By: Aaron Mendenhall, Chapman Lindsey Commercial Real Estate Services

TUCSON, Arizona — At the end of 2016 we were excited about attaining 2,699 permits and 1,904 single family house starts for the year. When compared to historical averages of 4,000 to 5,000 permits per year, these numbers seem low. However, it highlights the duration and severity of the recession in Tucson. After bumping around the bottom with around 2,000 permits for several years, a jump to 2,700 permits was a welcome change (a 24% increase from 2015). Last year we had several significant job announcements which, among other things, seemed to improve everyone’s outlook on the Tucson economy and market strength.

So far in 2017 market optimism has continued as permits surged even higher. We started out the year with 241 permits in January, increased to 254 permits in February and finished March with 299 permits. Permit counts have increased month over month since November. The 794 permits for the quarter is a 27.9% increase over the first quarter in 2016 and a 19% increase from the fourth quarter 2016. Increased permits and house starts means reduced lot inventories. Builders have been cautiously optimistic about the strength of the housing market and have been working hard to fill their pipelines with lots. As existing finished lots are pretty much non-existent in the market, builders have been purchasing both raw land and platted lot subdivisions for the past several years. The rate of new lot development has been increasing and just last year more new lots were developed and introduced than were built upon. These new lots are needed, particularly as the market continues to improve.

For a historical perspective, single family finished lot inventories were at 10,179 lots at the end of the first quarter in 2008 as the recession was hitting. Builders and developers pulled back from introducing new lots and focused on existing inventories. Finished lot inventories dropped rapidly without replacement lots being introduced to the market. Within a five-year span builders burned through over 6,000 lots and the inventory fell to 3,958 lots by the end of the first quarter of 2013.

Luckily builders and developers recognized the need for new lots as existing lot inventories were picked through and remaining lots were in less desirable locations. They began purchasing platted lots in 2012 and by 2013 these lots started entering the market. The rate of lot inventory reduction began to decline but there were still lot deficits every year. Finished lot inventories bottomed out at 3,013 in the fourth quarter 2015 but stabilized in 2016 as new lot inventory finally exceeded what was being built. At the end of Q1 2017 there were 3,118 finished lots.

As mentioned before, with the improving market and increased permit activity there is even more pressure on builders and developers to continue to introduce new lots to the market to maintain positive lot inventories. The builders’ pipeline management is looking out several years, but they have to walk the fine line of having enough lot inventory to sustain and grow their position without over exposing themselves in the event of a slowdown. The effects of the Great Recession are still in the back of everyone’s minds.

Fortunately, there are several new platted communities that will be coming to market soon that will help alleviate some of the builders’ needs for additional lot inventory in strong locations. We are working with Red Point Development to bring out several new single family communities in the Northwest submarket later this summer, primarily along the Thornydale and Twin Peaks corridors. Combined, these communities will introduce over 670 lots.

DeAnza, located on Hardy Road just north of Cortaro Farms Road, will introduce 251 lots in a coved layout mixing 45’ and 55’ lots.

The Hardy & Thornydale property is located on approximately 30 acres. It will have 84 lots with average lot sizes of 55’x115’.

The Thornydale & Magee property is located on the Northwest corner and is comprised of approximately 17.7 acres. The property will yield 36 lots with average lot sizes of 55’x120’.

The Thornydale & Linda Vista property is located across from the Mountain View High School on the Southeast corner. The property is approximately 18 acres with 36 lots. The average lot sizes will be 55’x115’.

Linda Vista Village is a 155-acre property comprised of five single family communities. It is located on both the north and south sides Linda Vista Boulevard just east of the Tucson Outlets and Twin Peaks Road. In addition to the single-family communities, other pads have been identified for multi-family and commercial uses. Concept plans currently have 265 single family lots with a variety of widths including 45’, 50’, 55’ and 60’. Lot depths will average 115’.

Market Overview

Lot Supply
The finished lot supply increased by 22 lots in Q1 to 3,118 due to an increased number of new lots introduced to the market. There were 580 new finished lots added in Q1: 128 lots in Blue Agave (Mattamy); 116 lots in Ridgeview (Mattamy); 78 lots in Tangerine Ridge (Pulte); 71 lots in Mountain Vail Ranch II (Richmond); 60 lots in Gladden Farms (Lennar); 58 lots in Gladden Farms (Richmond); 26 lots in La Estancia (Meritage); 13 lots in Andrada Ranch (Cornerstone); 12 lots in Haciendas at Wrightstown (Mesquite); and 10 lots in Estates at San Joaquin (Catland Properties LLC). During Q1 builders began construction on 558 new single family homes. This was 123 more home starts than last quarter and 12 more than Q2 2016, the highest quarterly number last year. This was also the most in a quarter since Q1 2010.

