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NEW YORK -- A Pentagon proposal to shut about 180 military installations, including 33 major bases, could be a development windfall for certain real-estate companies and home builders -- but a loss for others.
"I've been around this a lot over the last 20 or 30 years, and it really all gets down to where the base is -- it's incredibly geographic-specific," said Dennis Yeskey, managing director at Deloitte & Touche LLP.
Bases that were closed in Southern California over the past 20 years have been "a windfall," Mr. Yeskey said. "People would just plow them under and build whatever made sense."
But many of the bases slated for closure during this round of cuts aren't in hot markets such as Southern California, Florida and Washington. And that is when it gets challenging. Real-estate investment trusts that own apartment buildings in peripheral markets where bases are shuttered could see demand dry up and occupancy fall since military personnel are no longer there.
"The local communities are usually devastated . . . and sometimes they get a reprieve," Mr. Yeskey said. "It all depends on whether suburban sprawl has caught up to these bases or not, and I think you have to go base by base."
Morgan Stanley analyst Greg Whyte said some residential and retail REITs could face a real risk of falling rents and occupancies in some markets.
GMH Communities Trust, which invests in military and student housing, could potentially take a hit as it owns military housing at three of the bases that are slated for closure.
For home builders, the loss of jobs could cause a deterioration of a local economy and subsequently an increase in foreclosures, which would hurt home prices.
Merrill Lynch analyst Lorraine Maikis said none of the top 25 home- building markets will be impacted by the base closures. "(So) we do not expect a material impact on the operations of the public homebuilders," she said.
In hot spots, the returns can be explosive, but the competition among developers for the rights to the former military property is often fierce.
"It's a big multiyear, multiuse type of project," said Deutsche Bank analyst Lou Taylor. "I could definitely see them getting involved in some of these base closings." He sees Forest City Enterprises Inc. as a potential bidder, given its successful record for transforming large spaces, such as an old airport in Denver, into communities.
Mr. Taylor sees some REITs, such as General Growth Properties, bidding to become master planners of some of the military-base redevelopments. "General Growth really has the expertise to do multiyear, huge acreage type of redevelopment," he said.
Mr. Whyte named Catellus Development Corp. REIT as another real- estate entity that could potentially be involved.
The situation is similar for home builders.
"In real estate, obviously the issue is 'where,' " said Fitch Ratings analyst Bob Curran. In the right location, the payback can be "meaningful," he said.
"For many of the bases, there are probably some issues of contamination because of chemicals that are used, bombing ranges and a whole lot of other things," Mr. Curran said. "So, some of them might not be easily adaptable to residential uses."
Miami home builder Lennar Corp. has been a front-runner in the home- building industry in pursuing military bases in the past, having won the rights to master-plan or develop two bases in Orange County, Calif., and three bases in the Bay Area. "They all are in outstanding locations in land-constrained markets," said Emile Haddad, president of Lennar's California region.
Lennar is watching this latest round of base closures closely, although Chief Financial Officer Bruce Gross said it is "premature" to comment further.
But don't expect any windfall to happen overnight.
"It takes a really long time," said Deloitte's Mr. Yeskey, who estimates that the planning and development period can stretch between five and 10 years.
He cited Governor's Island in New York as an example. The site, a 172-acre island that was used by the Army and Coast Guard until the federal government shut it down in the mid-1990s, was handed over to New York State in 2002. However, its development remains stalled in bureaucracy, Mr. Yeskey noted. "(Governor's Island) is a hot property. Lots of people would pay a lot of money to do something with that island." he said. "But just like the World Trade Center, it's going to take a long time before anything gets resolved."
In less-popular markets, "you can't give away the stuff (land)," said Mr. Yeskey. "It's supply and demand."
Lennar won the rights to negotiate the master plan on its first military base in 1998, yet it only opened its first homes on the site this year.
Part of the delays are related to cleanup and remediation processes, to ensure the land is safe from petroleum, unexploded ammunition and other problems, said Mr. Haddad. However, the military is generally responsible and liable for cleanup costs, he noted. Delays can also arise from residents who sometimes launch legal battles to stop a site from being developed in a particular way.
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