In “A Tale of Two Cities,” “It was the best of times, it was the worst of times.” A 2017 preview of land development for Phoenix and outlying regions may not be as dramatic as being best or worst, but it assuredly is a tale of two markets.
Residential land development will call the shots transitioning into a new year, but how the land is utilized is beginning to manifest into a wide divide. Welcome to a sneak peak into the realm of the first-time, peripheral homebuyer market versus that of urban-core infill multifamily and single-homes.
Go big and go homes
It’s no secret that Arizona, Metro Phoenix in particular, has grown exponentially within the past few decades. Brent Herrington, president and CEO of DMB, pinpoints the land-expansion of our “ditat deus” state back to post-World War I, when Phoenix proper had a mere population of 100,000 people.
“The post-war era set off a gigantic series of boomtowns along the American Sunbelt — Arizona included,” Herrington says. “We’ve experienced a 60-year run of radical expansion.”
And while the belief for some may be that because so much growth has significantly reduced the amount of vacant-developable land, it has forced more subdivisions and master-planned community activity to occur on “peripheral land,” this isn’t entirely true.
Yes, there is a mere 17-percent of private vacant land remaining for development in Arizona. Residential-peripheral land development further West in places like Buckeye, Goodyear and Avondale, for example has something to do with the low percentage of vacant land, but more — much more — to do with buyer demographic rather than geography.
“The real story,” explains Brian Rosella, land broker at Cushman & Wakefield, “is that the first-time home buyer is coming back.”
What is it that’s bringing them not only back to the market, but to the outskirts of urban-core areas in particular?
“Our projected job growth is expected to be close to between 60,000 and 70,000 jobs for 2017,” says Greg Vogel, founder and CEO of Land Advisors Organization. “The job-to-housing ratio is far out of normal range, and a real demand for housing is kicking into higher gears in 2017.”
Millennial-mindset, urban legend?
Just when you thought you couldn’t stand one more reference to Millennial mindsets, its relevancy to future land development is quite intriguing: Here’s why: It’s wrong. Or, let’s amend the statement to say that the trending Millennial mindset is faulty when related to first-time homebuyers.
On a global scale, it’s been repeatedly touted that the Millennials want to be part of the urban core; that they have no desire to partake in the subdivision-suburban culture.
Herrington helps to debunk this theory by explaining that, “It’s not a matter of urban versus suburban living. It’s a matter of proximity,” he says.
He adds that when considering housing options, Millennials do want to be in close proximity to their jobs, towns, cities, entertainment and good schools, but not because they necessarily long to be in urban high rises and high-density areas.
“Millennials are every bit as diverse in their home-buying preferences as any other generation,” Herrington says.
So what, exactly, does this diversity in taste have to do with land development? Everything.
Land on the peripheral — the West Valley, Maricopa, Queen Creek, the Southeast Valley — is affordable for builders to develop and now even more desirable for new-home buyers, a large majority of whom happen to be Millennials. Again, this has much to do with cost effectiveness and satisfied proximity to entertainment/retail and freeway corridors.
Fill of infill?
Does this maturation into outlaying-regional land development mean the dwindling of infill land activity? No. In fact, it’s the flip side — it’s the other tale of the market trend for 2017. There will continue to be as much demand for infill as ever, despite the growing interest in peripheral land — but it won’t be easy.
“The land in infill locations is significantly, more expensive,” says Chaz Smith, senior vice president of The LandSource team for Colliers International. “And it’s hard to come by. I can’t show you a vacant new parcel (in Metro Phoenix). You have to go out on the perimeter to find vacant parcels, if you can find them.”
According to Curtis Hornaday, associate market director of research for Cushman & Wakefield, prized redevelopment land projects in infill areas demand high dollar.
“Right now, they’re trading at $24.66 per square foot,” Hornaday says, “especially in areas like Biltmore.”
A stark comparison considering the average price per land in Metro Phoenix, according to Hornaday, comes in at $2.21 per square foot.
“We will likely see an increase in demand for land from homebuilders for finished lots.”
In addition to being lucrative and expensive, infill land development comes with other challenges.
“It’s more challenging to knock down what used to be there to make room for new housing,” Herrington says. “It’s also difficult to get permits and build-out takes longer.”
