Next Generation-Tucson Land and Housing

By: Will White, Land Advisors Organization Tucson (LAO)

TUCSON, ARIZONA — As Tucson rolls into the second half of 2021, it is amazing what a difference 15 months has made. There isn’t a time in the history of the Tucson metro area that it has functioned like this. It is remarkable. The last boom cycle was impressive, but we all should have been able to see the warning signs of the oversupply in all areas. Today’s land market conditions in Tucson are completely different. It is under-supplied in almost all areas. What looks most promising is that the fundamentals and deal flow suggest that Tucson has room to run for a long time. The Tucson market is in rare air, and we have entered the next generation of the land and housing market in Tucson, a market constrained in several areas and with a vibrancy of employment and in-migration driving population growth that appears to be with us for several years. Let’s look at the main components driving it.

Supply vs. Demand
Supply, or severe lack thereof, is the driving factor in this current market. You can change policy overnight and demand can adjust quickly but supply takes a much longer time to turn around. The supply shortage in Tucson is historic but it didn’t just appear recently. It has been the product of over a decade of homebuilders permitting homes on more lots than they developed and replaced. This created a deficit of over 8,000 lots during the past 10 years. The land shortage was coming either way. However, the heated demand for housing over the past 12 months simply put accelerant on an already heated situation. Over the past 12 months, homebuilders sold more homes than they anticipated and that created the need to reload more lots faster than ever. Homebuilders ordered 3 times as many lots as we predicted in 2020. 2021 has continued with the same voracity. With this demand on top of the limited lot supply, lot prices have had nowhere to go but up. Finished lot prices were up 20-30% in 2020 and they are tracking up another 30-40% in 2021. In the most successful projects, it would not surprise us to see that finished lot prices double over 2020. The problem was the Tucson market was not prepared to supply the homebuilders enough lots for a 4,000 permit market and it is definitely not prepared to continue to supply the new level of consumer demand for housing we are seeing. In addition, the market is short of supply on all fronts; land, labor, MLS resale home supply, materials, and maybe even hours in the day! Developers are adjusting and working as quickly as possible to accommodate all the lot orders but, ironically, the faster everyone wants to go, the slower the machine goes. Sounds rough, but it is very good for our market as demand is far outpacing supply and will be that way for quite some time. The market is currently tracking 40-50% above last year in permits and homebuilders tell us that demand is probably another 20-30% above that. Based on current permit pace, Tucson needs 19,000 to 29,000 lots built and delivered to homebuilders over the next 5 years. Challenge is, we are having a tough time locating enough to hit the 19,000 number. Advantage; land owners and homebuilders with the better pipelines.

Master-Planned Communities Deliver
Another sign of the new generation is Tucson is now clearly a master-planned community-oriented market for the homebuilders. We expect 75% or more of all homebuilder lot acquisitions to come from these projects in the future. Builders require the lots quickly in this market and have come to rely on developer relationships and large-scale communities to provide that to them. Tucson’s master-developers have been very hands-on even before this run, and have put in place very good lot delivery programs and have done it with great success. We are not seeing homebuilder focus on “one-off” parcels or longer-term entitlement deals. Those deals don’t solve the need and strain homebuilder bandwidth. The larger projects running at full throttle currently and over the past 12 months are Gladden Farms, La Estancia, Rocking K, Red Rock Village, and Star Valley. These projects have seen the most overall activity and are quickly bringing out the next rounds of lots to keep the momentum going. They have robust homebuilder lineups and are in ‘go-to’ areas for the homebuilders for additional lot inventory. The success of these projects are, in turn, producing record prices for their lots. The one challenge to look out for is the fact that these communities are taking so many orders for lots that they could be sold out of land ahead of schedule. The market is looking for the next generation of large-scale projects and it takes time and capital to get these projects ready.

Where is it happening?
The top areas of Tucson are home to the most projects with approved plats and infrastructure. These components appear to define the region’s top areas. These areas then begin to feed on this momentum with more and more supporting commercial and retail. Tucson’s constraints will force the exponential growth of these specific areas. The Tucson market is dominated, historically, by the northwest and southeast. Builders target 75% of their land spend in these areas. To forecast area growth, you must look at available private land, available infrastructure, and available services. The areas that we will be talking about for the next 3-5 years will be SE/Vail, north Marana, and the SW/Valencia corridor submarkets. Vail and north Marana are well documented, but we expect the southwest submarket to run over the next few years with catalyst projects like Star Valley kicking off. These top areas are already successful, and developers are preparing the next round of large-scale projects that will be ready in 18-24 months. If homebuilders haven’t already, they want to get to know these ownerships as they look to the future.

Summary:
When you have amazing market conditions with successful homebuilders and extremely limited supply to reload, you are going to see higher land prices. This will continue until the Tucson area finds a way to produce enough lots to meet demand and find balance. We have been discussing the lot shortage for many years and anticipated that we would end up in this spot eventually. What we did not account for was the huge “demand” tidal wave that came over the past 12 months. The supply situation is now at a point that doesn’t look like we can build out of for some time. To further back up the point, all you need to do is look at the soaring prices of all components to homebuilding. In the last boom cycle, Tucson was permitting over 11,000 new homes and it had huge room to fall. This cycle is completely the opposite with Tucson permitting around 5,000 new homes and demand for 30% more. You could cut demand by 25% and we would be back at 2019 levels. The market was barely able to supply enough land for 2019 pace and is not set up to supply land at the new level we are pacing at now. Homebuilders have a total of approximately 9,000 lots which is only about 18 months of supply based on current demand. The challenge is the market will require between 19,000-29,000 finished lots over the next 5 years and, at this point, it is extremely difficult to identify where these lots will come from. Good news is, Tucson is in a very healthy and strong position going forward. We have huge demand against limited supply and we cannot overbuild this current situation. The focus now needs to be on developers and the region’s homebuilders to continue to work closely together to create enough runway and capitalize on this next amazing generation.

About the author: Will White, runs the Tucson office of Land Advisors Organization (LAO) and represents the vast majority of Tucson’s larger master planned communities and residential projects.