1st Quarter of 2023, Des Moines Metro Lot Analysis
History may not repeat itself exactly, but it often tends to rhyme. During trying times, one can’t help but look to the winners and losers of historically similar events. Like many others, I have always been keen on Warren Buffett and how he makes extremely complicated investments seem easy. For acquisitional purposes, upon analysis, Buffett has a strategy with three primary criteria: a company must have good returns on core operations, a company must have strong management, and the acquisition must be at a sensible price. How simple!
I have spent a lot of time over the years trying to figure out how this strategy can be implemented into land development. However, with the ebbs and flows of any market (specifically in real estate development), time and time again, it happens where aggressive acquisitions lead to poor performing development projects.
Many of the aspects of land development are out of the control of the developer. As an example, it is likely that the Fed will implement another 25 basis-point hike in May, which will have a negative impact on what have already seemed like “high interest rates”, and will in turn slow new construction house sales, leading to the slow-down of lot sales. Another example is how commercial lending has tightened significantly over the last several months, making it more difficult for builders to start new homes, and in turn, close more lots. Developers are then left holding excess lots and paying interest on them.
This is not specific to new construction, or developed lots, but the two words that seem to come up most in today’s real estate market are “supply” (or lack thereof) and “affordability”. A significant portion of existing homeowners aren’t interested in selling because they don’t want to lose their current, low interest rate. Something that has jumped out at me is that there are currently only 2,391 residential home listings (as of 4/27/2023), of which 58% are new construction. Compare those 2,391 listings to the number of agents currently on the Des Moines MLS (a total of 3,447 real estate agents), and it paints a pretty interesting picture.
*The following information is pulled from public record and pertains to the 20 cities that make up the Des Moines Metro. The data is updated monthly.
First Quarter 2023 lot sales are down 44% year-over-year from 2022. When compared to 2021, lot sales are down about 60%. In this market, it can take 12 to 18 months (we’ve seen projects take 24 months) from start to finish to complete a land development project, so there are still developments going through the development process that were initially started back when demand was very high, but upon completion, will have to deal with today’s market.
First Quarter 2023 building permits (single family and townhomes) are down 36% year-over-year from 2022. When compared to 2021, building permits are down about 46%. Builders are still trying to sell existing new construction inventory, and until existing inventory is sold, new construction building permits will continue to lag.
Interest rates have a huge impact on affordability. Land, materials (other than lumber), and labor costs are still relatively high with only minor signs of any relaxation. Because of high interest rates and costs, new construction housing has been difficult to obtain for many potential homebuyers. First Quarter 2023 new construction sales are down 32% year-over-year when compared to the first quarter of 2022. When compared to first quarter of 2021, new construction sales are down about 20%.
The number of vacant lots are increasing throughout the metro. In previous articles, I stated that a healthy lot market has about 30-months of supply in “normal” market conditions. There has been significant “up and down” over the last couple of years, so factoring in the average annual number of townhome and single family, new construction building permits over the last five years (3,815 permits), you get the following: 3,815 permits/12 months = 318 permits/month. 318 permits*30 months = 9,540 lots for a healthy lot market. The Des Moines Metropolitan Area’s lot market is currently sitting at 8,062 vacant lots, which means that technically the market is still under-supplied with lots. However, since 2022, the vacant lot inventory has increased 38% and will continue to increase as new development projects finish and new construction building permits continue to under-perform. This is because lenders and builders are reluctant to start new homes due to the lack of affordability and velocity of sales on new construction homes.
He has so many, I can’t help but close with a Warren Buffett quote… “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” I think that’s telling of the opportunities that will be available over the coming months for those seeking deals with cash in hand. However, I have to admit that another quote from Mr. Buffet is probably even more relevant to today: “Only when the tide goes out do you learn who has been swimming naked.” Whether it be board shorts, jammers, or a Speedo, it’s always wise to wear a swimsuit…
Nathan Drew, Broker/Owner of Drew Realty, a lot and development ground brokerage, has been in the business of lot and land acquisition and disposition since 2008. He keeps an ongoing inventory of all vacant lots and land throughout the Des Moines Metropolitan Area, and puts together a quarterly email blast with an interpretation of the metro’s lot market. Email Nathan to join his email blast list at Nathan@DrewRealtyUSA.com and follow him on Twitter @DrewRealtyUSA, on Facebook @DrewRealty, and on Instagram DrewRealty.