RETURN

How Hot Land Sales Offset
A Housing Glut in Phoenix

By MICHAEL CORKERY
December 7, 2007; Page B1

The Phoenix housing market, one of the hardest hit in the country, is the scene of sharply falling prices and a rapidly accumulating glut.

But the market also is beginning to see a phenomenon that at first glance would seem to contradict these other trends: land sales.

Wolff Co. and Langley Properties, two local real-estate investment firms, recently paid $70 million to acquire nearly 7,000 acres of residential land, or about 23,000 house lots, on the far outskirts of Phoenix, from D.R. Horton Inc., one of the nation's largest builders.

A piece of land near Phoenix may one day be covered with 60,000 housing units.

John Laing Homes, a large privately held builder based in Newport Beach, Calif., bought 136 house lots from developer SunCor in September, its first-ever land purchase in the Phoenix market. John Laing, a subsidiary of Dubai-based Emaar Properties, plans to start building model homes in the first quarter of 2008 and will likely start selling homes in May.

What's happening in Phoenix has begun to play out across the U.S. in recent weeks. Public home builders and land developers, who dominated the market during the boom, are bloated with land and need to sell, partly to record losses to recoup taxes. Meanwhile, more nimble private builders and opportunistic investors are raising money and starting to snap up the pieces, buying parcels for as much as 60% discounts.

"It's a great time to be looking for land in Phoenix," says John Fioramonti , senior managing director at Myers Builder Advisor, a real-estate consulting firm based in Scottsdale, Ariz. "The national builders are just in a panic to get rid of excess inventory."

The land deals in Phoenix and elsewhere are a vivid reminder that even when housing markets are scraping bottom, investors are willing to buy land if the price falls low enough.

Many of these investors, like Wolff, will likely hold the property for several years confident that the market will eventually recover. Others, like John Laing, think they can still profitably develop homes in the next few months if the land they buy is in the right location. Still others are looking to take land off a builder's books and then sell lots piecemeal back to that same builder for a hefty profit or fee. Even the large public builders will at some point need to replenish their supplies.

In one of the biggest deals since the housing collapse, Lennar Corp. last week sold 11,000 house sites to a venture mostly owned by the real-estate arm of Morgan Stanley for $525 million. Lennar had valued the land on its books at $1.3 billion, as of Sept. 30.

Phoenix has a history of real-estate booms and busts dating back to World War II, when Arizona became home to defense-related industries and other manufacturers. Investors have learned that buying during slumps can pay off handsomely when the market recovers. Companies such as Pivotal Group and DMB Associates emerged as major real-estate players in Phoenix after buying bargains during the '80s bust, says Jay Butler, director of realty studies at the Morrison School of Management and Agribusiness at Arizona State University.

"People have made a lot of money here by being willing to make a commitment to the long term," Mr. Butler says.

The most recent bust in the late 1980s and early 1990s littered Phoenix with office and retail buildings that stood empty for years. The largely commercial real-estate bust contributed to the demise of several banks and exacerbated a painful economic recession.

"In the late 1980s and early '90s, some people were saying it's time to turn out the lights," Mr. Butler says. "Things were really bleak. We don't have that at the moment."

These days, many mortgage lenders are reeling, and some local builders are on the ropes. But unemployment in the Phoenix area stood at about 3% in October, below a national average of 4.7%. Growth is slowing in Phoenix, but Mr. Butler doesn't expect a broader economic recession.

Buying land in this market, of course, carries large risks. If the housing slump triggers a regional or national recession, vacant land could stay that way for the foreseeable future. That's especially true in certain markets in Florida, where the supply of homes is about four times the national average of a 10-month supply. Land investors also are more inclined to buy in regions of the country expecting population growth.

But if investors time land purchases right, profits could be huge. Frank Zaccanelli a co-founder of Scala Real Estate Partners, a land investor based in Irvine, Calif., says home builders in Texas, who began building on low-cost land after the collapse in the late 1980s and early '90s made above-average profit.

"Your competition was knocked out, and you could control pricing," says Mr. Zaccanelli, whose firm has raised $200 million from Lehman Brothers Holdings Inc. and a Canadian pension fund to buy land in the current downturn.

John Laing Homes, the California builder, believes it can profit in Phoenix in a matter of months, not years. David Walls, president of John Laing's newly opened Phoenix division, says the builder bought the 136 lots in a master planned community for about 10% to 20% less than recent comparable sales.

Despite the supply glut, John Laing believes it can develop and sell new homes because it is paying less for land and because the land it purchased is in a submarket with more amenities such as retail stores and restaurants than competing projects.

John Laing may have more breathing room to experiment than the average U.S. builder. The company was acquired in June 2006 by the well-heeled Emaar Properties, which is expanding home building in the U.S., while also developing the world's largest tower in Dubai.

Land on the outskirts of Phoenix is attracting investors, often backed by private equity. The outlying areas typically suffer the worst glut of homes for sale, and will take the longest to recover.

Tim Wolff, co-president of Wolff Co., says he views his company's purchase of the 7,000-acre tract as a mid- to long-term investment. "We will hold it for however long it takes" for the market to recover, he says. He estimates it will take three to seven years.

Horton sold the land for $10,000 an acre, more than the $7,000 an acre it paid for the land three years ago, says Steve LaTerra, a home-building specialist at Scottdale's Land Advisors Organization. But Horton got much of the land entitled and readied for development, says Mr. LaTerra. After those enhancements, "if this property were sold at the height of the market, it would have sold for around $30,000 an acre," he says.

Initially, Mr. Wolff says, his venture will raise cotton or hay on the land and eventually will develop some of the land itself or join forces with a home builder. Indeed, Horton acknowledged in a recent conference call with investors that it may end up buying some of the lots back from the Wolff venture, as the market recovers. "We will be buyers of lots, most likely from the gentleman and the party to whom we sold the land," Horton's chief executive, told investors.

Write to Michael Corkery at michael.corkery@wsj.com

RETURN