Dirt cheap?

The recent round of rapid increases in the price of raw land for residential, commercial and industrial development in northern Nevada has come to an end.

But real estate brokers say many potential sellers haven't gotten the word, and some owners hoping for a big payday don't believe that the days of 30 percent annual increases in land prices have come to a sudden stop.

"The biggest challenge I have is educating sellers that this isn't the same market it was six months ago," says Mark Krueger, senior vice president of Grubb & Ellis|NCG in Reno.

What happened? Simple economics, say real estate brokers. The cost of land got so high that it killed commercial and industrial deals. And caution among homebuilders cooled the market even more.

"Prices hit the glass ceiling," says Paul Perkins, senior vice president in the industrial properties group of Alliance Commercial Real Estate. "We were getting to the point when deals didn't make sense anymore."

Bruce Breslow, a vice president with CB Richard Ellis in Reno, explains that developers often start their analysis with a look at construction and development costs and plug in a number for the rent they expect to generate. Once those two numbers are in place, developers know what they can afford to pay for land.

As construction costs steel, concrete, PVC, copper wiring have gone through the roof in recent months, Breslow says developers have less flexibility on their budget for land.

"We're walking away a lot more now," he says.

Homebuilders, who bought big swaths of land as the Reno-Sparks residential market boomed, now are getting more conservative, says Krueger, who handled $135 million in land sales in 2005, mostly to homebuilders.

Seeing a slowdown in new home sales, and concerned about the increasing need to offer incentives to get buyers to sign a sales contract, homebuilders are scaling back their purchases.

And rather than buy a big parcel all at once, homebuilders are more likely to phase their purchases buying a smaller chunk of land today and waiting a while before buying the next phase.

Contributing to the slowdown, Krueger says, is the increasing domination of the Reno-area housing market by major national builders.

Unlike locally based builders who bought land far in advance of their needs sometimes waiting for years to develop property the big companies don't stockpile land. Instead, Krueger says, they look to keep only land in inventory to meet their needs for 18 to 24 months.

The upshot: He expects annual increases in land values to return to the single digits that were common before the housing boom took off in 2003.

But he notes that the market for land is spotty: Cooling noticeably in Spanish Springs, for instance, even as it stays relatively strong in south Reno.

And even if the rate of increase has slowed dramatically, prices are still substantially higher than they were even a year ago.

Today, CB Richard Ellis says land for retail projects in the Reno-Sparks area sells for $8 to $18 a square foot, depending on location. A year ago, some retail land was available for $6.

And Breslow notes that some land prices continue to rise through the roof particularly on downtown projects where developers are eager to get the last couple of parcels they need to assemble a larger land package. Those sales sometimes have been recorded at $100 or more a square foot.

On downtown projects, where the cost of land is high, developers seek to recoup more of their cost by building high-rise structures essentially getting more square feet of rentable space from each square foot of expensive dirt.

Perkins says developers of industrial projects won't open their checkbooks to pay high prices for land unless they're certain that they can get enough in rent to cover the land cost.

And with industrial land selling relatively inexpensively at the Tahoe Reno Industrial Center and in the Fernley area, potential tenants will have options to move elsewhere if rents in Reno and Sparks move upward.