Land and lot supply remains a top issue for home builders in 2024. Delays in land development, including entitlements, zoning, and plan approvals, are driving up development costs and hampering market activity, according to Zonda’s most recent New Home Lot Supply Index.
The overall market remains “significantly undersupplied,” as it has since 2017 and NAHB chief economist Rob Dietz says lot supply is likely to get even tighter in 2025 relative to the current need for construction.
Builders and developers have been employing solutions to mitigate the challenges in the current market while also providing a runway for future activity to decrease the housing shortage. To understand the challenges related to the lack of developable land in high-growth areas and the relationship between land supply and housing attainability, Builder spoke with Noah Breakstone, CEO of Florida-based real estate and land developer BTI Partners. In addition to outlining market conditions and challenges, Breakstone highlighted the approach of BTI Partners in Florida to help combat attainability and affordability challenges.
What is the current state of the land market?
Overall, what we’re seeing is that lot supply and land has been undersupplied for quite a while. I think that has put a lot of stress on the home building market with the public home builders, and especially for attainable and affordable housing. I’m not sure if I see that changing in the near future. I would love to see it change, but I think there is a lot of work to make that happen. Housing starts in the last report were at 1.25 million [annualized] starts [and] where they should be normalized is about 1.8 million. There is a need for housing affordability, a need for more housing units, and we are confronted with the cross winds today of high interest rates and inflationary pressures. Something very interesting is that prices always go up very quickly—as we saw for materials—and they are extremely sticky in terms of being able to come down. We haven’t seen them come down to any substantial extent at this point. I think that puts a lot of added pressure on the market.
What additional challenges are in play in the land market in high-growth markets?
For the type of product we look to do, it is more the mid- to long-term land. By the time we go through approvals, zoning, underwriting, entitlements, design, and installation of horizontal infrastructure and are ready for the home builder to go vertical, it’s a minimum of a three year process. You just can’t turn on the spigot of available ready-to-build land inventory for the home builders when that need is immediately there.
That’s one of the difficult challenges in our industry because by the time you go through these processes, it takes a good amount of time. Three years out from now the market could be dramatically different from where the market is today. There’s a lot of crystal balling that goes into that. What we’re trying to do is stay ahead of the market. If we had all the approvals now, we probably would sell the majority of [our paper lots] very rapidly because the need of [land] today is so vital. The need is there, we are active buyers in the market despite where interest rates are today and the compression that we see in housing starts. Part of what we look to do is see where job growth is and where population growth is and those are the two fundamental key ingredients in household formation. Knowing that when we are ready to deliver paper lots to the public home builders or the regional privates, if it’s not today it’s tomorrow. That market is going to be there as undersupplied.
What solutions are being employed to help solve for housing attainability and housing affordability?
We’ll find a little more affordability as we go further out, in terms of distance. We look at proximity to major work centers as an important criteria [as is] access to highways. What we find is that while there were 60- to 70-foot lots when interest rates were very low, when interest rates, labor costs, and material costs are high, lot sizes start to get compressed. Instead of 50-, 60-, 70-foot lots, you’re going to start seeing 40-foot lots, 35-foot lots, townhomes, and different ways to add more density to projects to create more affordability. When we have inflationary pressures that we are seeing, we will also see the compression in the average size of a home to create a more affordable price point. Lot size, square footage of homes, the density of communities, [and] amenities, all of these are tools that can be used to create more affordability.
Are work-from-home trends influencing the attractiveness of land further from employment centers?
I don’t think we know the complete answer post-COVID as it relates to [work-from-home]. I think everyone is trying to understand what that will mean. I think it has caused the builders and many municipalities to focus on effective public transportation. In Florida, we are becoming a lot more effective at looking at ways to create connectivity and rapid transit so there can be more housing and affordability further out in more remote locations. What we are seeing is many more hubs that are being created around the transport areas in terms of multimodal hubs. I think that is going to continue to grow and give people the ability to live in more remote areas and less developed areas, more attainable and affordable areas, and have connectivity to the job centers.
For BTI Partners, what is your approach to building infrastructure land for builders?
We look at it holistically. We have a great opportunity when we take large parcels of land that can be anywhere from 1,000 to 5,000 acres and how to lay it out. In Florida, with 365 days of good weather, [it is important] to have trails that go out to the environment and health and activity and public parks. I think there is a great opportunity as we try to incorporate those elements into our communities. We [also] have a big focus on the quality of education. You’ll find that the better the quality of education, the higher the quality of schools, the higher the value of the homes. In a lot of our communities, we developed a focus on looking at some of the best municipalities that have great school systems. [In some cases], we are inviting different charter schools that focus on STEM or STEAM, that excel in being A rated schools in the arts, sciences, and entertainment areas. What we are finding as we develop these communities is it’s a very large attraction if you can go into a community and say you have schools with a history of being A rated schools.
Having trails, parks, community centers, and quality education for our homeowners are all critical ingredients to attract people to those areas. Those are all some of the most important elements that we look at when developing a community.
What are the important factors in evaluating areas for investment with a mid- to long-term project window?
What we try to look at is two fundamental things that create household formation: job growth and population growth. Is the environment we are looking at pro business? Are people attracted to those communities and those cities and those major metropolitan markets? Do we believe they are going to continue to have net in-migration and continue growing? Florida and the Sun Belt have continued to achieve those benchmarks. Great weather, low taxes, a pro business environment, growing cities, and relative housing attainability and affordability. As we look at markets, we are going to have downturns within that time period. It is impossible not to. What we want to understand is upon market recovery that these markets are going to continue to be attractive and are going to continue to grow. We believe the Sun Belt states and Florida continue to illuminate on those issues compared to the rest of the country.
What are other solutions to attainability that can be employed by developers, municipalities, and builders?
I think real estate tax incentives from cities are critical. Looking at infrastructure as it relates to transportation is critical. I think we’ve got to get back to down payment assistance programs. We used to do a lot more of that, we’ve gotten off of that. It may be interest rate assistance. All those types of programs to make housing affordable takes both the private and public sector working together.
I think it’s a work in progress. Florida has been very active in trying to solve these problems. A lot of [other challenges are] impact fees, permitting, and processing time. Just imagine if we could turn on the fire hose a lot quicker and it wouldn’t take for a master plan community between three or four years to activate [and] instead we could turn it on in six months. It would have a tremendous amount of benefit. The carrying cost for land for that three to four year period, it’s attached to the home buyer in terms of increasing those costs. I think streamlining those efficiencies will only be additive to creating more value to homeowners and affordability. We still have much more work in that area with the public sector working with the private sector. I think it’s critical throughout the process to sharpen our pencils in terms of our time. Ten years ago, that approval process that we are seeing—three to four years—used to be five to six. years I think the approval process has really improved over time dramatically, I think it has a good amount of distance to go.
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