TUCSON, ARIZONA -- Tucson's housing market and its homebuilders have been on an unprecedented ride for the past 24 months. The good news is apparent: homebuyer demand continues to be strong, our permitting levels are up, population is steadily increasing, and employment around the Tucson MSA is better than ever. Unfortunately, not all indicators are as positive. Median new home prices are at record levels, supply challenges have worsened, and lot inventories are at critically low levels. Looking at both sides of the equation, the logical question then becomes: What does this mean for real estate and we move through 2022 and beyond?
If there’s one group with insight into the future of Tucson real estate it is the Land Advisors Organization (LAO). We caught up recently with Will White who manages the Tucson office of LAO. Will and John Carroll at LAO represent the majority of Tucson’s master planned communities and residential projects and have been active in the Tucson real estate scene since 2000. Excerpts of our interview follow:
Will, nice to circle back with you for what has become an annual interview event. To get started, tell me how 2022 is shaping up compared to 2021 and what is Land Advisors seeing that might be different in the market this year?
We didn’t see much change in Q1 from what we saw in 2021. 2021 was wild by all standards; a tremendous amount of business got done, primarily in the masterplans around Tucson. This has continued through the first quarter of 2022, although I am seeing different strategies being employed by the homebuilder community. Homebuilders (and their associated strategies) fall into 2 main camps: those that are very bullish and see 2021’s run continuing into 2022, and those that are being cautious and expecting the current headwinds to continue. Only time will tell which was the right choice. We are also seeing the backlog issues that were present carry over from 2021, but we have an even more limited ready lot supply than we had previously. To me, it looks like the ongoing ‘tug of war’ over very strong demand and big supply challenges (land, labor, materials) is going to continue to intensify.
One of the biggest stories in real estate as of late is the rapid rise in prices of a categories of housing (new, resale, and rental). Is this going to change anytime soon?
I think any measurable price decline in the near term – in any housing category – is doubtful. Prices are currently at historic levels, and while this occurs for a variety of reasons, the main culprit is supply. At present, we have a 20-year low in MLS supply and a 20-year low in new home community counts, and unfortunately, neither of those problems are going to be solved anytime soon. We would have to see a mass rush of people putting their homes on the market to affect resale, which by itself is unlikely, and with the recent increases in interest rates, a person who was considering putting their home on the market may now reconsider doing so. For new communities to grow, we would need to see mass land/lot acquisitions coupled with a compressed lot construction cycle time, and this is clearly easier said than done. So, even if demand stays the same and our limited inventory shrinks even further, prices will at best stay the same and, at worst, increase even further. While most people don’t even want to think it, I could see new home median prices going up by another 10% by end of this year. Sorry!
When you have this imbalance, the pendulum usually shifts the advantage to the landowners. Would that be true now?
I think that is accurate for the most part. There is a lot of land to point to, but there is not a lot of land that is in the condition that allows the homebuilders to immediately build homes. Specifically, I’m talking about land with approved plats that are full infrastructure (i.e., utility services, roads, etc.). The owners that have their land in that condition – which, by the way, can be tricky and time-consuming to do - will be in a position to sell at a premium, both now and in the future. That is also why you are seeing 75-80% of all lot purchases come from master-planned communities in Tucson. Rather than doing it themselves, Homebuilders are looking for the developers to provide the ‘ready inventory’ to them. Like median home prices, we are expecting a 15%+ increase in finished lot prices into the second half of this year.
Let’s talk more about the demand side of the equation. As we know that people want to be in Tucson, and as we continue to attract more and more employers, it becomes crystal clear that demand not only isn’t going to go down, it likely is going to go up. This being the case, it seems then that the problem needs to be solved on the supply side. Assuming I have this right, is anything being done to improve the supply side of the equation?
In 2021, for the first time in a decade, homebuilders in Tucson bought more lots than they permitted through. While this was great, the stark reality is that to grow community counts and to create a multi-year pipeline, this would have to happen for several more years in a row, and history has shown us that this isn’t likely to happen.
A potential long-term solution that could help improve our shortage of lots would be if the State Land Department was to release more land for sale. There is more than 1 million acres of State land surrounding metro Tucson. While it wouldn’t solve the problem overnight, it would put us in a position to eventually improve the supply/demand imbalance, which would in turn have an effect on soaring housing prices.
