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LAND RUSH: Intense Demand For New Valley Homes Leaves Builders In Competition For Acres

LAND RUSH: Intense Demand For New Valley Homes Leaves Builders In Competition

With new homes quickly filling up what’s left of the Valley’s existing lot supply to keep up with buyer demand, many production homebuilders are competing in a land rush as they scout for huge parcels to build their own master-planned communities instead.

That puts some builders in a new position as they deal with considerations that don’t come with building on existing lots.

For one thing, starting from scratch with raw land means it takes longer to bring buildable lots to market because homebuilders will be tasked with going through the entitlement process and developing their own infrastructure, said Jim Belfiore, founder of Belfiore Real Estate Consulting in Phoenix.

Plus, he said, land is getting more expensive, pushing builders further out on the fringes of the Valley into areas like Casa Grande, Coolidge and Maricopa.

“At this point, the lot supply is so low, builders in most areas are willing to consider anything,” Belfiore said. “They’re looking for land aggressively today. Demand is so over-the-top crazy; demand is so high today.”

Putting down big bucks
Between January and November 2020, homebuilders bought 1,721 acres and another 14,335 lots across the Valley, according to RL Brown Housing Reports, which only included individual deals over $1 million. That is $1.34 billion in total transactions.

According to data RL Brown Housing Reports compiled exclusively for the Phoenix Business Journal, metro Phoenix has 38,684 available building lots, providing an average 1.4 year supply.

Despite the low lot count, Jim Daniel, president of RL Brown Housing Reports, said that’s a healthy supply for the market today because homebuilders and developers of master-planned communities have big projects in the pipeline.

“We don’t want six months of supply — that means we’re burning through dirt and would be out of lots at one point or another,” he said. “We don’t want to have 2.5 or three years of supply because that means builders are sitting on finished lots for a longer period of time and carrying those costs.”

Infrastructure for the 550-acre master-planned community at Barney Farms, a new master-planned community in Queen Creek is all done by Tempe-based Fulton Homes.
Infrastructure for the 550-acre master-planned community at Barney Farms, a new master-planned community in Queen Creek is all done by Tempe-based Fulton Homes.

Housing demand
As more people relocate to the Valley, a severe shortage of existing homes on the market for sale or lease — from apartments to single-family residences — has created a frenzy for new housing.

For instance, as of Jan. 4, there were only 5,430 active home listings in metro Phoenix, according to the Arizona Regional MLS. That equates to 0.6 months of supply. In December alone, 9,560 single-family home sales closed in the metro.

Industry experts say a minimum of six months is the usual benchmark for balanced supply and demand in the housing market.

“This is possibly the lowest supply count we’ve seen in over 20 years, which is especially impressive considering how much the city has grown in population and housing units since 2001,” said Tina Tamboer, senior housing analyst for The Cromford Report.

“Builders have a long way to go to catch up to demand because they’re having to make up for a decade of underbuilding in relation to population growth,” she added. “As the population continues to grow, it’s a significant effort to bridge the housing gap.”

Scouring for land
Arizona’s largest homebuilder, Miami-based Lennar Corp., has thousands of acres either in escrow or is working with sellers to get more land under contract throughout the Valley, said Jeffrey Gunderson, senior vice president of land acquisition and development for Lennar.

No stone is being left unturned, including land as far from central Phoenix as Casa Grande, Coolidge and Maricopa, he said, as buildable lots even in those outer areas are getting snapped up faster than people can imagine.

“As the real estate market heats up, it’s just more difficult every day for homebuilders to replace the communities they’re building in today,” he said. “There just isn’t the kind of master development community we used to have in the Phoenix metro area before the downturn.”

Additionally, Scottsdale-based Taylor Morrison Home Corp. was on track to close escrow on about 2,000 homes for 2020. That number is projected to grow 15 to 20% over the next year, said Brad Schoenberg, Phoenix division president for Taylor Morrison.

“With that growth, obviously, it’s hard to be in homebuilding if you don’t control good land,” he said.

And Schoenberg agreed it’s more difficult to buy builder ready lots now.

“The market has shifted to more raw land purchases with fewer entitlements on them,” he said. “We do have cost increase pressures coming from the supplier side and trade partners. Land prices are going up as well. It’s costing us more to develop the lot today.”

Business as usual for some
While buying raw land might be new for some homebuilders, it’s business as usual for Tempe-based Fulton Homes.

The builder is developing Barney Farms, a 550-acre master-planned community in Queen Creek, which eventually will have more than 1,700 homes and 22 acres of catch-and-release fishing lakes.

Sales are just beginning, with homes ranging from 1,658 to more than 4,000 square feet and priced starting in the high $300,000s. But this project has been three years in the making since Fulton Homes bought the land between Meridian and Signal Butte roads on Queen Creek Road, said Doug Fulton, CEO of Fulton Homes.

“When you’re going out and talking about buying a large piece of land, it’s a longtime horizon,” he said. “You’re really betting on a continuing strong economy and interest rates staying low. We are in a very favorable position with 6,000 lots in front of us.”

