Major Land Deals on the Horizon for 2008

Southern California Brokerage Firm Releases Report on Plunging Land Prices

By Tom Dallape and Norm Scheel

Principals of The Hoffman Company

Expect to see some major land deals come down the pipe in 2008. The price of real estate in Southern California – particularly in the Inland Empire and northernLos AngelesCounty– is approaching the bottom of the market, according to our team of brokers at The Hoffman Company who work those areas daily. This should tempt opportunity funds backed by Wall Street money off the fence and into action over the next several months.

Land prices have plunged more than 50 percent in some areas ofSouthern Californiato reach levels not seen since 2002, according to the Hoffman Land Index our team has compiled after years of tracking land values in the region. Although you might expect land values to be suffering in outlying areas such asHemetand Adelanto, we’re seeing dramatic real estate opportunities in cities within an easy commute of downtownLos AngelesorOrangeCounty.

In Corona, a burgeoning Riverside city only several miles east of the Orange County border, the average lot prices have dropped from $300,000 to $180,000 since the peak in late 2005. The worst decline in land values – 52 percent over the past two years – is in theFrenchValleynear Murietta, a bedroom community forSan   Diegowhere the population has more than doubled since 2000, making it one of the fastest growing areas in the state.  In theAntelopeValleynorth ofLos Angeles, the value of land has dropped 38% in West Palmdale and East Lancaster and almost 20% in parts of unincorporatedLos AngelesCounty.

This decline in the price of land has happened rapidly; in the past two years many of these areas inSouthern Californiahave lost five years of appreciation, most of it in recent months. Although land prices may drop a few more percentage points in 2008, we believe that land values already have taken the “big hit.” Whatever comes next will be minor in comparison.

Substantial changes in land values reflected in the Hoffman Land Index include:

• InLos AngelesCounty,      finished lots declined almost 40% in parts of theAntelopeValley,      where Palmdale lots that soared to $210,000 in 2005 are now selling for      $130,000.
• Land      prices in the 15 cities ofRiverside     Countyhave fallen      from their 2005 highs by an average 42%, down 5% from September.
• In 14      cities surveyed inSan        BernardinoCounty,      the estimated lot values have fallen by an average of 37%.
• The      largest decline inRiversideCountyis a 52.1% drop inFrench    Valleyand smallest decline is in     MorenoValleyat 36.1%.
• InSan BernardinoCounty,      the smallest reduction in value is inFontana     at 27.1% and the largest is inHighland     at 48.9%.

The value of land inCaliforniais being set by land investors and speculators. After months of stalemate, it’s suddenly a competitive environment. The price expectations of buyers and sellers are much closer today than even a year ago, so more deals are being put under contract.  In the last quarter of 2007, The Hoffman Company several land transactions in theInland Empiretotaling more than $30 million and put an additional $80 million in land sales under contract. We expect the next several months to bring even more activity.

So far, most of the buyers have been individuals using their own money. They know the land market could still drift down a bit, but the risk of waiting is greater. Getting in too late has them competing with Wall Street money that could run up land prices. However, that scenario is going to change in 2008 once land values reach the right point of temptation.

A lot of attention has been focused on falling home prices and foreclosures in recent months. Indeed, the Riverside/San Bernardino statistical area ranks ninth in rate of foreclosures. In November, the median home price inRiversideCountywas down 16.5 percent from a year earlier. That was the largest percent year-to-year decline in Southern California and the biggest recorded forRiversideCounty.San BernardinoCounty’s median home price was down 13.2 percent, the second-steepest drop in the six-county region.

But focusing on home prices overlooks the other side of the equation. The cost of land is a key factor in determining the price of new homes, and less expensive land means that developers should be able to build more affordable homes once existing inventory is whittled down.

For example, finished lots inFontanawere selling for $240,000 at their peak and new homes were selling at $570,000, which was roughly 2.4 times the value of the land. Today, the estimated lot value inFontanais $175,000. For a builder to realize the same profit margin, a home on that lot could be sold for $415,000. That should be a welcome change for homebuilders who found it difficult to make a reasonable margin in 2005 due to the escalating land basis in those areas.

Tom Dallape and Norm Scheel are principals of The Hoffman Company, a leading land brokerage firm in Southern California for the past 30 years. Its brokers have closed more than 1,100 real estate transactions for a total $4 billion since the company’s inception in 1978 and have booked an average of more than $500 million annually over the past five years. The Hoffman Company represents land owners of all property types, including residential, multi-family, commercial and industrial sites. For more information, call 949-553-2020 or visit www.hoffmanland.com.