Exclusive By: Will White, Land Advisors Organization, Tucson Office
The Tucson market has gotten off to a very strong start in 2016. As we turn the corner on the first half of the year, it appears that the activity has caught most homebuilders and land owners by pleasant surprise. The permit numbers are tracking to a 25% increase over 2015, and this has held on through the first 6 months. The driving factor behind this increase is increased sales, traffic, and most importantly, stronger job numbers. Over the past 5 years we have all come to understand that the bar is low in Tucson, yet many people would not realize that permits are at a 24-year low. The questions become, “What is the ‘real number’ that Tucson metro should be permitting, and are we even prepared to meet this demand on the land and lot side of the equation?” For the past 5 years we have been telling the tale about the market’s historic lot shortage and, with finally a stronger show of demand and improved economic conditions, Tucson may have just lit the fuse to a supply and demand imbalance that may be nothing like we have seen in Tucson’s history.
Supply
As we look deeper into the basic economic formula of supply vs. demand, we can start with the existing lot supply. Over the past decade, Tucson homebuilders have permitted through 30,700 lots. What is important to understand is, during what most would describe as the worst market Tucson has ever seen, the conditions didn’t warrant a balanced resupply of lot inventory for the homebuilders. Owners didn’t want to spend capital to build lots and infrastructure, it was nearly impossible to finance any construction, and the homebuilders were not willing or able to do it. Now the market is absorbing above projections and most everyone is playing catch up. As so few new lots were put on the ground over the past decade, the single family and active adult homebuilders now own a historic low of 2900+ finished lots in active communities. Further, the community count in metro Tucson is at a 15-year low and what is most concerning is that over half of these communities have only 6-12 months left until they are sold out completely. In discussions with the majority of the Tucson homebuilders, the concern on lot pipeline is focused on mid-2017 and beyond. There have only been just under 600 lots purchased YTD in 2016 that can be constructed into 2017. Based on absorption, that number should be closer to 1500 lots purchased by mid-year. Increasing concerns on supply side is that homebuilders have been purchasing less lots than we have permitted for the last few years in Tucson. What this suggests is that homebuilders will likely face a “gap” in the second quarter of 2017 that may render them unable to meet the likely consumer demand for housing. This also means that the improved market conditions and job growth will further fuel the need for aggressive homebuilder acquisitions over the next 24 months. The question will become, “Are there enough entitled 'shovel ready' lots available to fill all builder’s pipelines and business plans in this compressed timeframe?”
Demand
The demand side of the equation has been fueled by four major components. Over the past 5 years there has been a strong shift in Tucson’s homebuilders market share. It used to be difficult to be a 10% market share homebuilder in Tucson. Today, our top 2-3 homebuilders are responsible for almost half of all the business in town. The top 6 national homebuilders in Tucson control almost 80% of the market. With these larger market shares comes a stronger demand for land to feed the growth plans. Tucson has also seen new homebuilders enter the market over the past 24-months and these builders have been aggressively buying land to set up operations and to cut into market share. In fact, in an effort to minimize (better control) competition, homebuilders have been buying larger positions in Tucson versus sharing these projects with other builders. This trend is not limited to our top marketshare builders, as at least 4 different builders have taken large, proactive positions in the past 24-months. That said, the main component to renewed demand has been the uptick in job growth in the past 12 months. Tucson metro has seen approximately 3.5% year over year job growth. With the recent announcement of Caterpillar locating a regional headquarters to downtown, among others, it certainly appears that the momentum has shifted and Tucson’s economic picture is looking much brighter than it has in the recent past.
Shift to MPC’s
One of the biggest story lines in 2016 has been the redirection of attention to Tucson’s existing and new master-planned communities. As “ready now” lot inventory has been difficult to secure, the master planned communities in Tucson have become the “go-to” spot for fully entitled and infrastructured lots that are easy to put into production. What the homebuilders are finding attractive is that these projects are located in high-growth areas of Tucson and are providing new era amenities that their homebuyers find attractive. One of the most active master-plans in 2016 has been Gladden Farms in Marana, which has gone from 1 to 4 homebuilders in the past 6 months. Dove Mountain has continued to build on its traction in the move-up and higher-end segment. Builders have purchased almost 1400 lots in this community over the past 18 months as it has seen much more success selling at the higher price point. La Estancia opened in May and Meritage Homes has seen very strong traffic and sales throughout the summer. This project has received the attention of several homebuilders and will be a strong supplier of well-located lot inventory for the foreseeable future. The stand-alone parcel situation in Tucson has become difficult over the past few years mainly because of the heavy lifting required in rezoning and infrastructure that the parcels require. The new master-plans easily solve this problem for the homebuilders, with the only real downside being that there is a finite amount of lots in these projects.
Future Outlook:
The good news is that all of the fundamentals point to a very active land market over the next 24-36 months. We took a look at 5-year projections in permits in 3 different scenarios, from absolutely no growth to getting back to 5500 permits in the next five years. The conclusion was the homebuilder will need between 11,500 - 23,000 finished lots delivered to them to accomplish this permit range in the next 5 years. We all know how quickly 5 years can go by. To accomplish this, the homebuilders will have to find some flexibility in their underwriting and some of Tucson’s largest developers may want to take advantage of the opportunity to put finished lots on the ground. A combination of the two would be a proactive start to becoming a more balanced market, and should be a proposition that rewards both sides.
One thing is for sure: Tucson is in unchartered waters when it comes both to permits and lot supply. The only way to guarantee that we don't grow is to continue to be reactive to developing lots and land for a market that is showing strong signs of progress and potential.