Norman Nicholls, president of Fulton Homes, said the builder started buying huge tracts of land to develop its own communities after the 9/11 terrorist attacks when he saw families traveling less and wanting to stay closer to home.

Norman Nicholls, president of Tempe-based Fulton Homes, at Barney Farms, a 550-acre master-planned community that will offer more than 1,700 homes starting in the high $300,000s in Queen Creek.

Norman Nicholls, president of Tempe-based Fulton Homes, at Barney Farms, a 550-acre master-planned community that will offer more than 1,700 homes starting in the high $300,000s in Queen Creek.
“They wanted more amenities in their communities,” he said. “Over the last decade we’ve been pushing up our game.”

Despite having more than 6,000 lots, Nicholls said he has no time to rest on his laurels, considering the homebuilder wrote more than 1,200 contracts in 2020 and is on pace to write upward of 1,500 in 2021.

“I’m in trouble right now,” he said. “It sounds like a lot of inventory, but it’s not. We’re all struggling and scrambling — how are we going to replace what’s being absorbed right now. The cycle time is just too slow to bring it out of the ground.”

Over Christmas weekend Fulton Homes sold 34 homes. At that pace, that would mean 1,600 contracts would be signed over 52 weeks.

David Garcia, vice president of land acquisitions and development for Scottsdale-based Shea Homes, said one of the advantages of developing their own communities is being able to put their signature on them in terms of amenities and overall vibe.

“Valleywide, we have some larger deals in escrow we’re working through entitlement, both in the East Valley and the West Valley, where we will have 300 to 400 home sites each if not more,” Garcia said.

Some of those deals are scheduled to close in 2021, while others won’t close until 2023.

“Right now, it takes you 12 to 14 months just to get through the entitlement process and then another 12 months to get the site ready,” he said. “When you embark on this strategy, you’re not offering homes for a couple of years.”

But the payoff is putting your own stamp on a community, he said.

Bidding wars
Competition to buy huge tracts of land is intense, Garcia said.

When the Arizona State Land Department auctions a land parcel, bidding wars can get fierce, as was most recently seen when a bidding war for a 2,783-acre parcel in the far East Valley caused homebuilders to bid in increments of $5 million over a 45-minute time period.

Arlington, Texas-based D.R. Horton Inc. won that bidding war, paying $245.5 million, but Garcia said it’s likely the production homebuilder will sell lots to other homebuilders, including Shea Homes.

While Shea Homes was outbid at that auction, it prevailed on a 415-acre parcel in a state land trust auction in the West Valley in December, paying $46.77 million for that parcel, which is near its two other communities north of Peoria.

Garcia said the market is going to remain strong meaning competition won’t ease anytime soon.

In fact, Kevin McAndrews, president of KB Home’s Phoenix division, said the region’s dynamic economy offers plenty of opportunities for long-term growth.

“Today, many buyers are entering the market, and factors driving demand remain very favorable,” he said. “These include low mortgage rates, job and wage growth, high consumer confidence, increasing household formation and demand from millennials.”

KB Home recently purchased a large tract of land near 27th and Southern avenues in Laveen, where plans call for opening during winter 2022 with 335 new homes.

“Historically, the majority of land KB Home has acquired in Phoenix over the years has required some level of development,” McAndrews said. “We are always looking for innovative ways to make home ownership more affordable, and our strategy is driven by data on what our homebuyers want and what they can afford in a new home.”

Master developers

With 15 active communities open for sale and plans to open eight new communities throughout the Valley in the near future, McAndrews said he’s also working on several other land deals that could bring an additional 2,500 home sites.

As homebuilders look for their own tracts of large land parcels, they are going head-to-head with established master-plan developers who are working just as furiously to develop more communities as existing communities sell out.

Tim Brislin, vice president of Harvard Investments, said his team is working diligently to bring more master-planned communities to market as quickly as possible to meet demand.

“We are actively planning home sites in our southwest Valley, Maricopa and southeast Valley communities,” Brislin said. “Additionally, Harvard is working to grow its Phoenix land portfolio and continue to serve our builders with new home sites in 2022 and beyond.”

Chris Grogan, executive vice president of El Dorado Holdings Inc., said the Scottsdale-based developer is actively working on five major master-planned communities representing more than 20,000 lots.

“We delivered approximately 700 lots in 2019, are currently under construction on over 600 lots: Spur Cross Ranch, 59 lots, and Bella Vista Farms, 560 lots,” Grogan said. “We expect to start development on as many as 2,500 lots over the next 18 months.”

Even Fulton Homes, which typically buys land parcels rather than buying finished lots from developers, has reached out to El Dorado Holdings to potentially buy lots in some of the Scottsdale-based developer’s master-planned communities.

“He is one developer that has the Fulton Homes mentality,” Nicholls said of Mike Ingram, founder of El Dorado, which is developing a $1 billion residential project in the city of Maricopa. “The work they’re doing is sensational. He’s one, when buyers have choices and times get tough, those are the kinds of communities they gravitate to.”

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