There are currently 18 single family communities (1,329 lots) in various stages of construction throughout Tucson. Of these up to 528 could be finished in Q2 2017. Up to eight new communities could be added next quarter and additional lots will be added to existing communities.

There are approximately 74 active SFR communities throughout the Tucson area. Six communities were built out in Q1, but are still selling the remaining specs: two in the NW, two in the Far South and one in each of the NE and SE submarkets

Lot Supply Statistics

SFR Community Statistics as of March 31, 2017:
▪ 77 active traditional SFR communities
▪ 6 communities were built-out or closed in Q1 (most still selling specs)
▪ 10 new communities were finished or opened in Q1 (some were additions to existing)
▪ 18 communities under construction (1,329 lots / up to 528 could be finished in Q2 ’17)
▪ up to 8 new communities could be added in Q2
▪ 15 residential land transactions in Q1 2017 totaling over $20.7 million
▪ 5 finished lot transactions
▪ 5 rolling options in 3 communities
▪ 1 investor land transactions – raw land for future development
▪ 4 platted lot transactions to builders – 2 in SE, 1 in SW and 1 in Far South

Lot Ownership
During Q1 2017 investor inventory increased by 10 lots while builder inventory increased by 9 lots.
▪ Builder controlled lots: 2,510 (80.5%)
▪ Investor controlled lots: 608 (19.5%)

Investor Ownership Q1 2017:
▪ 51.6% Far South submarket (206 lots)
▪ 15.6% Northwest submarket (257 lots)
▪ 13.5% Southeast submarket (106 lots)
▪ 13.5% Southwest submarket ( 39 lots)

Sales comp data from Real Estate Daily News – RED Comps (realestatedaily-news.com)

The Land Team of Dan Feig and Aaron Mendenhall at Chapman Lindsey Commercial Real Estate Services in Tucson can be contacted directly for additional insight and information at 520.747.4000

To read the full Q1 Tucson Land Update web version click here.

Strong permits, house starts and land development add to an improved economic outlook

TUCSON, Arizona — The year 2016 was a good one for the Tucson home building market and for Tucson in general. The Great Recession took its toll on Tucson and attitudes regarding the economy and future growth were often negative for many years. It seemed jobs and growth were passing us by in favor of larger markets, including Phoenix just to our north. The housing market began its turnaround in 2012 but it was slow. The driving force of the housing rebound was the move-up markets, particularly in the Northwest submarket. While the higher prices and increased sales were welcomed, there was also an underlying concern of the sustainability and depth of this move-up market in Tucson where the median household income is only $46,162 (per US Census). The lack of high paying jobs was always a point of discussion.

In 2016 things began to change. In March, Banner Health announced that it had allocated $500 million for capital improvements in Tucson which would result in significant construction and other related jobs. Home Goods purchased land to construct a distribution center and announced in April that it would be looking to hire 400 employees initially and then increasing that number to 900 in subsequent years. Then in May, Caterpillar announced that it would be relocating its Surface, Mining & Technology Division to downtown Tucson. They estimated this would bring in 600 executive level jobs within the next five years. The biotech company Monsanto purchased 155 acres in Marana in October and plans to employ 50 initially but the operations may expand to employ much more. Raytheon announced in November that they plan to expand in Tucson and hire an additional 2,000 employees over the next five years. That same month Lucid Motors announced plans to construct a plant in Casa Grand to assemble electric cars. It hopes to employ 2,000 workers and be at full capacity within six years.

The impact of the employment and economic benefit of these future jobs is significant. An additional benefit that is hard to quantify is the number of supporting vendors and businesses that will follow these larger corporations to Tucson. With these job announcements attitudes regarding the economic outlook of Tucson are now extremely positive, a near 180 from just a year ago. This optimism is spreading through the home building industry as now they can more easily identify future demand for housing.

The builders and developers deserve credit for exercising their faith in the future growth and strength of the Tucson market as 620 permits were pulled in Q1. This was 80 more than Q4 2015 and 150 more than Q1 2015. In Q2 there were 750 single family permits pulled. This was followed up with 622 and 667 in Quarters 3 and 4 respectively, for an annual total of 2,699 permits, a 24% (523 permit) increase over 2015.

Builders have been working hard to fill their pipelines with lot inventory over the past few years primarily with platted lot purchases. These lots began to enter the market in significant numbers in 2016 with 1,953 new lots being completed. This is a roughly the same number as the prior two years combined when 873 and 1,139 lots were brought to market. It will be crucial to maintain or increase this pace of development to meet the demands of the improving market.