Tucson needs at least 25,000 lots to be developed and delivered to builders in the next 5 years to meet demand. For now, the supply will come from the handful of larger projects around metro Tucson and their developers. The supply situation in the future won’t be a good situation, that’s for sure. If more land doesn’t come out, Tucson will likely be running into a situation where the metro area runs out of zoned, infrastructure land. And if that happens, it’ll put some of our few homebuilders into a situation where they’ll have to make some extremely tough choices.
What types of tough choices are you referring to?
To me, the situation is clear at this point. There are not enough lots available for each of our homebuilders to continue to have an adequate, multi-year land pipeline going forward. Couple this with the rental homebuilders and new homebuilders entering Tucson and limited inventory becomes even more scarce. And without any help from entities like the State Land Department, Tucson is going to get very scary for some homebuilders as we move from 2022 into 2023 and beyond.
Some homebuilders, with little to no future inventory to build on, may have to scale back on their growth plans or consider leaving Tucson altogether. Because without land to build on, a homebuilder ceases to be a homebuilder. Sadly, it is as simple as that.
Knowing all of this, what are you telling your homebuilder clients to do?
Tucson has changed dramatically in the past 24 months. I am telling them that, in these uncertain times, they need to not only be strategic, they need to be bold. I am telling them to act on the deals they want sooner rather than later. Waiting for prices to soften or to for sellers to capitulate simply doesn’t not work in an environment like this. If a specific deal can work for their purposes, they need to act on it immediately as it won’t be around for long. There are two strategies at play on acquisition right now. Even in the event of a pullback in demand, the proactive builders will simply be in a stronger spot in 18 months.
Also, I am constantly encouraging the builders to expand their thinking as it relates to how they evaluate potential deals and how those opportunities might work for their purposes. Based on the current and projected environment, they are going to have to look at deals they may not have even considered doing in the past. Whether it is price, timing, financing, or something else, the reality is that the paradigm in Tucson land has shifted and to survive in it, one needs to evolve too.
Before we wrap up, let me ask you the same question that I ask you every year: In what areas are you seeing the most activity?
Far and away, the north Marana area is seeing the most activity in the Tucson MSA. It has the most private land to be able to grow seamlessly and what has been a pro-growth mindset and is landing most of the new employment. That said, it is fair to say that all areas of Pima County have benefitted from the swing in demand over the past 24 months. We are seeing continued strength in Vail, and we are also seeing a very active southwest submarket.
After 21 years in the business is there anything new or different with how LAO-Tucson is addressing this market?
We are extremely fortunate here in Tucson. We represent some of the best developers in the business and we are simply continuing to advance their programs and make sure they are a successful as possible. We have a lot of business in front of us and look forward to providing a large amount of lot inventory in the best areas of Tucson over the next several years. The business will no doubt be fluid over the next 12-24 months, and we are going to be very proactive in response to that.
How would you summarize the current state of the market?
I looked at things recently and Tucson is permitting 5,000 new homes, we can efficiently build and deliver only about 4,300 new homes, and we have demand for 6-7,000 new homes. Demand will outpace supply for a while. While the market will definitely change, it will not necessarily be a change for the worse. Opportunities will continue to exist, and like always, will favor the most creative and bold. We all need to work ahead to solve or mitigate problems before they become untenable, and if we do so, will continue to thrive in one of the best real estate markets in the country.
Thank you Will for your time and insight.
Will White has led the Tucson office of Land Advisors Organization for over 18 years. Under his leadership, the Tucson office has been recognized as the leading land brokerage company in Tucson by volume for over a decade. Will specializes in the representation of the area’s top master-planned and residential communities. His work with southern Arizona’s homebuilders is well documented and the office has been responsible for Tucson’s most high-profile land transactions and assignments. Will currently represents Tucson projects with a lot inventory exceeding 20,000 future lots and is a known go-to for speaking engagements and writing contributions. Will’s long-term relationships with many key players in Tucson and Pima County enables him to continually represent public and private homebuilders, master developers, and large financial institutions effectively and efficiently. He is a member of Urban Land Institute and its Mentor/Partnership Program, the Southern Arizona Homebuilder’s Association, Big Brothers Big Sisters of Southern Arizona Chair of Advisory Board, and the Tucson Chamber of Commerce. He has consistently earned the CoStar Power Broker recognition in the Tucson Market, an achievement that is based on transaction volume and dollar value. Will graduated from the University of Arizona with a bachelor’s degree in regional development and earned his Arizona Real Estate license in 1997. He can be reached at 520.514.7454 or wwhite@landadvisors.com.