Local Builders are Finding Infill Communities as Nationals Focus on Larger Opportunities
The Tucson land market continued to improve in 2015. Much has been said regarding the permit counts in the past as a primary indicator of the market, but as with everything else, there are extenuating circumstances that can explain away variations from the expected path. 2015 ended with 2,176 permits being pulled in the Tucson metro area. This is 108 permits fewer or a 4.7% decline from 2014 and 74 fewer than 2013. However, we know that the market did improve and that the permit number was thrown off by an increase of permits within the City of Tucson at the end of 2014.
We have been tracking the finished lot supply on a quarterly basis in Tucson since 2008 and take note of lots as they are improved and added to the finished lot inventory as well as when builders start to construct houses on the existing finished lots and deduct them from the finished lot inventory. We feel this is another way to gage the health of the market. It does lag permits, but it demonstrates actual demand and builder optimism in the construction of both speculative and sold homes.
In 2015 traditional single family builders started 1,545 new homes (this number does not include active adult, attached or multi-family homes). This is the largest number of home starts since 2009 when 2,615 homes were started. The 2015 home starts were a 12.4% increase from the 1,375 homes started in 2014. This shows a slightly better picture than the 4.7% decline in permits in the same period. To be objective, the 2015 home starts were only 2.0% greater than 2013 and 5.3% greater than 2012. Tucson is not a double-digit growth market yet, but there is growth and it has been steady over the past few years.
Finished lot inventory continues to decline as we ended the year with an all-time low of only 3,025 finished lots in the market. Builders continue to start more homes than new lots are being developed. This trend does not appear to be changing as we go into 2016 and we expect to be below 3,000 finished lots next year. This depletion of lots has not gone unnoticed and builders have been scrambling to find replacement inventory as existing communities build out. Of the approximately 67 active SFR new home communities, up to 34 or about ½ of the existing communities could build out this year based on recent sales and building trends.
Trends in land sales over the past few years highlight the limited supply of finished lots and the need for new lots from both builders and developers. The demand for land bottomed out in 2011 when there was just $34 million in land transactions with $18 million coming from investor purchases, $9.6 million in finished lot transactions, $6.2 million in finished lot option deals and there were no raw or platted lot transactions from builders. Since then transaction totals have increased substantially. The past three years have each recognized over $100 million in land transactions. Finished lot transactions peaked in 2012 at $51 million and have been below $10 million for the past two years. Raw land and platted lot transactions to builders have skyrocketed. Builder transaction values for raw and platted land have increased from $0 in 2011 to $73 million in 2015. These numbers do not include the many large land purchases made over the past few years by investors, many of whom are currently in the platting and entitlement phases, working to have communities and lots ready to deliver to builders.
Many of these new and future communities are located in the periphery of Tucson. Infill projects have been historically overlooked as being too small or too much work for too few lots. Lately several of the builders, particularly the smaller local ones, have turned their attention toward infill locations.
Miramonte Homes has a history of successful infill locations in Tucson. They are currently selling homes in Miramonte at Glenn, a 34 lot community at Glenn Street and Mountain Avenue where they closed 19 homes in 2015 at an average price of $267,000 and an average price per square foot at $137. They recently acquired 11 gated lots in Rancho Merlita on Wrightstown Road where they will be selling homes in the low $500s.
Not far away Pepper-Viner Homes acquired the vacant Wrightstown Elementary School property and platted a 56 lot community called The School Yard where they recently opened for sales starting at $229,900 for a 1,457 square foot home. Pepper-Viner also just opened a new community on Blacklidge Drive and Tyndall Avenue where they are offering small homes on small lots starting at $179,900 for a 1,186 square foot home. Their first phase is 37 lots and will have a similar number of lots in their second phase.
Mesquite Homes is closing out their two east side infill communities of The Mesquites at Riverbend and The Mesquites on Pantano. They have recently broken ground on the new 18 lot community of Alamo Crossing on Pima Street near Wilmot Road. AF Sterling purchased Red Colt Ranch, a 21 lot platted community on 22nd Street near Harrison Road last October. They should begin development early in 2016. Rick Price, a local developer, recently purchased and started development on Camino Seco Village, a 33 lot community on 22nd Street and Camino Seco. Lennar Homes was able to secure and close Robb Hill, a recently platted 53 lot subdivision on Speedway Boulevard near Pantano Road.
The majority of these infill properties are relatively small in number of lots, but the builders are expecting to capitalize on their infill location with lack of competition from other new construction homes. These opportunities are giving the local builders additional communities without having to compete directly with the national builders. However as the available inventory lots and land continues to tighten, we should not be surprised to see more nationals vying for these rare infill opportunities as well.
Please contact us for additional insight and information.