By: Will White, Land Advisors Organization Tucson
TUCSON, ARIZONA -- (Editor's Note) In Q1 Real Estate Daily News began publishing “Tucson’s Land and Housing: 2020 and Beyond”, a 5-part series written in conjunction with Will White of Land Advisors Organization-Tucson. The focus of the series is to provide an insightful look into the various components driving Tucson metro’s successful, but complex, land and housing market. Will has been a Land Broker in Tucson for over 20 years and currently represents many of Tucson’s most successful master-planned communities and large-scale residential projects.
A lot has changed since our last series update in April, and fortunately, most of it has been in a positive direction. In our last article, we were in the initial throes of the COVID-19 pandemic and – logically - a tremendous amount of uncertainty was plaguing the land and housing industry. From late March thru mid-April, there was definitely a “hold on tight” approach, with strategies being put into action to fend off unknown risk and prepare for the huge correction that was expected to be coming. We saw a shift in late-April with homebuilders working diligently to make the best out of the current situation and moving forward, albeit with significant caution.
This change in strategy appears to have paid off, with the results for April being a pleasant surprise. Even more surprising was the pent-up demand that was waiting in the wings for May. May was exceptional in Tucson and most homebuilders put up record monthly numbers that were even more shocking considering the negative predictions that were made just two months prior.
Simply put, 2020 has been a year for the history books and we are only halfway through it. We have gone from a great start in Q1, to a predicted housing apocalypse, to a completely unexpected show of strength in housing. In today’s update we will touch on where we are now, explain why we believe this is the case, and then try to predict how the balance of 2020 in Tucson likely will play out.
Completely Different Look:
May housing numbers show one of the strongest months on record for the Tucson metro area, in not only sales but also in new home prices. This is welcome news by all of us in the industry, and it arguably could create one of the busiest land markets Tucson has seen in some time.
Over the past several years, Tucson has struggled with limited inventory in all fronts, new home communities, resale home supply, and land and lot inventories. Ironically, this storyline of under-supply may have saved Tucson from a catastrophic situation.
During the COVID “time out” homebuilders delayed most land spend and requested extensions to their existing land transactions and construction. This was largely done based on the common assumption that sales were going to grind to a halt.
Surprisingly, sales continued at a strong pace. Absorptions have and continue to increase, and consumer demand is spilling over into what has traditionally been our slower summer months. While good news, it is important to note that the hiatus in lot acquisitions and new community development has caused several issues. First, homebuilders are just now looking to close on deals that were previously scheduled for March/April. This delayed new construction of replacement communities up to six months and will cause them to miss a majority of the 2021 selling season. Second, in a normal world they would have closed on these initial deals and then directed their attention to additional acquisitions for the second half of 2020. While the limited supply – and associated consumer demand – has kept activity strong, the delays have now created what will now be a shortage of inventory for the next 12+ months.
Homebuilders are now acutely aware of this and land sales have reached a feverish pace over the past 45 days. Fortunately (or unfortunately, depending on your perspective), landowners are very aware of this newfound builder urgency and leverage has clearly shifted from buyer to seller.
Finished lot prices in Tucson have moved substantially upward over the past 36-48 months. Even though many predicted declining prices during the pandemic, we have seen absolutely no land/lot price depreciation through the first half of the year. Transactional urgency is up, land prices are holding steady or increasing, and there is no evidence to show that this trajectory will stop in the next 6-12 months.
The lot supply/demand equation is historically out of alignment. Even though horizontal development costs continue to rise and push finished lot pricing upwards, future inventory is becoming the focal point for homebuilders. Homebuilder success this spring and the delay of acquisitions are fueling intensified homebuilder competition. Even with the feverish pace of second half acquisitions, it is an almost absolute certainly that builders will be short on lot deliveries for 2021.
While a handful of homebuilders have been proactive and are well positioned in the region’s top projects, many others are not. This fact will also increase competition for limited resources which will in turn continue to drive prices upward.
Hot spots in Tucson:
Most of the activity in Tucson remains focused on the northwest and southeast submarkets. These areas are home to Tucson’s most successful master-planned communities and they continue to exceed all expectations. Sales, pricing, and new deal activity are brisk in projects like Gladden Farms, La Estancia, and the east Vail area into the Rincon Foothills. New projects like Rocking K are substantially under construction and ramping up for openings at the start of 2021. While homebuilders will continue to focus on the projects that are proven producers and are closer into Tucson, they have also been keeping an eye on the future by taking positions further out on projects that can bring more affordable options to the consumer.
Where do we go from here?
Our observation over the last several weeks of activity and discussions is that home builders will continue the push to affordability and towards proven submarkets/projects. Their acquisitions will be focused on deals that, while considered expensive in the moment, ultimately limit their overall risk and position them for success in the future. We expect them to gravitate away from development deals that saddle them with large development risk and look to partner more with the region’s master-developers.
With the economic gains that Tucson has made over the past several years and the fact that the SFR permit bar is historically low in Tucson, we see consumer demand continuing to be strong in both new and resale homes in Tucson. We are definitely not saying it will be smooth as there are too many unknown variables current in-play, but we do believe that our low levels of inventory will be the main story for the next 24-36 months.
(Murky) Crystall Ball:
Without question, Tucson is in interesting times. A lot has changed since the first installment of this series and our next installment could be just as different. The fact is no one knows exactly how this will play out. While there are several variables to consider that could go either way, one thing we know for sure is that we were short on inventory going into 2020 and we will continue to be short throughout the year. Not short in one or two categories, but short in many of them (community counts, MLS resale inventory, labor, land and lots, etc.). With the COVID-19 “time out” we amplified this shortage and it will take a huge push to get ahead of things.
We know that the future is uncertain, but we also are aware that it could have been much worse. The pace and strength that the market moves forward with will be dependent on sales and consumer sentiment. The creation of enough ‘housing runway’ for growth will, as it has been in the past, continue to be a challenge for Tucson. For housing and land in Tucson, we may not be out of the woods, but, based on the last 45 days, we may just be seeing a preview of the type of market that has been overdue for many years.