2021 was another interesting year in the new construction and land development industry. On the positive front, numerous cities throughout the metro set records on building permit activity. However, material costs for building and development continued to skyrocket with supply chain issues and labor continued to lag due to ramifications of COVID-19. Looking back at 2021, and more importantly, looking forward to 2022, here are four points to consider from a land development perspective:
- Our market is building more homes than lots are being developed. A healthy lot market has a 30-month supply of ready-to-build-on lots. The 30-month demand for lots (single family and townhomes) in the Des Moines Metro (based off of the most recent new construction sales data) is approximately 9,000 lots, while there are only approximately 6,500 vacant lots currently developed. More lots need to be developed to serve our market.
- Due to the significant competition for lots, more lots are being held on builders’ books rather than on developers’ books. There were approximately 4,200 lots that closed in 2021, while there are currently 2,800 developed lots “for sale” (“for sale” by my definition, means still on land developers’ books). In the development business, it is a seller’s market, so if you are a builder competing for lots, the lots are going to whomever is willing to close the quickest at the highest price.
- Agricultural farm prices are at an all-time high. That is great for landowners looking to cash-out, but is very unfortunate for land developers looking to buy land. It also negatively impacts landowners that sell their ground to land developers that want to 1031 their money into more farmland. It’s no secret, development ground goes for a premium above farm ground prices. So, when farmland values increase, landowners in the development path expect a premium on top of that.
As an example, historically speaking, if good farm ground was trading hands at $10,000/acre, a landowner may have expected something around $30,000/acre if said land is in the development path. Now, if that same piece of ground is worth $15,000/acre as a farm, that same landowner may expect something around $45,000/acre if the ground is in the development path. This ends up getting passed onto the end consumer (homebuyer), and when a land developer is weighing what they believe a builder can pay, and weighing what they think the end homebuyer can pay, the price of land can kill development deals.
- There is not enough ground ready to be developed. I spend all day, every day looking at the development potential of parcels of land on the fringe of the metro… and unfortunately, there are not that many pieces of ground that are “ready to go”. This is a major factor in the lack of available lots.
Another fallout of the lack of ground that is “ready to go” is it forces land developers to start “land banking”, which is fine as long as said land developers are buying the land with cash, but once land developers are borrowing money to land bank ground that isn’t ready to be developed, it’s lights out… back to 2007/2008 times.