Transitional Land: Creating Housing for a Growing Population

December 11, 2020   |   Market News

David Hitchcock, Clay Taylor, and Gary Ralston discuss the future of residential land and the concept of transitional lands.

What Is "Transitional Land?"

Transitional land is usually a parcel of 10 to 300 acres located near the edge of an existing municipality. Due to close proximity to the municipality, transitional land has the potential to provide utilities, retail stores, and other services that new residents desire.

SVN | Saunders Ralston Dantzler Real Estate sales associates, David Hitchcock, ALC, CCIM and Clay Taylor, ALC, have years of experience with transitional land.

When it comes to purchasing transitional land, Hitchcock's advice borrows from the great hockey player, Wayne Gretzky: "Go where the puck isn't."  Being able to anticipate population trends might allow for an investment in transitional land that could accrue a much higher value over the course of a decade. 

Most transitional land is purchased by investors, developers, or home builders. Investors usually hold the land anywhere from five to ten years. Developers often begin the developing process early by putting in roads, clubhouses, and other amenities. Home builders tend to seek finished lots, often from a developer.

Florida Demographic Trends

“Demand for this land follows population and jobs,” Hitchcock says. Therefore, understanding demographic and economic trends is vital to the development of housing for a growing population.

Gary Ralston, CCIM, SIOR, a leading expert in commercial real estate data, has advocated that Florida is one of the best real estate markets in the nation. According to the latest U.S. Census Bureau data, Florida’s population is now 21.3 million and grows by almost 900 people each day. Using Lakeland as the center point for analysis, there are 1.5 million people within 30 minutes, almost 4 million people within 60 minutes, and 7.5 million people within 90 minutes.

Housing growth continues to be extremely strong across the I-4 corridor. Currently, demand exceeds supply so we expect residential development of houses, townhouses, and apartments to continue to increase. With this residential shortage, housing prices will also continue to grow. There is a need for almost 100 new housing units every day across the five counties that comprise the I-4 Corridor: Osceola, Lake, Polk, Orange, and Hillsborough.

Entitlement And Finished Lots

Before any development begins, the land needs to be “entitled.” Entitled land is raw land with all the approvals (zoning, permitting, etc.) needed to begin residential development. It can take one to two years or even longer to get land fully entitled. Sales contracts for transitional land almost always have a contingency clause negating the contract if the property can’t be fully entitled.

Finished lots are ready to build houses on; they are developed with roads and other amenities already in place.

How Transitional Land Is Valued

Clay Taylor adds that the value of transitional land “ultimately goes to the price of the house that’s going to be built.” The purchaser begins by adding up permitting and entitlement costs, infrastructure costs (roads, utilities, and amenities), and an expected profit. They will then deduct the total of those costs from the expected house price. “And that’s what you can pay for the land,” Taylor says.

The rule of thumb is that the price of an improved lot will equate to about 20 percent of the house’s sale price. That would mean $40,000 could be paid for an improved lot on which a house is constructed with a total price of $200,000.

Something important to keep in mind when purchasing transitional land is that Class A land tends to have higher prices. The I-4 Corridor is currently a particularly hot center for transitional land. Class A land is located in and around the greater Orlando or Tampa areas and will have a much higher price than Class B land located in areas such as Plant City, Northeast Polk County, and Lake County. Transitional land located in Sanford, Florida currently holds a price of $125,000 per acre.

While the costs for transitional lands can be high, they can be an incredibly lucrative investment opportunity if properly undertaken.

Gary M. Ralston
Gary is an expert in all things commercial and he holds a strong passion for educating clients on market trends in the current and future economy. Earlier in his career, he guided a corporate real estate firm from less than $15 million in real estate assets to over $1.5 billion. Recognized as...