For small builders in many parts of the United States, the battle to control land has already been lost. The old days of plenty are gone, and big parcels have become almost the exclusive domain of large builders.
"A few years ago, there was only one public builder in this area, and now there are eight," notes Rich Guerard, a builder/developer with Wyndham Deerpoint Homes in North Aurora, Ill. "Five years ago," he continues, "a piece of property might have five people bidding on it. Now there are several people from each [big] builder's land department, and they are very methodical. They map out the entire region, and they know the status of every parcel."
As if this daunting competition for land purchases wasn't enough, Guerard says small builders have fewer and fewer developers at their disposal. Why? Because large builders, who have their own development services, can afford to pay a premium price for land and make up the difference in home sales.
This tactic tends to reduce profit margins for independent developers by as much as 30 percent, Guerard asserts. Many of them simply surrender. Others simply join the invaders, purchasing and rolling over raw parcels to the big builders with no improvements. This creates a desperate situation for small builders, many of whom have come to depend on entitled, ready-to-build lots.
"Now the [public builders] are buying close to three-quarters of the land that's available," says Guerard. "For instance, we've been looking for months for a piece of land with 50 to 100 lots ready to go. But if it's entitled, it's already sold. The big companies are all looking for 20 percent growth, and they are recovering more and more of the market. There are simply no lots out there that would allow a small builder here to build in the affordable range."
Last stand?
That harsh reality has taken hold in other regions as well, where high land costs have forced small builders to abandon their traditional move-up and starter niches to serve an ever narrowing clientele--those who can afford more expensive custom homes.
In Atlanta, developer Rick Porter says small companies that offer affordable homes are becoming a thing of the past. "Now, even when we're far out [from the city], the price of land stays high," he says. "We have both an infrastructure and a public relations problem. Nobody wants to 'become Atlanta,' so we are allowed fewer lots per acre [because of zoning]. At this point we have a difficult time delivering entitled lots for less than $35,000 apiece.
"Some builders have gone into denser types of product, such as townhomes," he adds, but he believes wholesale conversion to such infill-friendly homes may take years.
Jim Durrett directs the Atlanta district council of the Urban Land Institute. He agrees that the move toward denser, infill building on smaller lots won't happen overnight. The city has an antiquated infrastructure (including an infamous, 100-year-old leaky sewer system), and zoning is only beginning to address the market need for denser housing.
He adds that while there is no lack of land on the outskirts of the city for new construction, "there is a lack of land that's near transit, that's affordable."
"Land scarcity does play into it," he adds, "but it's not the only thing--or the most important thing. NIMBYism comes into it, plus the need for higher density."
Defining scarcity
Surprisingly, when we ask builders in Florida, Colorado Springs, Colo., or Atlanta whether land is in short supply, they don't blame scarcity. Instead they believe that there's plenty of land to be had--but the political and regulatory obstacles to purchasing and developing it are enormous.
Alain Bertaud, an urban planner and consultant in Glen Rock, N.J., notes that "on the one hand, you have extremely low density in the United States, compared with the rest of the world," he says, "but there's not much flexibility in zoning. For example, the suburban roads here are much wider than they would be in other places for the same traffic."
He suggests that land use should conform to demand, rather than serving the whim of existing residents. "One indicator of that is that if you suddenly change the zoning in an area, the price of land immediately goes up. If zoning corresponded to demand, there would be no change. The price of land would stay the same."
Porter says big builders have been less able to dominate the land market in Atlanta because the land is divided by topography and old patterns of use. There simply aren't the big parcels here that allow big players to gain a quick foothold.
He also believes one reason for higher land prices in the Atlanta area is that the usual housing cycle hasn't played out. Demand never seems to flag. Yet he remains optimistic that the old cycles will return, eventually bringing land prices lower.
Wishful thinking?
Places such as Silicon Valley, in California, however, with a consistent median home price of $600,000, might argue against that optimism. Boom and bust property values seem a thing of the past. As the Washington Post recently observed, home prices in the Valley region have remained at the same hugely inflated levels, even when the NASDAQ lost three-fourths of its value. It also notes that "while [home] prices in Iowa or Idaho may look good by comparison, not many people want to move there."
Many density assessments consider land in the United States at large, not buildable land in the places people most want to live--near cities, along bodies of water, in scenic mountain vistas, or favored getaway locations such as Las Vegas (see "Trouble in Sin City," above).
Which explains in part why many towns from central Florida to California to the suburbs of Maine have hit the panic button in recent years, throwing up building moratoriums--a choice that raises land prices even higher.
According to Ken Rosen at the University of California at Berkeley (one of the few economists who correctly predicted California's dot-com collapse), escalating land prices caused three-fourths of the rise in home prices in the past 10 years. That helps explain why California home prices have risen to the point where only about one in four residents can afford to buy a home.
But what can builders do in the face of such powerful economic and social forces?
Survival tactics
"Builders now need to make themselves attractive to developers," says Jeff Rader, vice president for operations policy with the Greater Atlanta HBA. "They have to have a good reputation and a niche that distinguishes them."
Rader doesn't see the land situation in his region as a crisis yet, although small builders "don't have land out in front of them" like they used to. He says entitlement takes longer, and local jurisdictions often "down-zone property for no reason."
