TUCSON, ARIZONA — A recently published article portrayed what many in the industry felt was a rather bleak future for Tucson real estate.  While many of the challenges outlined are real, the reality is that overall trajectory of the market is extremely positive, and we have a lot to look forward to in the months and years ahead.

Story of Supply – dominating the market for 2018-2019
There is strength to the local market on many fronts. Median new home price is in record territory, sales and permits continue to improve every year, economic news is strong with continual job announcements that are starting to show tangible results in new home sales and population growth.  Tucson (production) homebuilding is on pace to show a nice improvement over its previous year. If the second half of the year resembles the first, this would put the new home permit level at an (approximately 150%) increase since the market bottomed out in 2011.

Supply, however – or the lack thereof – remains the main theme. MLS listings are down 10% from a year ago, resales are up, SFR permits to date are at 1855, lot acquisitions are at 751, community counts continue to dwindle, direct costs for construction of new homes continues to be high, horizontal construction costs have seen a sharp increase over a year ago, and labor on all sides is hard to come by and getting more expensive.

The lack of lot acquisitions remains a concern as homebuilders are tracking acquisitions at only 40% of what they are absorbing through based on permits. The upside? Last year this produced a monster second half of lot buying activity, and that likely will be the case this year as well.  Unfortunately, even with any second-half buying surges, this constrained inventory has led to the obvious result: rising prices.  Home prices have risen swiftly and, without an injection of inventory, prices will continue to rise over the next couple of years.

Acquisition Breakdown
Thus far in 2018, homebuilders have closed on only 751 lots in ALL the Tucson Metro area. As we have mentioned before, “shovel ready” lots are extremely hard to come by, and most of the attempted deals outside of this “ready now” category have many challenges to get them across the finish line and are (generally) not getting done.

The master plans now have builders that have purchased and performed well and have new blocks ready to go just in time. These builders have a huge advantage as they have created relationships with these owners and make the process easy to reload. The active homebuilders in these projects have the convenience of a large runway of land available to them and are buying lots and getting them developed in time. Homebuilders that are not in these projects may have a difficult time getting positions as future blocks usually get ordered before they hit the market.

And, while this ‘reloading process’ might be easier for some, it is not without challenges.  Most notably, these are the rising costs on the direct and on the lot construction sides. There are several larger deals in the works and it will be extremely important for the market to have these closed and under construction. The consequence of not getting more lots under development will be continued fighting over limited supply and rising home prices in all areas.

Hot areas 
The areas getting the most attention from the homebuilders continue to be the Northwest and the Southeast submarkets. These areas are not only where the majority of the new escrows are occurring; these two areas of Pima County have been the source of almost 80% of the homebuilder transactions in the past few years.

The projects that are doing well continue to be the master planned communities in these areas. Gladden Farms, Dove Mountain, La Estancia, and Rancho Vistoso all benefit by having multiple homebuilders driving traffic and offering different product.

An interesting shift that we have seen in 2018 are homebuilders targeting small lots and affordability versus the move-up opportunities we saw them go after in the past few years. This target is universal, be it our existing Tucson builders or the new ones looking to enter the market.  Also, as new home pricing continues to rise, be on the lookout for builders pushing farther out of the metro area to find the affordability in land/lot pricing that they require.

Pricing 
Pricing is driven by economics and all factors currently point to land prices rising over the next 2-3 years. The supply of shovel ready lots is at an all-time low, and the demand for more lots to maintain a multiyear pipeline in a continually improving market is strong. The costs to improve the lots continues to rise and with most of the region’s developers managing lot construction and guaranteeing the finished lot price, the lot prices will have to rise to warrant a strong enough land residual for them to consider selling.

As we look into the crystal ball, the answer is clear.  The time to lock up these lots is now at current pricing as prices will be forced nowhere but up for some time in Tucson.

