MARKET UPDATE - SUMMER 2010
... If you missed our Spring 2010 Market Update you can get it here ... Market Update - Spring 2010
Lot sale and land development indicators for Gallatin County, Montana:
An example of the market's movement and change is the high amenity golf-course community called Black Bull located outside of Bozeman. Development began in 2006 and at one time it was credibly reported that almost all lots had been reserved by an array of buyers who had placed money in escrow while the lots were still in the development stage. The golf course and infrastructure were completed and brought on the market in 2008, but the majority of the reserve buyers failed to materialize and many buyers left deposits on the table. The Black Bull development is now in bankruptcy and is unable to gain traction.
MLS data suggests less than 10% of the Black Bull lots are sold. The development owes over $35,000,000 against an estimated March 2010 value of $17,620,000 as per a recent Bozeman Daily Chronicle newspaper article. The 18 hole golf course is in, as are infrastructure and the clubhouse. Based on Gallatin County MLS data about 80 lots sold in this entire area in 2009. The average lot price was about $88,000 per lot. Based on that average, a total sell out of the remaining Black Bull lots would still fall 15% below the project's current debt.
Overall, current county data suggests there are over 14,000 platted, yet undeveloped, lots less than 20 acres in size within Gallatin County. Hundreds more are still in the preliminary plat approval phase. Approximately 10% of the existing lots are listed for sale. Data suggests there is a small up-tick in sales activity in 2010. However, without exception, all segments of the market related to undeveloped lots within all areas of the county are substantially below 2006 and 2007 levels in terms of value and volume.
Data from Gallatin County MLS data illustrates general trends regarding lot sales in Gallatin County for residential lots one acre or smaller. The annual sale volume of lots is off over 80% from 2006. Average values were off 25% from 2008 to 2009 in the county overall and down 10% from 2009 to 2010. However, these average values have limited applicability due to the overall mix of sales in the database which is skewed by the Big Sky lot values. Big Sky lots on average lost 20% in value from 2008 to 2009, but remain at an average of $321,000. Without Big Sky lot sale data, the Gallatin County lot sale data actually shows an average value decline from 2008 to 2009 of 39.46% as shown on the following chart which excludes Big Sky and West Yellowstone sales.
The decrease in lot values and the significant change in sales volume does influence land values in the major market areas and creates a ripple affect into all the land markets. A recent sale in April of 2010 in the Bozeman area shows interesting trend data for development land. It was the sale of an REO property and represents the only sale in this market in over 10 years of pre-developed lots on a bulk basis. It included 42 developed lots with infrastructure that were bought at $40,000 each for a total of $1,680,000, plus 26.5 acres that were adjacent and undeveloped but had been approved for 55 lots. The development period had lapsed but the buyer will reapply and based on past approval this is considered an easy approval process.
On the developed area the bulk discount is 38% which is lower than sale data for raw land would suggest and is reflective of the anticipated market value of the developed lots. The risk is limited as the lots are developed and ready for sale with all infrastructures developed and paid for. Based on a five year sell out as projected by the buyer, the internal rate of return is 18.7%. A bulk discount and return rate for the developed lot in this range is not surprising.
The major shift in value reflected by this sale is indicated by the raw land value. Paired to area sales of raw land that occurred in 2005 to 2007 for development, mostly without preliminary approval, this sale shows a value decrease of 50% to 80% for the raw land.
The following chart shows raw land sales from 2005 through 2007 comparable to the above-referenced transaction (2010 sale). No sales of raw development land were seen in 2008 and 2009. These are 20 to 80 acre sales which were bought for residential lot development. The sale values per acre are not time adjusted. If the older sales were time adjusted to the end of 2007, as has been the practice, they would reflect values at $85,000 to over $100,000 per acre and would tie into the last sale in the market which occurred in 2007. Most 2007 sales set the high and then the market folded around them.
