A trend I am seeing throughout the country is that builders are stepping up their game relating to elevations. Why?
Don't give up on developing land
Many builders I've spoken to over the past few months have told me they've stopped looking at acquisition deals for raw land and suspended all land development operations. It's a logical step right now, when many housing markets have such a surplus of already-developed lots that you can buy lots for less than it would cost to develop from scratch.
Get the right land now for mixed-use developments.
Click here to watch the video.
Many builders I've spoken to over the past few months have told me they've stopped looking at acquisition deals for raw land and suspended all land development operations. It's a logical step right now, when many housing markets have such a surplus of already-developed lots that you can buy lots for less than it would cost to develop from scratch. Still, my advice is to stay flexible, with the ability to jump back into land development fast, if and when it makes sense to do so.
In the first place, if you build in a market where you needed to develop land in the past, it's probable that the market will eventually return to that state of affairs — the only question is when. Secondly, infill is likely to be the name of the game for many builders for the next five years or more — location is now more important than ever. And many of the best infill sites will require land development, not to mention rezoning.
A few very astute builders have alerted me they never say never. “We've always been primarily a finished lot buyer,” says Bill Saint, CFO of Charlotte, N.C.-based, luxury-production kingpin Simonini Builders, “but I think it still makes sense to develop some land.
“We'll develop, but in a very controlled way — only small land parcels in infill locations,” Saint says. “Locations we can move through quickly. Our lot supply in Charlotte is way up right now because home sales are down 40 percent from last year. But the lot inventory here will disappear fairly fast if people start buying houses again.”
Suburban Chicago builder Jamie Bigelow of Bigelow Homes builds to a more mainstream target market at the middle of the pricing spectrum rather than the high end where Simonini operates, but he echoes Saint's analysis. “Existing lots will be what most builders use for the next several years,” he says, “because they're there and they're cheap — and no one really knows what land that is not developed or entitled is worth today.
“Still, we are not giving up on land development,” Bigelow says, and his No. 1 reason is that, with so many of the public builders trying to convert to the land-light, NVR operating model, there should be good margins available in land development once the market comes back. “That could be five years from now, but in the Chicago market, it takes three years to get entitlements,” Bigelow says with a laugh.
Of course, Bigelow also needs to develop land to create the unique “Home Town” concept — with child-friendly restriction of automobile traffic — the firm is known for. But he's also wary of how fast a seemingly huge oversupply of existing lots could disappear.
My advice is to retain the ability to develop land. If you needed to do it before, you'll need to do it again. And when the inventory of developed lots goes away in 2010 or 2011, there will be differences on the development side of the housing industry that could even lead to a shortage of lots. It's likely that banks will still be reluctant to get into financing acquisition and development. Equity investors will have to fill the void. But no one will want to risk doing big projects. And it takes just as long to entitle a small development as a big one. The money will be there to finance development, but it will be expensive, cautious money.
Keep your powder dry and multiple options open.