The upside, however, and there is a big one, is that because land is so valuable in infill locations, people will pay more — which equates to a substantial return on investment in the long run for developers and builders.
According to Vogel, a majority of infill will be dedicated to multifamily land with projected total single family and multifamily permits in 2017 ranging between 27,000 and 32,000.
“The majority of multifamily starts the past few years have been located in downtown Phoenix, Tempe and Scottsdale,” Vogel says. “There will also be a preponderance of new apartment construction spreading toward the west and Southeast Valley.”
But when it comes to infill, be prepared for obstacles that might not be present in other land development projects.
“Infill property challenges arise on a case-by-case basis and navigating city zoning ordinances and other code provisions can be difficult,” says Brian D. Greathouse, an associate with Burch & Cracchiolo. “We recommend reaching out to a zoning attorney early in the process to identify development challenges, collaborate with neighborhood leaders and understand the city processes, which are key ingredients to delivering an urban infill development on schedule and within budget.”
Landing the master plan
During the recent recession, we witnessed the halt to sprawling pop-up subdivisions. Will we see a continuation now that the economy is recovering and the residential market is clearly dominating land development in 2017?
Yes and no.
“We will likely see an increase in demand for land from homebuilders for finished lots,” says Kuldip Verma, founder and CEO of Vermaland. “Rents are going higher within the city and we are likely to see more people opting to buy an entry-level home versus renting.”
Builders will continue to develop subdivisions on peripheral land to accommodate the influx of first-time homebuyers, but there may be a shift to more master-planned communities that include a retail component.
Turn your eyes to the West for an example. DMB’s Verrado, nestled against a White Tank Mountain backdrop, saw the development of homes simultaneously with its “Main Street” retail. A risk, according to Herrington, as the motto for residential has always historically been fill homes first, then bring in retail.
Now, however, opposed to when Verrado was first conceptualized a decade ago, master plans — especially those on the outskirts of urban core locations — will have to take risks.
“Verrado is a great example of what builders need to do to be successful,” Herrington says. “People do not want to live in remote locations where there is nothing to do. Building a subdivision on the edge of a metropolitan area is a challenging proposition for builders because it’s not (what) consumers want.”
The “master plan” isn’t relegated to single-home layouts. Take the 440-unit transit oriented multifamily development in Tempe, where DMB prepares for Eastline, to include an anchored 16,000-square-foot plaza street scene with up to 4,000 square feet of street vendor retail.
Although residential is clearly setting the stage for land development in 2017, we’ll be smart to remember that the state of the economy is still fragile.
“I think we’re going to see a robust economy in 2017,” says Smith. “I think Christmas will tell us a big tale. The consumer always leads the charge.”
Retail is a significant player, according to Brennan Ray, a partner at Burch & Cracchiolo, because Arizona — and more specifically Maricopa County — is considered to be over-retailed as compared with the national per capita average.
“There are many factors that will influence Arizona’s commercial real estate industry moving forward,” says Ray, a zoning and land use attorney, “including the general state of the national economy and the strength of the post-2007 recession recovery, the growth of nominal wages, and the continued impact of Internet shopping on ‘sticks-and-bricks’ developments … When analyzing the overabundance of commercial developments with these factors, a challenging environment begins to appear with no readily apparent ‘quick fixes’ to ensure the commercial real estate industry regains the strength that it enjoyed in Arizona pre-2007. Creative business models, marketing and flexibility for the businesses using the commercial developments will be needed.”
State land: Landlocked
Although experts don’t seem concerned in regard to languishing private land availability, what is the thought on the role of state land heading into a new year? According to the Arizona State Land Department, only a minute portion of land is allocated for sale each year, with an average of approximately 5,000 acres being sold statewide — which represents only one-hundredths of one percent of total State Land Trust holdings.
“State land is a complicated topic in that there is a regulatory standpoint on how that land is sold for the beneficiaries of the trust,” says Herrington. “It’s frustrating for the real estate community because within state land holdings, there is tremendously attractive land opportunities located near freeways and infrastructure.”
Until current policies are reformed, according to Herrington, we may not see much leniency in expanded state-land availability. Regardless, he’s still optimistic regarding the outlook for more accessibility to state land, although it will take time.
“I’m encouraged for the likelihood that over the next 20 years, the state will get to a win-win regarding state land,” Herrington says.