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Business Observer Friday, Oct. 24, 2003 15 years ago

Dearth of Dirt

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Competition between local and national homebuilders has created a new land rush throughout Florida's Gulf Coast.

Dearth of Dirt

Competition between local and national homebuilders has created a new land rush throughout Florida's Gulf Coast.

By David R. Corder

Associate Editor

John Cannon remembers the good old days. Just a few years ago, homebuilders considered $15,000 to $20,000 an acre a high price for vacant land in eastern Manatee County. "If you find anything like that now, buy it quick," advises the Sarasota-based president of John Cannon Homes Inc.

Such pricing availability preceded a market rush the past two years throughout the 10-county Gulf Coast region. Aging but affluent out-of-state Baby Boomers - desirous of the region's warm climate - joined with a ready market of younger first-time homebuyers to take advantage of nearly all-time lows in national mortgage rates.

This surge in demand for new Gulf Coast homes over the past couple of years didn't go unnoticed in the corporate headquarters of the nation's largest homebuilders. National builders already in the market stepped up land development and homebuilding operations. Those not here a few years ago are now. Consequently, the unprecedented consumer demand, coupled with intense competition among the national and local homebuilders, has pushed the prices on land along the Gulf Coast to soaring new highs.

"We're in the spotlight for the national builders," says Gulf Coast land broker Bill Eshenbaugh, affectionately known as the "Dirt Dog" throughout Florida's real estate industry. "Pressure is coming from the Southeast Florida homebuilders who have run out of land in Palm Beach and Broward counties. They first pushed into Collier County two to three years ago. In the last 18 months, they've pushed into the Fort Myers market. Over the past 12 months, they've pushed into the Tampa Bay market."

To compete more effectively, local homebuilders now must plan farther out and risk more of their resources sooner to acquire coveted parcels. "What (the national homebuilders) have started doing is buying land that doesn't have the zoning and other entitlements," Cannon says. "That's where you get into land banking, waiting for the market to come to you. Obviously, there's only so much land. So the larger builders with the financial resources are tying up a lot of the larger parcels."

Escalating prices

Homebuilders such as Cannon don't like to talk publicly about specific building-lot costs, but public records show a pattern of escalating prices throughout the Gulf Coast region. Take, for instance, Cannon's work in Lakewood Ranch's Country Club Village in eastern Manatee County - a hot market for small- to mid-sized homebuilders based in Sarasota, Bradenton and Tampa and their larger competitors.

In early May of last year, Cannon bought a 20,649-square-foot builder-ready lot for $177,800 or about $8.61 a square foot in the Country Club Village. In mid-April this year, the Sarasota homebuilder paid $144,286 or about $9.79 a square foot for 14,732 square feet in the upscale subdivision. That's a 13.7% increase in cost in almost 12 months.

To understand where land prices may be headed, consider how much Lennar Homes Inc. paid in April this year for a 6,726-square-foot builder-ready lot in the Heritage Harbour community near Lakewood Ranch.

The homebuilding subsidiary of Miami-based Lennar Corp., one of the nation's top five homebuilders, acquired the lot for $106,800 or $15.88 per square foot. That's about 62% more a square foot than the $9.79 Cannon paid for comparable dirt just about a mile away.

The surge in Gulf Coast-area land prices in the past two years surprises even the most knowledgeable land brokers. "If I could have seen this coming two years ago, I would not have taken on all the commercial property listings I have now," says Eshenbaugh, president of Clearwater-based bbre/Eshenbaugh Commercial Services Inc. "I was out on the front lines and didn't see this coming. Most people didn't."

Top dollar

Raw undeveloped dirt - sans infrastructure - commands top dollar throughout the Gulf Coast region, especially in the Collier County market. "The reality of it is there aren't any large tracts of land left in Collier County," says Paul J. Marinelli, president of Naples-based Barron Collier Commercial Inc., one of the county's prominent developers. "Southwest Florida is a very desirable market, given the climate and the ambiance. We've experienced a significant amount of growth - as is forecasted. As a result, that demand with a limited supply is going to put pressure on land prices."

In February, for instance, Centex Homes paid about $1.44 million or $5.02 a square foot for 6.6 acres of undeveloped land in Palomino Village, a subdivision in Naples' 2,900-acre Lely Resort Golf & Country Club. In comparison, the homebuilding subsidiary of Dallas-based Centex Corp., one of the top five national homebuilders, paid about $4.1 million or only $1.74 a square foot in June for 162 acres of raw undeveloped land in the fast-growing Ruskin community in southeast Hillsborough County.