He points out, however, that the tough land market has had some positive effects: "For one, it has actually inhibited us from overbuilding, so we don't end up sitting on inventory," he says. "Also, developers can be more selective and hold out for builders who offer better quality product."
Like builders in other fast-growing regions, however, small builders in Atlanta are being forced toward higher-end floor plans to absorb land costs. "Location has become more of a key factor," says Rader. "If you're a cost sensitive person, you basically have to keep driving until you can afford a home."
Back in the suburbs of Chicago, Guerard has taken an increasingly common step: teaming with other small- to mid-sized builders to purchase land. It means putting old rules about competition aside. "I've done it with two or three other guys. Each partner does a different aspect.
"There are actually more small builders here than there were a few years ago," Guerard adds. "A lot of them are moving into remodeling and teardowns. But when you have 3,000 lots available [in the area] and one company is doing 1,000 homes a year, it's tough."
By Steve Zurier
Builders may find that there's plenty of green to be found in revitalizing their local brownfields.
The EPA reports that since the mid-1990s the federal government has spent more than $700 million to clean up and redevelop brownfields, funding that has leveraged $5.1 billion in economic activity and created some 25,000 jobs.
According to the federal Brownfields Revitalization Act signed by President Bush in January 2002, a brownfield is real property, the expansion, redevelopment, or reuse of which may be complicated by the presence of a hazardous substance, pollutant, or contaminant. The Northeast-Midwest Institute, a research group in Washington, estimates that there are 450,000 to 600,000 brownfields in the United States, including former dry cleaners and gas stations.
Many of these sites lend themselves to development by small builders. For example, in a field investigation of more than 100 brownfield sites in 12 New Jersey municipalities, the Northeast-Midwest Institute reports that 28 percent of the plots covered less than half an acre, making residential reuse an attractive development option.
"Many of these projects are going to be too small for the larger builders, so building on brownfields could be a good opportunity for some smaller builders," says Sven-Erik Kaiser, team leader for brownfields policy and legislation at the EPA.
Kaiser says interest in brownfields started in the early 1990s, when communities wanted to clean up and develop sites that were contaminated but were not severe enough to be designated as one of the 1,500 Superfund sites. The first brownfield project was funded in 1993 through a grant authorized under the Superfund. Revitalizing brownfields became a formal pilot program in 1995.
Under the new law, funding for brownfields increased to $170 million for fiscal year 2003, up from $90 million the year before. Roughly $50 million goes to the states to help them build up state response programs. The rest of the money is spent in one of three ways:
* Assessment grants of $200,000 that go to state and local government and redevelopment authorities.
* Direct cleanup grants of $200,000 per site that go to state and local governments, redevelopment authorities, and nonprofits.
* Grants of $1 million that go to states and local governments and redevelopment authorities to establish revolving loan funds for brownfields cleanup.
Kaiser says that along with expanded federal funding, the new law clarified the liability statutes. In the past, new buyers were liable for contamination even if they had nothing to do with it. The liability laws scared off potential developers. Now, as long as builders and developers go through the due diligence process outlined in the new law, they are not held liable. "The new liability protections make it more likely that a smaller developer can take the chance and get involved in developing a contaminated property," says Kaiser.
The process starts with a phase one assessment, a records search, visual inspection for contamination, and interviews with past owners that costs around $2,000. If potential contamination is identified, a phase two assessment is required. This includes hiring an engineering firm to conduct sampling, typically at a cost of $50,000 to $75,000. Actual cleanup costs, which include having an engineering firm develop a formal cleanup plan, average $500,000, but can be less than $100,000 for a small site such as a local gas station.
You never know: This house in Barton Square in Galveston, Texas, was built on land previously thought to have been contaminated by past light agricultural use and an unknown fill material that raised the site to the level of the flood plain. The fill turned out to be a selling point, as 40 homes were built on the 6.58-acre site. The project was completed last summer, and the homes sell for a maximum of $125,000.
The frenzy of home building in Las Vegas in recent years has stumbled on its own success. According to the Wall Street Journal, Vegas has become a battleground for builders trying to obtain land. Almost every deal involves a bidding war, and home prices are rising accordingly. This is true in part because the federal government owns the land encircling the city. Builders use 5,000 to 6,000 acres per year there for construction, and prices have been rising at 15 percent per year since 1997. According to the Journal's report, "Seventy-one local builders have shut down or sold out to national builders since 1996," rather than risk overpaying for land.
Ecologists argue against the modern economic viewpoint that land shortages are temporary--and that science and technology will ultimately amend the loss, especially of high-value agricultural land. They note that the experience of other countries has not borne out this theory.
For example, says ecologist Edward Goldsmith, "three countries of Southeast Asia regarded as having achieved the most economic growth have lost between 40 percent and 52 percent of their cereal growing land in the space of less than 40 years."
He adds, "It is not clear how these countries will feed themselves if this is allowed to continue."
Goldsmith argues that human survival will ultimately depend on reversing our sprawling land-use patterns. But he admits that such a move would require a complete rethinking of an economic cornerstone: constant growth. "At present we cannot do this," he says, "But if we fail, the global economy must one day collapse on its own accord.
Source: The Ecologist
Learn more about markets featured in this article: Atlanta, GA, Los Angeles, CA.
