Builders, start your backhoes and bobcats. The number of finished lots available in markets that buyers desire is dwindling fast, and developing raw land—which became a lost art for many builders during the recession—could soon be a necessity for growth-minded companies.
There are approximately 600,000 vacant developed lots in the U.S., which equals a 60-month supply based on the current rate of home building. However, the number of lots in A locations is less than a 17 months' supply, compared to a “normal” level of between 24 and 36 months. “This is a severe shortage,” exclaimed Brad Hunter, chief economist for the research and consulting firm Metrostudy, who presented these data during a seminar at the International Builders' Show on Wednesday entitled “Where’s the land?”
In contrast, there are 34 months of B lots, 92 months of C lots, and 1,670 months of D, E, and F lots.
Hunter pointed out that single-family detached finished lots, “which drive [home] sales,” have been falling since the second quarter of 2007, and are now down to about 75,000, or 0.75 months’ worth of supply when the “equilibrium point” should be around 2 months. Houston’s supply of these lots, at 1.9 months, is at a seven-year low, he said.
This dilemma is exacerbated by the fact that housing starts in many parts of the country are accelerating. Inevitably, supply and demand are colliding in places like Boynton/Delray Beach, Fla., where there’s a 15.1-month supply of A lots and only a 1.7-month supply of finished vacant homes.
Consequently, “projects that were running really hot have had to slow down,” said Hunter. And the rush to acquire or control A location lots is causing prices to escalate. For example, in Atlanta, where only around 10% of its 140,000 finished lots are where home buyers actually want to live, lot prices rose 35% last year. Highly desired lots in Dallas are fetching $1,700 per front foot, between $1,200 and $1,600 in Denver, and as high as $3,400 in Boca Raton, Fla.
Hunter observes that, short of developing their own land, which can take years and many regulatory headaches to get ready for construction, builders facing a lot-shortage quandary are rationalizing their land positions and accepting lesser-quality lots. “C has become the new B," Hunter quipped, in places like Phoenix, California’s Inland Empire, and some areas of Florida. Builders are also looking for A lots in C locations in places like Atlanta; or are turning their attention to building in emerging markets such as York County, S.C., and Fort Bend County, Texas.
Meyers said he expects large public builders to also start pursuing more mergers and acquisitions to bolster their lot pipelines in certain markets.
Meyers noted that land is most constrained in markets where job growth is strongest, such as San Jose, Calif., or Washington, D.C. Phoenix added 40,000 jobs last year, so it hasn’t been surprising that land investors have been flocking to Phoenix, where Meyers estimated there are 37,000 builder-ready lots (43% of them in Pinal County), and projected that 25,000 residential permits would be issued in 2013.
Land transactions in Arizona rose by 26% in 2012. But this is a market where 72% of the available lots are controlled by home builders. In small and midsize markets, that kind of concentration can be onerous for private builders trying to compete for land with national and large regional builders, said Sanderson.
“And in these markets, people are not going to drive long distances for good schools,” he added.
In small to midsize markets, Sanderson said builders are facing lot prices that have reset to 2000-2004 levels; “zero” availability to borrow from banks for acquisition and development; an uncertain regulatory climate; and environmental opposition to development in general.
So he offered advice to these builders about where they might obtain land. There’s still some bank-owned property out there, but its quality and location are variable, he said. Sanderson also noted that banks “want out” of lending for land development, so builders’ best bet for financing might be private equity for a while longer.
Sanderson also suggested that builders consider adaptive reuse of retail and light commercial space; infill and teardown opportunities; taking over failed subdivisions; picking up land in tax sales and auctions; and relying more on Realtors and brokers. “They call them ‘broke-rs’ for a reason,” he laughed.
John Caulfield is senior editor for Builder magazine.