Tucson Land Trend Report: October 2014
Will White • published in the October 2014 issue
We can all agree that land is the foundation of housing; we can’t build a house without it. It is becoming more and more apparent where the future supply of lots will be coming from. The real question is how homebuilders can secure this needed inventory while underwriting to today’s challenging environment. As the active areas like the Tangerine Corridor begin to run low on supply, the big question for 2015 is which homebuilders will be first to pioneer new areas. The Tucson metro area has seen another year of minimal lot supply being prepared for our market and even at these low permit levels there is a clear picture emerging. As we work to keep up with demand for the next 5 years, all signs are pointing forward.
I compared notes and themes with Ginger Kneup of Bright Future Real Estate Research as we put together our recent land and housing forecast at the Ritz Carlton at Dove Mountain. Currently the homebuilder owned finished lot count is at 2,994. This is getting low enough to show concern as we move into 2015. Historically the builders need to stay above 2000 lots and as we move into next year we will be going far below this number. We estimate that we are on our way to 3,500 permits by 2018. To put this into perspective, the last time we were under 4,000 permits was 1991. So amazingly, we are working to get back to 1991 levels over the next five years. Even with these low numbers, to accommodate this improvement we will need approximately 11,000 finished lots to be delivered in the next five years. All of us in the business know this is an uphill battle based on what is available. What is clear is the easiest source for these needed lots is in several of the active and planned master-planned communities that have entitled, “super pad” lots. This will be the first place homebuilders will look as these can be prepared in 2015.
Our market has become very reactive. When new homes are selling well then there is a surge of land acquisition and when sales slow it seems like everything halts. This is understandable because it is difficult to underwrite deals in today’s environment. The challenge is this is creating “mini-cycles” within the larger cycle we have seen. The homebuilder deal volume went down to an all-time low in 2011 and then shot up 3 times that amount by the end of 2013. All the land was bought in anticipation of a strong selling season that did not materialize. This caused 2014 to be a sluggish year where only 1,126 lots have been bought YTD. The most interesting fact is that almost half of those lots were purchased by homebuilder expanding to Tucson, Mattamy Homes and Toll Brothers. The one thing we do know is that the most successful homebuilders have taken on a proactive approach vs. reactive in this market. They have been first to secure positions in the up and coming submarkets. It is interesting that the “Tangerine Corridor” name was only adopted after some Homebuilders already had shown success early in this area. The mini-cycles will continue until we have a more stabilized absorption pattern to count on.
As the region’s land trading has been extremely active in 2012 and 2013, several large positions have been acquired. This fact coupled with the existing constraints has helped to further define the areas of Tucson that have lot inventory and where deals will most likely be happening in the next 12–36 months. It is clear that the northwest submarket continues to be the most active. The new retail at Twin Peaks is a big boost to projects like Gladden Farms, Saguaro Bloom, Dove Mountain and the Twin Peaks Corridor, which have shovel ready inventory. The next area that has been seeing a lot of activity is the I-10 Corridor and Vail. This area too has seen new retail and housing and is close to our current employment base. The Vail school District is a big draw for housing as well.
Projects such as La Estancia, Mt. Vail, Rincon Knolls and Rancho Del Lago are seeing a lot of attention from homebuilders currently. The growth is pushing out southwest to the planned communities of Pomegranate Farms and Sendero Pass. Rancho Sahuarita and the Corona de Tucson area round out the southern corridors and also have lot inventory ready for construction.
The challenges that homebuilders continue to face are slower absorptions affecting the ability to buy needed future inventory, increased competition by both expansion homebuilders and market share driven builders, and varying acquisition strategies. Tucson is going to remain competitive and a good place for expansion in Arizona. The most successful homebuilders have been the pioneers of the new areas and have been rewarded for it. This proactive approach is more important now than ever as we look to open up different geographic areas. With limited supply, increasing competition and a need for 11,000 lots in the next five years, the recipe is in place for a busy time in southern Arizona.
Since opening the Tucson office of Land Advisors Organization in 2001, Will has been responsible for the sale and marketing of residential land to production homebuilders, production lot developers, and speculative investors throughout Pima County, with a particular emphasis on land activity in the Town of Marana. In the past 24 months, Will has successfully negotiated the sale of over 1,600 finished or platted lots in the Tucson Metro area. He can be reached at WWhite@landadvisors.com.