One negative aspect of the year related to land was a significant drop in the value of land transactions and correlated lots. In 2016 the total value of the 49 single family related land purchases was $64.9 million with 1,474 lots. This is considerably lower than the prior four years:

2015: $118.8 million / 3,766 lots*
2014: $108.6 million / 2,457 lots*
2013: $127.1 million / 4,765 lots*
2012: $ 97.4 million / 2,362 lots*

* lot numbers are approximate as some raw or block platted land deals did not have lot counts associated with them. Once entitled, these lot counts will increase.

Each of the prior four years had at least one extraordinary purchase, which 2016 lacked. While this lower number of lots purchased should not impact 2017, it may start to impact 2018 and beyond if builders and investors do not increase their land purchases and lot development going forward. The current strong economic outlook should bolster confidence and we should see more deals being done this next year. We are excited for the Tucson land market as we begin the new year in 2017.

* Permit data from Bright Future Real Estate Research, LLC and Sales comp data from RED Comps a division of Real Estate Daily News Comps (realestatedaily-news.com)

For the full report click here.  To learn more Aaron Mendenhall can be reached at 520.747.4000 x102 for additional insight and information.

Lot inventories, or the lack thereof, could shake up sales leaders

The Tucson housing market continued its upward momentum through the 3rd Quarter. While permits and house starts were below the stellar 2nd quarter numbers, they were still higher than any other quarter since the downturn. We are on pace to see 2,600 permits in 2016 and 1,800 single family house starts. It is good to see the sustained growth in the Tucson market and an improved outlook for the future.

As has been discussed in prior quarters, the single family finished lot supply is low. Over the past several years the builders and developers have taken notice and have been purchasing primarily raw and platted land around Tucson. These investments are paying off as new lots and subdivisions have been completed and introduced into the market at rates about the same as they are being built. Finished lot inventory bottomed out at 3,015 lots at the end of 2015 and has been holding steady around 3,140 throughout 2016.

Nearly 500 lots have been introduced in each quarter this year which has kept pace with the increased permits and house starts from the builders so far. It is interesting to compare the volume of new home sales to lot inventory levels and to lot development. Some builders have been more aggressive than others and are positioning themselves for future success as lot inventories throughout Tucson continue to tighten. Several builders who have enjoyed strong home sales are finding themselves in need of future lots to maintain their market positions. Comparing the top five builders in these different areas sheds some light on how builder ranking and positioning may change in the next few years.

When looking at new home closings over the 12 months ending September 30, DR Horton is the clear leader with 403 closings. Richmond was a distant 2nd with 261 closings with Pulte right behind at 221. Lennar was 4th with 172 closings and Meritage 5th with 149. KB Home and LGI Homes were the only other builders with more than 100 closings with 134 and 104 respectively.

The existing finished lot inventories of builders is much tighter.. Meritage currently controls the most finished lots at 321 with Maracay right behind at 316. DR Horton’s fast sales pace has depleted their lot inventory down to 294. KB Home comes in 4th with 265 lots and Lennar in 5th at 243 finished lots.

Pulte is currently has the most lots under construction with 310. Mattamy is right behind them at them at 308 lots. KB Home is developing 227 lots and DR Horton has 209. Meritage comes in 5th with 61 SFR lots currently under development. These numbers are what is currently being developed. Many builders have other lots currently going through the entitlement process that should start development within the next year or two depending on entitlement challenges, but it will most likely be at least two years prior to being ready to start constructing homes.

When combining existing lots and lots under development we see positioning that should be representative of builder success for the next year or two. This gives an idea of the lots that each builder will have to build on in the near future and highlights which builders need replacement lots the most. (see chart for details)

The top 5 builders with the most combined lots in Tucson are as follows: DR Horton – 503; KB Home – 492; Pulte – 441; Mattamy – 420; Meritage – 382. Please note that these numbers can change quickly as development of platted inventories begins.

Builders have spent over $26 million so far this year on platted or raw land with over 1,200 future lots. Last year they spent over $73 million for approximately 2,800 future lots. The timing of entitlements, approvals and development will determine their release to the market. These lots are coming but more will be needed as the housing market continues to strengthen in Tucson.

To read the full Q3 Land report click here.

For additional insight and information contact Daniel Feig / 520-747-4000 x103 danf@chapmanlindsey.com and Aaron Mendenhall / 520-747-4000 x102 aaronm@chapmanlindsey.com at Chapman Lindsey Real Estate Services.