Summary
Tucson’s housing market continues to improve year over year. The market has pricing power and sales and permits are increasing at the same time. Tucson also continues to have very positive job news which is strengthening the market, and we believe that you would be hard-pressed to find a component of the Tucson market that is not advancing.

I have a lot of clients ask us “when do we return to normal numbers?”, and our answer is that “this is the new normal market”.  Supply will be our biggest hurdle for the next 24 months as it continues to be out of sync with demand. Unfortunately, this year did not produce enough first half lot acquisitions to ease the problem into 2019. It looks like Tucson’s residential land game will continue to be played reactively, which will force decisions by the area’s homebuilders and pricing by the area’s developers.

The best lot deals for the builders over the next 24-months appear to be in front of them right now as labor, infrastructure, and overall entitled lot supply is extremely constrained and will force prices up. The solution is to get ahead of these issues by targeting land positions now and to work closely with the main developers to arrive at prices and structures that will work.

As we have been stating for the last few years, this lot shortage is real and now we have other factors at play constricting it further. In summary, Tucson’s housing market is up almost 150U% from the bottom of the market.  The question then becomes, “when are we going to make enough room to really benefit from all the good news?”

Will White has lead the Tucson LAO office for 16 years, providing strategic direction for the sale and marketing of residential land to production homebuilders and lot developers and speculative investors throughout Pima County. Specializing in land activity in the town of Marana, Will has helped make Land Advisors Organization the top-volume brokerage firm in Tucson. He works closely with homebuilders, assembling a record of success selling and marketing the region’s top master planned communities. He is known for his role in high-profile, high-price land deals, and has negotiated the sale of more than 5,000 finished/platted lots in the Tucson metro area in the past 36 months. His long-term relationships with many key players in Pima County enables Will to effectively represent public and private homebuilders and large financial institutions. He is a member of the Urban Land Institute, DM50 (a support group for Davis-Monthan Air Force Base), the Southern Arizona Homebuilders Association and the Metropolitan Pima Alliance. Will consistently earns the CoStar Power Broker recognition in the Tucson market, which is based on transaction volume and dollar value. Will participates in numerous speaking engagements and real estate/economic panels. A graduate of the University of Arizona with a bachelor’s degree in regional development, Will earned an Arizona real estate license in 1997.

TUCSON, ARIZONA – As we are now through the first half of the year, we can see several significant trends in the Tucson land market. There is no question that the housing market has substantially improved on the critical metrics of traffic and sales, which bodes well for the ongoing evolution of the city. What remains unknown for the Tucson housing and land market, though, is what is its true potential, and how do we maximize that potential?  Getting to these answers will in large part determine the appropriate strategies to follow in the short, medium, and long terms.

In a single word, we could describe predominant homebuilder strategy in Tucson to be CAUTION.  Most homebuilders have adopted a ‘wait and see’ approach, and this has translated into a reactionary approach to land acquisition. We fully acknowledge that this was appropriate strategy when the annual results were (still) consistently underperforming. That said, the current environment has changed, and over the past 18 months we have seen a dramatic shift in demand by the consumer for new housing.  This was vividly illustrated when looking at the most current (May) numbers in which Tucson’s permits were up 51% year-over-year!

We clearly have a faster moving housing market, yet many are employing the same cautionary approach described above.  The result is a greater pace imbalance between the (faster) housing market and the (slower) land and development market. With lots and community counts at all-time lows, we need to make some strategic changes if we want to accommodate the growing demand we are seeing in Tucson.

Let’s look at some of 2017’s first-half themes.

The Good:
Home builders have been dramatically exceeding expectations in sales and permits in 2017. Permits are projected to end the year at approximately 3,300, which would be an 18% increase over 2016 and a 58% increase since the bottom of the market in 2011. The market has yet to show any signs of slowing down as traffic and sales figures have remained strong into June. We have also seen the resurgence of master-planned communities like Dove Mountain, Gladden Farms and La Estancia.

These communities have experienced an increase in new active homebuilders, substantial lot construction, and much stronger sales pace and traffic. These communities have seen the benefit of multiple homebuilder marketing programs and are gaining strong momentum.