With costs for raw land soaring, it is not unusual to see local homebuilders pay top dollar for builder-ready lots - especially lots suitable for luxury homes. Four months ago, Sarasota-based Pruett Homes Inc. paid $334,000 or about $21.35 a square foot for 15,641 square feet of land in Englewood's Boca Royale Golf and Country Club subdivision. In March, Osprey-based Coachman Homes of Sarasota Inc. paid $195,000 or $17.02 a square foot for an 11,458-square-foot lot in The Three Oaks subdivision near downtown Sarasota.

Expect prices to go only higher, says Robert J. Strudler, Lennar's vice chairman and chief operating officer.

While supply and demand are the key elements in pricing, Studler attributes considerable pricing pressure today to policymaking, especially as local governments adopt more stringent pay-as-you-go growth management policies.

"Given the continuing pressure on the entitlement process, I would suspect that there will be continuing pressure on land pricing," Studler says. "In my view, the scarcity of available land provides a buffer for not going back (on prices)."

War chests

But local homebuilders such as Lee Wetherington attribute the greater part of the escalating pricing to the larger publicly traded competitors and their considerable borrowing and bonding wherewithal.

"They used to stay out of subdivisions with less than 100 lots," says the president of Sarasota-based Lee Wetherington Homes Inc. "Then it became less than 50 lots. They've become very aggressive. What's made them more aggressive is there are so many in the marketplace."

Over the past decade, top publicly traded homebuilders such as Michigan-based Pulte Homes Inc., Lennar and Centex established a strong presence especially in the Naples, Fort Myers, Sarasota and Tampa-area markets. In the past few years, however, other large publicly traded companies such as Los Angeles-based KB Home, Atlanta-based Beazer Homes Corp. and California-based The Ryland Group Inc. joined the fray.

Earlier this summer, Texas-based D.R. Horton Inc., ranked by the Builder Online magazine as the nation's largest homebuilder, expanded into the Tampa Bay market after two years in the Fort Myers-Naples markets. The Arlington-based company paid $4.2 million or about $12.70 a square foot for 7.8 acres of land in St. Petersburg, a market developers target for mostly redevelopment opportunities.

To understand how aggressive they've become, look at the publicly traded companies' financial reports.

As of Dec. 31, Pulte Homes, which BuilderOnline ranks as the second largest national homebuilder, reported it owns options on land valued at $1.5 billion to build on about 43,800 lots throughout the nation. It also owns options on another 48,700 lots valued at $982 million, which are under review and evaluation for possible building. While it did not respond to a request for information, Pulte disclosed in its financials that only individual metropolitan markets such as Phoenix and Atlanta each accounted for more than 10% of its total domestic homebuilding operations.

Although company officials refused to disclose how much they earmarked for Florida, Centex reported it had deposited or invested $82.2 million in options on prospective national land purchases valued at about $2.03 billion as of March 31 this year.

"They're hunting very hard for land," says Wetherington, who also says he has rejected the suggestion of a buyout from at least five national homebuilders that wanted to expand their presence in the Sarasota-Manatee market. "They've gotten very aggressive about buying local homebuilders."

Scarcity

Collier County, most of Sarasota County north of North Port, Pinellas County and metropolitan Tampa all bear the signs of built-out markets. So much of the new homebuilding focus now centers on northern Lee County, Charlotte County, the North Port area of Sarasota, eastern Manatee, southeastern Hillsborough County and the Interstate 75 corridor through Hillsborough and Pasco counties.

"As you drive down I-75 through Charlotte, Lee, Collier counties, the land becomes increasingly more scarce and more expensive," says Frank D'Alessandro, a principal partner in D'Alessandro & Woodyard Commercial Realty, a Fort Myers Re/Max affiliate. "So the builders - the local mid-sized builders - are going north and land-banking. They obviously can buy more land for their dollars. So the growth is headed into northern Lee and Charlotte counties.

"All the Naples builders are in Lee County now," D'Alessandro adds. "Lee County is going to face the same problem as Collier County in the next three to five years. You won't be able to find large developable tracts of land in Lee County. So that's forcing growth and development to Charlotte County."

