Land Market 2016 Mid-Year Update
July 22, 2016
CEO, Land Advisors Organization
While the economy is growing stronger the need for land is rising. The Phoenix metro volume of overall land transactions has improved significantly from this time last year. This increase is being heavily influenced by the homebuilders and their rapidly declining lot and land inventory in the face of increased new housing demand.
With a very low resale housing inventory of only 3 months, there is and will continue to be increased demand for new homes. The builders need to project forward several years of lot supply required to fuel the current and projected needs based on their growth plans. Very high occupancy rates of apartments and single-family homes is affirming the need for new construction. The fact that housing is “full” is also leading to some of the highest rent increases creating a new motivation to own versus rent.
2016 Trends and Changes: Permits & Employment
Single family permits are up 20 percent year over year and expected to total 18,000-19,000 permits for 2016. All projections call for an increase in permits each of the next several years. Phoenix Metro employment growth is 6th in nation. Our jobs to new housing ratio is at an unsustainably high ratio and will lead to pressure for new housing.
Costs & Returns
Cost to build is up approximately 4 percent year to date. Labor constraints are a big part of the problem. Cost increases must slow or it will create further affordability issues and put additional pressure on builder profitability. New home prices are seeing some upward pressure, but only enough to cover cost increases. Residential land and lot prices have stabilized from the meteoric rise of 2010-2013 and are expected to remain stable until builder margins begin to rise. Builders are struggling to achieve the ideal 20 percent gross margin and 20 percent Internal Rate of Return on new and existing projects. Some builders are adjusting expectations to find top line revenue and gain market share.
Approvals Remain Difficult While Supply is Diminishing
Builders have removed inflation of home price from their financial projections making it harder to get deals financed or approved by their financiers and land committees. The builders desire to buy 12-24 months of inventory versus larger, longer land positions. All the while, small bite lot and land inventory continues to shrink in the face of increasing demand. There are few true lot developers left after the 2008 crash to provide builders with finished lots. The opportunity to develop lots is also muted by the profitability issues referenced above. There is little room for land and lot developers to make a middleman’s profit.
Land Advisor Organization proprietary research shows builder land and lot transactions are on the rise as depicted in the graphs below.
As we put all of these trends together, we will see an increase in the volume of land transactions just to supply the current demand for housing. As we add up the projected demand in 2017-2020, we will need to develop over 100,000 new lots with 50 percent of these lots in the West Valley. It has been nine years since the crash and we are just at the very beginning of a new building phase. Apartment building led this phase and we are about to see single family building activity increase significantly. Starting in 2017, we will begin the commercial building phase of office and industrial and 2018 will finally see new retail construction.
The land market is a leading indicator of building activity soon to follow. The Land Advisors Organization is at the forefront of this land activity and we are seeing a significant increase in our pipeline and recent closings. This new building phase will drive so many positive factors back into our local economy – primary to this is jobs, increased population growth, increased personal income and government receipts will also be on the rise.
The long awaited good times are arriving for all involved in the construction and housing industry.