Despite challenging fundamentals, available land remains a valuable asset in the U.S., as evidenced by a record-setting year for both sales volume and price appreciation in 2021.

“Demand remains robust, especially for entitled land, which allows developers to underwrite construction costs and interest rates with greater certainty,” Andy Slowik, a managing director and co-lead of the land advisory group at commercial real estate services firm Cushman & Wakefield, said in an interview with Wealth Management.

The sale of development sites in the U.S. was up 43.5% last year, with $31.8B in sales in 2021 compared to $22.15B in 2019, according to data from real estate firm Real Capital Analytics. Prices for shovel-ready sites have increased between 50% and 200% in some cases, according to Wealth Management.

A major tailwind is the surge of industrial, multifamily and single-family construction activity, according to Davis Adams, managing director in the Houston office of JLL Capital Markets, Americas, and co-leader of the firm’s land group. Adams said the majority of sales are concentrated in those three asset classes.

High-growth states have seen the majority of sales volume, according to data from the National Association of Realtors, which shows property in Texas, Florida, California, Georgia and Arizona comprised 44% of all land sales in 2021. Affordability and remote work are fueling residential land sales in suburban and tertiary markets, Matt Davis, senior advisor in Cushman & Wakefield’s land advisory group, told Wealth Management.

“We have seen residential homebuying activity substantially increase in secondary and tertiary markets through the last couple years, which is likely to drive commercial development and investment into those markets as well,” he said, noting that income-generating land, such as productive farmland, is also gaining traction as investors look to hedge against inflation.

The surge of demand in these high-growth markets has made it increasingly difficult to find land, and owners are reacting by raising prices. National Land Realty reported $1.5B in land sales in 2021, a record high for the brokerage firm driven in part by an increase in cost, according to the Wealth Management report.

Andrew Pieper, vice president of Dallas-based Hillwood Communities, said at an April 26 Bisnow event that the cost of land is just one factor delaying the development community’s ability to meet unprecedented demand for housing.

“The cost of materials, development, labor [are up] really across the board … and on top of that, the price of land is through the roof,” he said, noting that Hillwood’s development costs are up 30%. “It is certainly unsustainable, and I just don’t know when it will break. There are a lot of headwinds.”

Construction costs, inflation and rising interest rates have not yet curtailed development activity. Total construction starts in Q1 were up 9% year-over-year, according to Dodge Construction Network. A dearth of shovel-ready sites entitled for development and with the necessary infrastructure in place, however, could slow momentum, Nathan Fabrick, vice president of corporate development at National Land Realty, told Wealth Management.

“There is a lag, and it’s not moving as fast as the market is developing,” he said. “So, it is creating a huge bottleneck on available land that can be developed.”