The same is true to the north, especially because of county government growth management policies that severely restrict development east of I-75 in Sarasota County, says Britt Williams, president of Bradenton-based Bruce Williams Homes Inc.

"There's a line drawn in the sand," Williams says about the county's 2050 growth-management plan. "Sarasota County's development plan or posture is to force development south or into Manatee County. Right now all of our operations are in Manatee, but we've been looking the past five to six months to the south, east and north. We've talked with people in Pasco, Hillsborough, Polk and Sarasota counties."

Meanwhile, Tampa Bay-area homebuilders not only are pushing farther into east-central Pasco County but also into southeast Hillsborough and northern Manatee counties.

Established homebuilders such as Oldsmar-based Nohl Crest Homes Corp., Tampa-based Windward Homes Inc. and Lutz-based Hannah-Bartoletta Homes Inc. each are either already building in northern Manatee or have plans to expand there - in addition to their work in Pasco and Hillsborough counties.

"The only thing we can count on is up and down the I-75 corridor (in northern Hillsborough and southern Pasco)," says Mike Bartoletta, president of Hannah-Bartoletta. "We're not yet in Manatee County, but we're looking at it. We just quoted prices to a Sarasota developer, $95 to $100 a square foot for the base price of a house, including tile roof, pool and granite countertops. Apparently it's a steal in Sarasota. He was shocked. He thought we would be in the $150 to $165 price range."

Affordability

Affordable homebuilding sites still exist throughout many sections of the Gulf Coast region, but market experts wonder how long they will last.

In just the past couple of years, land pricing in Lee County has acquired some characteristics of historic pricing trends in Palm Beach County, which Eshenbaugh cites as an example of where Gulf Coast land pricing may be headed. "Lee County was influenced by the builders coming over from the coast," he says. "They're very rapidly catching up to Palm Beach County there."

But it's difficult to forecast whether land prices in the Gulf Coast region anytime soon could reach pricing levels seen in New England or California.

"I don't know whether we've reached a plateau in terms of numbers, but the level of activity has reached a plateau," Eshenbaugh says. "Almost every significant property in Pasco and Hillsborough are virtually in play. I do think we're on the verge of creating a new industry of (land speculators), who will spend three to five years to tie up property and reap huge benefits, if they're successful, on the back end of the process much like (the trend) in California."

Builder-ready lots of 10,000 square feet average from $15,000 to $20,000 in the fast-growing Lee County community of Cape Coral, says Patrick Logue, president of Fort Myers-based First Home Builders of Florida LLC. "There has been a dramatic appreciation over the past couple of years," he says.

But the prices for lots in Cape Coral and Lehigh Acres, two of the county's hottest markets, may be a little deceptive, Logue says. Just after the dot-com bust three years ago, weary stock market investors rushed to the Lee County real estate market, acquiring building lots at average prices of $3,000 each. But maybe, he says, those lots now might have a just market value of only $8,000 to $12,000.

"Again, the sheer speculative nature of these outside investors, foreign and national, has caused a false acceleration in these lot appreciations," Logue says. "If they carry these lots for 20 years, the question is: What is the carrying costs in taxes and maintenance? It's all still relative to what the market can bear."

Recent sales of builder-ready lots in North Port still remain well below prices farther north in Sarasota County. In May this year, for example, North Port-based Premier Communities Inc. acquired two builder-ready lots with a total of 76,965 square feet in the Lakeside Marketplace subdivision for $244,200 or about $3.17 a square foot.

But prices of once-affordable land in southeast Hillsborough are showing clear signs of appreciation. In August, Tampa-based Westfield Homes of Florida Inc. paid about $948,600 or about $4.66 a square foot for 34 builder-ready lots, totaling about 203,448 square feet, in the upscale Fishhawk Ranch community. Earlier this year, Alpharetta, Ga.-based Morrison Homes Inc., which Builder Online ranks as the 22nd largest builder in the nation, acquired a 7,920-square-foot lot in Fishhawk for $33,000 or about $4.17 a square foot.

Even in the northern Hillsborough community of Lutz near the county line, Hannah-Bartoletta paid $594,857 or about $5.66 a square foot in June this year for four builder-ready lots containing 105,112 square feet in the upscale Lakes of Wellington subdivision.

"We're even pushing the limits now with Pasco on price range," Bartoletta says. "We're selling million dollar homes in Pasco at Wilderness Lake."

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