Furthermore, home price appreciation has been market-leading in each of these communities. We had not seen measurable price appreciation in the market until (approximately) 15 months ago, and since that point builders have raised prices from $10,000-25,000.  This has, in many ways, paralleled Tucson’s employment growth, as we have continued to see a strong increase in job announcements and employers relocating to Tucson.  Our combined population growth (natural growth plus in-migration) has also shown strong forward momentum, and are continuing to propel the local homebuilding market.  In short, Tucson is firing on all cylinders!

All this positive news, though, has made for an increasingly competitive homebuilder arena. The race for market share has been a big theme since the downturn, and this has been a successful strategy for several.  Public builders continue to dominate the Tucson landscape, and we are seeing larger market shares than have historically been the case.

Moving forward, the key to increasing market share will be land, especially in a market like Tucson that has a very tight supply. Whether one is a homebuilder with a large market share or a homebuilder looking to grow market share, all Tucson builders have a reason to buy for the next 12-18 months. Simply put, without the required land, any homebuilder’s market share and/or survival is at risk.

Large players Richmond American, Meritage, and Lennar have been the most active thus far in 2017. In fact, these three have acquired almost 60% of all the lots purchased in the first half of the year. While in many respects this could be viewed as a case of the big getting bigger, we tend to think of it in terms of proactivity.  The proactive builders are positioning themselves for the future, and as our list of “shovel ready” lots and projects dwindles, we believe this will continue to be the necessary strategy for builders who want to be relevant in 2018, 2019, and beyond.

The Bad:
The bad side of the story for the first half of 2017 really becomes the lack of closed deals. In the first 2 quarters of 2017, homebuilders have closed on only 817 lots. Only 8 deals of 23 were bulk purchases, with the remainder being scheduled option takedowns. This would put the market on track for acquisitions totaling only 1700-2000 lots.  Remember that we will be permitting close to 3,300 this year.

In an industry where we have all waited patiently for the market to improve, it is unfortunate that many won’t be able to capitalize on this increased consumer demand, and it appears this will remain the case well into 2018. This trend has been building over the past 3 years, with homebuilders selling out of more communities then they have been adding.  The result does nothing more than intensify the lot shortage we have been experiencing.

It also becomes a timing problem.  Even if the acquisitions pick up in the second half – which we believe will happen – any new projects will take (approximately) 10 months to build and be open for sales.  The result will be projects that will completely miss the selling season in 2018. Again, we believe this would be a significant missed opportunity.

The best scenario we can hope for at this point is to have the next 12 months become very active and to set the market up for a historically strong 2019. The die may be cast for 2018, but with proper planning and foresight, we are not destined to have these same challenges in 2019.

The Ugly:
As we look at a continually improving story in the Tucson market, the cautious, reactionary approach to acquisitions employed over the past several years has put the land market in a 2-3 year “catch up” phase. The consensus is that Tucson is a housing market that should support 6-7,000 permits annually. To get back to a base of 5,000 permits in Tucson annually by 2022, the market will need to deliver approximately 22,000 finished lots to homebuilders in the next 5 years. That would translate to about 4,400 lots per year which is more than double the lots that have been purchased annually over the past few years. Obviously, to grow, the land deals done in Tucson desperately need to accelerate.

Outlook:
The rebound in the housing market is great news, and the land shortage – while problematic – is solvable.  I think what is most exciting in the industry is that we do not know what the ultimate potential is, but we know it is at a much higher level than we are currently at.  If we can continue to see builders shift their mindset from being reactive to proactive, our success and ability to capitalize on the market is virtually assured.  And while we can always debate the long-range direction of the market, one thing is certain: Tucson will be a busy place on the housing and land side for many years to come!

for his role in high profile, high price land deals throughout the region. For more information, White can be reached at 520.514.7454 or WWhite@landadvisors.com and www.landadvisors.com