Zeroing in on Lot Supply
Land acquisition professionals among higher volume home builders have their work cut out for them in 2018, as the pressure to control lots and put new communities in builders’ pipelines mounts.
As demand trends–expressed in new home sales “orders”–continue to show mojo, and might be expected in many non high-cost markets to get an adrenaline boost from the effects of the Tax Cut and Jobs Act of 2017, what hasn’t kept pace for many builders is their new community openings.
This reflects stresses to builders’ capacity to acquire and develop lots–the front-loaded investment that builders have to make a minimum of 24 to 36 months before most new subdivisions and neighborhoods can come online, particularly as Spring Selling Season opens for business the weekend after the Super Bowl each year.
For many private builders, a key source of the stress to their land-buying and development pursuits is financial. In many markets and submarkets, they’re competing with multiple other builders in the pursuit, which puts upward pricing power in control of land sellers, which can distort the relationship between costs of lots versus the value they can produce.
The financial stress occurs when either the lot package at the bid doesn’t pencil profitably when all carrying costs and other obligations are added in, or when the cost of financing and debt would weigh too heavily on margins.
But there are other forces thwarting both public and private home builders in their land acquisition goals.
For one, municipalities that had laid off staff during the Great Recession–inspectors, engineers, planners and other town agency building and development officials–are still understaffed when it comes to processing entitlements, permits, and other approvals necessary to bring communities online.
Too, although much of the “labor shortage” attention has focused–with good reason–on capacity constraints among skilled and semi-skilled trade laborers, home building and development also lost many mid-level managerial staffers–engineers, land planners, etc.–to other fields and careers in the wake of the downturn. Ed Hudson, chief of market research at Upper Marlboro, Md.-based Home Innovation Research Labs notes that phenomenon among technical level construction supervisors here.
Net, net, both public and private home builders in 2018 have entered a critical moment of truth in their land acquisition and development plans. For one, they’re going to have to navigate increasingly tricky and ambiguous signals as to how aggressively to bid, and how far forward to model growth rates as the recovery cycle itself grows long in the tooth.
The analysts and experts at Zelman & Associates, in the latest issue of The Z Report, focus specifically on how both private and public home builders have had challenges building their respective community counts even as order growth has gained momentum.
What may be an encouraging note in The Z Report–which you can sample on a free-trial basis by clicking here–is the assertion that when you blend the current capacity constraints with current levels of demand it means that the path of recovery can extend for an unusually long period. The Z Report says:
“As we forecast another 9% increase in single-family starts in 2018, it is natural to worry about complacency, but as we see with the public builders and our private builder survey, it is challenging to meet well-planned production schedules in an environment where capacity constraints are paramount. It is difficult to envision that backdrop changing in the near term. Furthermore, national single-family starts have increased more than 9% only 24% of the time over the course of the last six decades, so history is positioned against upside to our current projection. Collectively, these points further support our view that the current housing cycle is likely to be defined by its extended duration when all is said and done.”
Land acquisition strategy, execution, and opportunism, therefore, need to hold up in a marathon mode, not burn out after a sprint.