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REVIEW SUMMARY
Industry. Homebuilding
Trend. Builders are acquiring more lots
Key. Lot prices in desirable locations are rising at a fast clip, but pricing risks outpacing current demand.
Florida residential land isn't toxic anymore.
Prices for residential land on the Gulf Coast are showing signs of appreciation again after the real estate collapse decimated values. In some desirable locations, prices have risen as much as 50%, brokers say.
Of course, no one is ready to declare another land boom, and the price increases have been limited to wealthier areas of the Gulf Coast such as Naples and Sarasota. The Tampa area, which is more dependent on employment growth for housing demand, has not yet experienced a resurgence, says Marvin Rose, the publisher of Rose Residential Reports who tracks that market.
Still, rising land prices in second-home markets such as Collier County are another indicator that the bottom of the real estate market may finally be behind us. Homebuilders are reporting stronger sales and increased traffic through their models. For example, Scottsdale, Ariz.-based Taylor Morrison builds in 25 communities from Tampa to Naples and reported sales rose 35% in the first three months of this year compared with the same three months in 2011.
Builders that left the market, such as Ryland and Meritage, are coming back. And companies new to Southwest Florida are scouting sites, including Centerline Homes and Standard Pacific.
But the problem is many homebuilders divested land assets during the real estate bust, and now they're scouting land and lots to ensure they have an adequate supply should demand continue or increase materially.
“Now investors are starting to buy raw land that's entitled,” says Randy Thibaut, president and CEO of Land Solutions in Fort Myers.
Some builders, such as Toll Brothers, are building new communities from scratch. “The finished-lot opportunities are pretty much a thing of the past, at least in desirable locations,” says Ross McIntosh, a broker in Naples.
More traffic
Builders that made it through the real estate bust are expanding their operations from Sarasota south to Naples. “We've close to doubled our community count,” says Matt Devereaux, director of sales and marketing for Lennar in Fort Myers.
For example, Lennar recently acquired Treviso Bay, a 1,050-acre community off U.S. 41 in Collier County with room for 1,200 homes. Terms were not disclosed because Lennar bought the debt on the property.
In fact, Lennar created a subsidiary company called Rialto Capital in 2010 and raised millions of dollars from investors to acquire distressed properties. Besides being a publicly traded company, Rialto's financial firepower gives Lennar an edge in finding and securing land for future development.
While Lennar doesn't disclose sales for the Southwest Florida region, Devereaux says prospects coming through the model homes are genuinely interested in buying a home now. “They're not just coming in for a free hot dog,” he says.
“We've seen a change in the psychology of the buyer,” says Ryan Marshall, division president for the South Florida region of PulteGroup. He says traffic through the company's model homes from Sarasota to Naples has increased 8% to 10% this season compared with the same period in 2011.
Marshall says Pulte has waiting lists on premium lots that aren't ready yet, such as those that front lakes, preserves or golf courses. “There's definitely increased demand,” he says.
In some premium locations, builders have been able to raise prices. For example, Lennar increased prices 1.5% over a 90-day period at the Bella Terra community in Estero.
The ability to increase prices means builders can generate a sense of urgency that nudges prospective buyers. “It's good for the people who bought yesterday and for those who buy today,” says Devereaux.
“You need to raise prices because everyone is chasing subs,” says Craig Perry, president of Centerline Homes, referring to subcontractors such as electricians and roofers. The company recently acquired 150 acres off Immokalee Road where it plans to develop a new residential community to be called Bank Creek Preserve.
The residential construction industry's collapse decimated the ranks of subcontractors, and those who are left could command more money if homebuilding activity continues to strengthen. “You're hearing rumblings about it,” says Perry.
Land prices rising
Land brokers and builders report land prices in the best locations have surged by as much as 50%. “Land deals exploded in 2011 in Southwest Florida,” says Thibaut. “This whole thing started in the third quarter of 2010.”
Investors and builders are scouting for developed lots in less desirable locations now that the premium lots have been acquired. “It's happening 24 months before we thought it would,” says Thibaut.
Despite the price increases, lot prices had fallen 80% to 90% during the real estate bust, so a 50% increase means land prices are still half of what they cost during the boom. “The competition is fierce, but what I've seen so far they're underwriting land deals at today's pricing,” says Pulte's Marshall.
As a group, builders remain disciplined and are not factoring in significant price increases in their market analyses. “The land prices we're seeing are priced properly,” says Michael Belmont, Florida president for Minto Communities, a Canadian homebuilder that recently acquired lots in TwinEagles in Naples.
Still, brokers caution that the sudden rush of lot-buying activity could turn unruly. “Homebuilders are saying the market is back, but I'm still not persuaded that the sales numbers support the level of enthusiasm,” says McIntosh. Still, as one builder told him: “By the time the numbers support it, you'll be too late.”
When you add up all the lots that builders have acquired over the last 18 months, it could amount to about four to five years' worth of inventory based on current demand, says Thibaut. “All of a sudden you've got thousands of lots coming into the market,” he says. “I expect lot prices will stabilize out now the next 12 to 24 months because of what buyers are willing to pay.”
Thibaut says builders should be cautious. “They have to be real careful and do their homework to make sure they're not putting too many lots in the ground and creating another bubble,” he says.
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