”.

The rectangle is defined by the following roads:
– On the East, the I-45
– On the South, the future Grand Parkway up to where it connects with FM 2920 & from there to FM 2978
– On the West, the FM 2978 that is now open from FM 2920 all the way to Lake Conroe
– On the North, the FM 1488 that connects FM 2978 with the I-45.

The “anchors” for each corner of the Golden Rectangle are:
– South/East corner: ExxonMobil & Springwoods development
– South/West corner: Baker Hughes & it’s new $54M USD “Western Hemisphere Training Center”
– North/West corner: Target Superstore & tons of retail at that intersection
– North/East corner: Multi-family development & some retail

The three main roads along which a lot of development is and will be taking place are: Gosling, Kuykendahl (to the South) & FM 2978. The prices along these roads have jumped but are not yet at the levels seen along the I-45 or along FM 1488.

A Word of caution. 

Buying commercial land might seem like a simple transaction…. there’s no building to inspect or tenant to review so you just pay for it and you get it. Well, yes but there is a lot more to it than that. You really need to work with someone that can help you analyze the land…. issues to consider are: flood plains, easements, wetlands, environmental issues, traffic counts, demographics and so on…. it’s easy to make VERY expensive mistakes.

In a recent purchase we helped a client save $60,000 in a land purchase that had some wetlands on it that the seller was not aware of. We arranged to have the seller cover the costs of mitigation up to $60k. So, don’t make a $60,000 mistake when you could have a professional representing you in your next land purchase without it costing you a penny!!!

Let us help you review the options & the tracts out there that are for sale. Our new state-of-the-art offices are set up with projection capabilities & mini-conference seating for up to 7 people. We have excellent tools to identify tracts, owners, and pretty much all the information you would need to locate your next land investment. Our partnership with Terragon Developers (a commercial development company) allows us, in some cases, to partner up with owners to create valuable and viable commercial developments. So, we can provide end-to-end assistance.

Some pieces are not listed & we simply approach the owner. Remember, it pays to work with a professional. 🙂

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