High-Density Building Offers New Opportunities

Effective land acquisition and utilization can help builders offer a wide range of products

By GREG VOGEL

The land and housing market has seen continued improvement and a recent large uptick in volume from a lull starting in Q3 2018 and ending in late Q2 2019. Interest rates are low and decreasing, homebuyer confidence is high and rising, wages are increasing, costs have begun to stabilize, and a multitude of other positive factors are all wind in the sails of the land and housing market.

Seldom does the land and housing market see leaps in innovation. We can mark this point in time as a clear inflection point in the innovation of particular housing products. The simple idea of providing single story apartment homes has created more enthusiasm than I have seen in decades. This could be cottages, bungalows, casitas or as we have labeled them, “Horizontal Apartment Homes.” This product grew out of Tucson up to Phoenix, was re-invented by NexMetro through their Avilla product, and has now made it to the mainstream. They have now grown out of Arizona to multiple markets across the U.S. Furthermore, it was innovated by Christopher Todd Communities, also out of Phoenix, and this past month CTC and Taylor Morrison announced an alliance to expand this product across the US.

This is just one new form of build-for-rent. There are many other forms including the BB Living/Toll Brothers alliance to build townhomes for rent. There is also a new and ready buyer for single family detached homes in the demand now created by the Single-Family Real Estate Investment Trust’s (REIT) that need to find areas for growth after running out of low priced distressed homes.

The backstory behind both the Horizontal Apartments and Townhomes for-rent products is that they can be built in suburban areas near the cost of building single-family product with single-family subcontractors. This parallel of land search and use of similar subcontractors allows for the small to medium size builder to enter these product types without monu- mental distraction. These builders can build for their own account and hold, merchant build, or fee build. There is a large wave of capital providers currently in, or entering this space. Adding this element to land acquisition strategies can be very lucrative to returns. This space also allows for the acquisition of a larger site for both single-family detached and 8-12 unit per acre “build-for-rent” land. In Phoenix there is currently 10,000 units of this product in or nearing production. We’re seeing this trend in its infancy, and it can fit in primary to tertiary markets.

The other large shift is the momentum in building attainable housing. How we build attainable housing requires multiple innovations. Most homebuilders are now heavily focused on the first-time buyer. Excluding coastal markets, this means building a single family detached home under $300,000. The early leaders in this cycle have been DR Horton Express and LGI Homes. They are now being followed by dozens of builders seeking volume while maintaining margin. This is not easy, but it all starts with affordable land and lots. The cost to service lots has risen dramatically (see my article in June about the “$250 per front foot problem”) and landowners are generally unsympathetic to builder cost issues. The government has generally made things worse related to increasing regulation, higher impact fees, and now that many are fiscally sound, not as inclined to allow room for negotiation.

We now are witnessing a 40-70 percent increase in lot cost that is now required in order to buy land and finish new lots. The below-replacement lots were recently at $30-40,000, and now amounting to a minimum of $55-$65,000 for new acquisitions.

This required step up is still at its infancy in allowing for feasibility past land acquisition committee, let alone a lender.

Feasibility is key in getting these required increases past a land acquisition committee, let alone a lender. We need to see innovation in product – narrower lots without full garage dominance, cheaper financing for land, vertical building, and end financing the homebuyer.

Build-for-Rent can work in many of these outlying suburban locations as $250-$300,000 is the sweet spot for the Single Family REITS. This allows for higher absorption, immediate revenue and potentially full neighborhoods.

1. Fee building
2. Firming sales of close out inventory

3. Firming absorption for banks, lot bankers and land committee approvals

4. Ability to take down larger parcels of land or lot takes

5. Ability to gain scale for negotiating with subcontractors, appliance providers,
and building products

6. Building of recurring revenue streams by building and holding rentals

7. Creating a farm team of future homeowners as renters convert to buyers

We have only begun to see the capitalization of these projects and the financial market’s reaction to the homebuilder’s migration into these forms of housing. Building Single Family for Rent and differing forms of Townhomes to Horizontal Apartments is a long-term trend. We are now seeing the impacts to the land market as suburban areas previously labeled not attractive are taking a larger share of the housing pie.

Greg Vogel is the Founder & CEO of Land Advisors Organization. He may be reached at landadvisors.com.

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