“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
By Will White – June 30, 2017
TUCSON, ARIZONA – As we are now through the first half of the year, we can see several significant trends in the Tucson land market. There is no question that the housing market has substantially improved on the critical metrics of traffic and sales, which bodes well for the ongoing evolution of the city. What remains unknown for the Tucson housing and land market, though, is what is its true potential, and how do we maximize that potential? Getting to these answers will in large part determine the appropriate strategies to follow in the short, medium, and long terms.
In a single word, we could describe predominant homebuilder strategy in Tucson to be CAUTION. Most homebuilders have adopted a ‘wait and see’ approach, and this has translated into a reactionary approach to land acquisition. We fully acknowledge that this was appropriate strategy when the annual results were (still) consistently underperforming. That said, the current environment has changed, and over the past 18 months we have seen a dramatic shift in demand by the consumer for new housing. This was vividly illustrated when looking at the most current (May) numbers in which Tucson’s permits were up 51% year-over-year!
We clearly have a faster moving housing market, yet many are employing the same cautionary approach described above. The result is a greater pace imbalance between the (faster) housing market and the (slower) land and development market. With lots and community counts at all-time lows, we need to make some strategic changes if we want to accommodate the growing demand we are seeing in Tucson.
Let’s look at some of 2017’s first-half themes.
The Good:
Home builders have been dramatically exceeding expectations in sales and permits in 2017. Permits are projected to end the year at approximately 3,300, which would be an 18% increase over 2016 and a 58% increase since the bottom of the market in 2011. The market has yet to show any signs of slowing down as traffic and sales figures have remained strong into June. We have also seen the resurgence of master-planned communities like Dove Mountain, Gladden Farms and La Estancia.
These communities have experienced an increase in new active homebuilders, substantial lot construction, and much stronger sales pace and traffic. These communities have seen the benefit of multiple homebuilder marketing programs and are gaining strong momentum.
Furthermore, home price appreciation has been market-leading in each of these communities. We had not seen measurable price appreciation in the market until (approximately) 15 months ago, and since that point builders have raised prices from $10,000-25,000. This has, in many ways, paralleled Tucson’s employment growth, as we have continued to see a strong increase in job announcements and employers relocating to Tucson. Our combined population growth (natural growth plus in-migration) has also shown strong forward momentum, and are continuing to propel the local homebuilding market. In short, Tucson is firing on all cylinders!
All this positive news, though, has made for an increasingly competitive homebuilder arena. The race for market share has been a big theme since the downturn, and this has been a successful strategy for several. Public builders continue to dominate the Tucson landscape, and we are seeing larger market shares than have historically been the case.
Moving forward, the key to increasing market share will be land, especially in a market like Tucson that has a very tight supply. Whether one is a homebuilder with a large market share or a homebuilder looking to grow market share, all Tucson builders have a reason to buy for the next 12-18 months. Simply put, without the required land, any homebuilder’s market share and/or survival is at risk.
Large players Richmond American, Meritage, and Lennar have been the most active thus far in 2017. In fact, these three have acquired almost 60% of all the lots purchased in the first half of the year. While in many respects this could be viewed as a case of the big getting bigger, we tend to think of it in terms of proactivity. The proactive builders are positioning themselves for the future, and as our list of “shovel ready” lots and projects dwindles, we believe this will continue to be the necessary strategy for builders who want to be relevant in 2018, 2019, and beyond.
The Bad:
The bad side of the story for the first half of 2017 really becomes the lack of closed deals. In the first 2 quarters of 2017, homebuilders have closed on only 817 lots. Only 8 deals of 23 were bulk purchases, with the remainder being scheduled option takedowns. This would put the market on track for acquisitions totaling only 1700-2000 lots. Remember that we will be permitting close to 3,300 this year.
In an industry where we have all waited patiently for the market to improve, it is unfortunate that many won’t be able to capitalize on this increased consumer demand, and it appears this will remain the case well into 2018. This trend has been building over the past 3 years, with homebuilders selling out of more communities then they have been adding. The result does nothing more than intensify the lot shortage we have been experiencing.
It also becomes a timing problem. Even if the acquisitions pick up in the second half – which we believe will happen – any new projects will take (approximately) 10 months to build and be open for sales. The result will be projects that will completely miss the selling season in 2018. Again, we believe this would be a significant missed opportunity.
The best scenario we can hope for at this point is to have the next 12 months become very active and to set the market up for a historically strong 2019. The die may be cast for 2018, but with proper planning and foresight, we are not destined to have these same challenges in 2019.
The Ugly:
As we look at a continually improving story in the Tucson market, the cautious, reactionary approach to acquisitions employed over the past several years has put the land market in a 2-3 year “catch up” phase. The consensus is that Tucson is a housing market that should support 6-7,000 permits annually. To get back to a base of 5,000 permits in Tucson annually by 2022, the market will need to deliver approximately 22,000 finished lots to homebuilders in the next 5 years. That would translate to about 4,400 lots per year which is more than double the lots that have been purchased annually over the past few years. Obviously, to grow, the land deals done in Tucson desperately need to accelerate.
Outlook:
The rebound in the housing market is great news, and the land shortage – while problematic – is solvable. I think what is most exciting in the industry is that we do not know what the ultimate potential is, but we know it is at a much higher level than we are currently at. If we can continue to see builders shift their mindset from being reactive to proactive, our success and ability to capitalize on the market is virtually assured. And while we can always debate the long-range direction of the market, one thing is certain: Tucson will be a busy place on the housing and land side for many years to come!
Will White, Land Advisors Organization Tucson
Will White has led the Tucson office of Land Advisors Organization for 16 years, providing strategic direction for the sale and marketing of residential land to production homebuilders, lot developers and speculative investors throughout Pima County. Specializing in the marketing and sale of the regions top master-planned communities, Will has helped make Land Advisors Organization the top-volume land brokerage firm in Tucson. He works closely with Tucson’s top land developers and homebuilders and is known for his role in high profile, high price land deals throughout the region. For more information, White can be reached at 520.514.7454 orWWhite@landadvisors.com and www.landadvisors.com
SEE IT ALL: https://realestatedaily-news.com/good-bad-ugly-first-half-2017-tucson-land-market-review/
“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
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- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
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I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
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Walter Unger CCIM
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