In interviews regarding the 2010 sale referenced herein, it is doubtful that absent the retail lots, the raw land would have sold. The retail lots give the developer an immediate play that will allow the undeveloped lots to ripen as the market begins to re-gear in 4 to 5 years as most experts believe.
A specific analysis of the data reflected in the chart would most likely lead to a conclusion that the market value of raw development land in the area is off by a minimum of 75% for tracts in the 20 to 80 acre size range. Prior to 2002 the sale data in and around Bozeman rarely exhibited a sale greater than 10 acres for speculative development. Tracts 20 to 80 acres in size were not in play for development. As these moved into play for development, larger tracts of 160 to 320 acres moved to interim use consideration and values there also began to spike. When studying the run in land value associated with development in areas like Bozeman it appears most, if not all of the gains in land values between 2002 and 2007 have evaporated, as the underlying highest and best use of these lands retreats to stronger interim agricultural uses and values.
NOTABLE REAL ESTATE TRANSACTIONS:
Gallatin County Pending Sale
A current sale in Gallatin County that is pending on a parcel in the 700 to 900 acre range is under contract at a value indicative of 2002 or 2003 land values in the direct area of the pending sale. The land was bought in 1995 and will show a return to the owner of about 5% a year over the last 15 years based on the current sale. Based on 2006 and 2007 sales in the area of this property it is 60% below what larger parcels were selling for before the market faltered and declined. The sale value of the pending transaction will still reflect speculative investment. A cash lease of the property would gross less than 2% and after costs it would be a break even proposition. The property has good agricultural attributes and good recreational features and is a primary valley unit. This unit would not have been in direct development play in 2007 but would have been influenced by large tract investment reflective of different market considerations.
Beaverhead County Sale
Another interesting sale which occurred in late 2009 was the sale of what was referred to as the High Mountain Ranch property located near Dell, Montana. That property was comprised of approximately 7,000 acres and reportedly sold in the area of $12-$13 million. The property included a custom home which had a reported construction cost in excess of $14 million. Again, as noted, this sale is reflective of specific sale circumstances or conditions related to this property, and an analysis of this sale relative to the overall market is difficult to make.
Paul Allen Montana Ranch
Another sale which closed in late 2009 was the sale of a rural retreat owned by Paul Allen. That property was located in the Centennial Valley and was comprised of approximately 2,400 acres. It traded to several local ranchers at a value reported to be in excess of $5 million. It also included personal property and custom buildings which make the overall indication of this property relative to the market difficult to ascertain. However, it is notable as a sale to area ranchers.
Schroeder Ranch
Perhaps one of the most interesting transactions which occurred in the market in the last six months was the November sale of the Schroeder Ranch. This property is comprised of approximately 6,200 acres, and is located south of Missoula, Montana, along the Bitterroot River. The property reportedly sold in late 2007 for a value in the range of $26 million. It was purchased for development as a partnership property for rural ranchettes. This property re-traded in the open market in November of 2009 for a price reported to be less than $15 million. This is indicative of the transitioning highest and best use as the property moving away from probable development to a more recreationally based value.
Sun Ranch located in the southern Madison Valley
This ranch, comprised of approximately 18,000 acres, reportedly traded in the range of $28-$30 million and it was well improved. The majority of the ranch was subject to conservation easements which restricted development. The sale included some lands which had been added to the main ranch over the past ten years. The main ranch sold in 1998 for $28 million. Ostensibly, the current sale suggests no appreciation, but as noted earlier, one must take into consideration the changes since 1998, which includes the majority of the property being placed under conservation easement since the purchase in 1998. Also, one must take into consideration the river properties which were added and included in the sale, as well as improvements which were made to the property since 1998. It previously sold in 1993 for $10,500,000.
The following map of the Sun Ranch is an example of our interactive mapping capabilities and is based on information provided by the State of Montana. This map is for illustrative purposes only and the information is not warranted by Norman C. Wheeler & Associates.
Thank you for your interest -- Clark Wheeler