Timing the entrance of a new project into the market is always a nerve-wracking undertaking. During periods of expansion when new housing is in great demand, speed to the marketplace is key. Competition for lots has been fierce, and the success of a project depends on the capacity to make quick decisions. In the present market, quick decisions can come at the expense of a well-informed analysis as the lost opportunity of a good project may outweigh the consequences of a less than stellar performer.
Conversely, when the market is contracting, risk increases and the process should slowdown enough to enable thorough review and informed decision-making, such as when the market will begin to expand again and how much demand there is for a certain product.
There are many market variables to consider when determining the most appropriate time to bring a project online, including the condition of the general housing market, employment trends, energy costs, consumer spending, planning and zoning, public improvements, and financing alternatives, among others. The list goes on and becomes increasingly complex when attempting to predict what each will do in the future. However, understanding the status of a competitive market area (CMA) around a proposed project will infuse objectivity into the process and is a critical step to developing a timeline for when to bring the project to market.
Understand the current market: Each active new-home project within the CMA must be analyzed to determine its absorption, current levels of inventory, and remaining lots to assess potential build-out times. The CMA can be further segmented by product type, lot size, and price point to determine where the new project might follow behind another approaching close-out.
Understand the futures market: Once a build-out model has been established for active projects in the CMA, the next step is to apply the same routine for all of the known future projects. Information about future projects is typically harder to come by, but knowing the entitlement status and anticipated start date will help clarify the future’s competitive environment.
The trend for future lots in Utah reflects how developers have responded to recent market expansion. Currently, there are a combined total of 241,022 future lots in the Greater Salt Lake and St. George market areas, including conceptual, preliminary, and final platted lots for single-family and attached for-sale product. Over 31,000 of these future lots are considered to be “under development,” meaning some sort of actual development has begun on the lots. The number of projects moving through the entitlement process continues to increase because of demand and current low inventory of available lots, however the process itself is getting slower due to many factors and therefore limiting the number of lots that get approved and developed.
With 31,000 future lots currently under development and another 22,500 finished lots on the ground, builders should theoretically have their choice of lots; however, that is not necessarily the case. Based on the current pace of absorption, the 31,000 future lots under development represent a 16.3-month supply, which could help relieve some pressure from the already low lot supply, however this will not fix the lack of inventory. The roughly 22,500 vacant developed lots on the ground represent an 11.8-month supply, therefore the need for more lots is greatly needed. Zonda considers a healthy level of vacant developed lot inventory to be between 18 to 24 months, therefore the current level is well below equilibrium.
It’s often stated in the home building business that “timing is everything.” But within today’s market environment, forces out of your control can dictate the ultimate performance of your project. What can be controlled is understanding the current and future competition around a proposed project, in order to make a logical decision about the appropriate time to bring a project to market.
