By Will White, Land Advisors Organization Tucson | Real Estate Daily News
TUCSON, ARIZONA — As Tucson rolls into the second half of 2021, it is amazing what a difference 15 months has made. There isn’t a time in the history of the Tucson metro area that it has functioned like this. It is remarkable. The last boom cycle was impressive, but we all should have been able to see the warning signs of the oversupply in all areas. Today’s land market conditions in Tucson are completely different. It is under-supplied in almost all areas. What looks most promising is that the fundamentals and deal flow suggest that Tucson has room to run for a long time. The Tucson market is in rare air, and we have entered the next generation of the land and housing market in Tucson, a market constrained in several areas and with a vibrancy of employment and in-migration driving population growth that appears to be with us for several years. Let’s look at the main components driving it.
Supply vs. Demand
Supply, or severe lack thereof, is the driving factor in this current market. You can change policy overnight and demand can adjust quickly but supply takes a much longer time to turn around. The supply shortage in Tucson is historic but it didn’t just appear recently. It has been the product of over a decade of homebuilders permitting homes on more lots than they developed and replaced. This created a deficit of over 8,000 lots during the past 10 years. The land shortage was coming either way. However, the heated demand for housing over the past 12 months simply put accelerant on an already heated situation. Over the past 12 months, homebuilders sold more homes than they anticipated and that created the need to reload more lots faster than ever. Homebuilders ordered 3 times as many lots as we predicted in 2020. 2021 has continued with the same voracity. With this demand on top of the limited lot supply, lot prices have had nowhere to go but up. Finished lot prices were up 20-30% in 2020 and they are tracking up another 30-40% in 2021. In the most successful projects, it would not surprise us to see that finished lot prices double over 2020. The problem was the Tucson market was not prepared to supply the homebuilders enough lots for a 4,000 permit market and it is definitely not prepared to continue to supply the new level of consumer demand for housing we are seeing. In addition, the market is short of supply on all fronts; land, labor, MLS resale home supply, materials, and maybe even hours in the day! Developers are adjusting and working as quickly as possible to accommodate all the lot orders but, ironically, the faster everyone wants to go, the slower the machine goes. Sounds rough, but it is very good for our market as demand is far outpacing supply and will be that way for quite some time. The market is currently tracking 40-50% above last year in permits and homebuilders tell us that demand is probably another 20-30% above that. Based on current permit pace, Tucson needs 19,000 to 29,000 lots built and delivered to homebuilders over the next 5 years. Challenge is, we are having a tough time locating enough to hit the 19,000 number. Advantage; land owners and homebuilders with the better pipelines.
