California CRE Land Prices in Initial Stages of Correction
Tariffs, labor shortages and already high construction costs are not making things any easier. Particularly, the land market is cooling fast, leading to fast deterioration, according to a new report from John Burns Research, including in San Diego.
Absorption is down, and builders are raising their required returns, thereby affecting the prices they can pay.
Rob McRitchie, senior director at JLL Capital Markets, told GlobeSt.com that multifamily development in California has struggled to produce positive land values for years.
“More recently, we’re seeing homebuilders start to retreat as market sentiment declines slowly,” McRitchie said.
“Recent tariffs and labor shortages are exacerbating already high construction costs. Meanwhile, elevated interest rates, declining household wealth, and overall high home prices are sidelining many potential buyers, keeping housing increasingly unaffordable for a large segment of the population. We are witnessing the initial stages of a market correction.”
In retail development, developers remain interested in land purchases, but pricing makes it unrealistic to purchase without long lead times, according to Glenn Sherman, partner at Saul Ewing.
“No one wants to buy on spec now,” he told GlobeSt.com. “They want tenants signed up and entitlements and building permits received before they will close or even go hard. That way, the risks are limited to construction costs, which are still a wild card.”
He said tariff worries compound the concerns, and it's hard to get contractors to commit, so proformas are difficult to tie down.
“Demand for construction related to the Southern California fires is also an issue, since contractors are busy with that too.”
The John Burns report found today’s national pricing climate similar to late 2022, as only 28% of land brokers reported strong demand in their markets, down from 76% just one year ago.
Furthermore, nearly eight in 10 land brokers nationally are reporting more transaction cancellations and renegotiations than normal.
“Deals that made financial sense six months ago no longer work today,” John Burns said. “Land brokers confirm how shifting conditions have stalled the market, with buyers and sellers often far apart on pricing expectations.”
Source: GlobeSt/ALM