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Land Sales Are Starting To Pick Up, Driven By Booming Suburban Residential Demand

The hottest land in Houston right now is in suburbia.

Residential demand for single-family homes in the greater Houston area has grown rapidly this year. Low interest rates are cited as a major reason, but other factors include a younger cohort looking to buy homes, the rise of remote work and a health-motivated reason to move out of the crowded urban core.

As a result, land activity in Houston, which largely stalled in the early days of the coronavirus pandemic, is ramping up as homebuilders try to keep pace with demand that is threatening to outstrip supply.

Land transactions in the greater Houston area slowed between mid-March and the end of May, as the pandemic forced developers and investors to pause and reassess their plans. Consequently, land brokers found themselves grappling with the uncertainty of whether deals under contract would ultimately fall through.

CBRE Senior Vice President Darin Gosda told Bisnow that his transaction volume this year is between 50% and 80% lower than planned, reflecting the withdrawal of several prime development deals that were in the pipeline.

“I think my first quarter will probably be the majority of the revenue. Obviously, that was pre-COVID,” Gosda said.

Aside from the pandemic, Gosda pointed to additional headwinds that are putting deals on pause, such as the increased difficulty in acquiring financing from traditional lenders and the pending outcome of the federal election in November.

“If you're in this position, if you can push the uncertainty down the road, it's going to be easier for you from most standpoints,” Gosda said.

JLL Managing Director, Land Advisory Services Simmi Jaggi told Bisnow that because the commercial real estate sector has never faced a pandemic before, there were some initial industry assumptions that the impact would be as severe as other recession events. 

However, about 80% of JLL’s existing land transactions in Houston went through, and the firm saw a rise in new transactions and new offers being submitted in June.

“It was definitely a positive that most of our deals proceeded and did not terminate,” Jaggi said.

Land Advisors Organization broker Kirk Laguarta typically sells large tracts of land to Houston-area homebuilders outside of the Beltway 8 loop. Prior to the pandemic, there was already a shortage of single-family lots. The combination of a land-buying pause and unexpectedly high residential home sales during the pandemic has exacerbated that shortage.

“The single-family residential market is extremely hot. Extremely,” Laguarta said. “We've got a record volume of deals that are going under contract or that are scheduled to be closed, let's say, in six to 12 to 18 months.”

Land Advisors Organization Houston MSA Advisor Duane Heckmann is Laguarta’s business partner and said the firm frequently talks with major homebuilders in the region. Almost all of them are “very happy” with their home sales right now.

“If the homebuilders are selling homes at a great clip, we're going to be busy,” Heckmann said. “I think it would be pretty safe to say, in general, 2020 will be certainly better than 2019.”

JLL Managing Director, Land Advisory Services Simmi Jaggi

The demand for single-family homes has been driving the majority of land activity in Houston this year. That activity reached a major milestone in July when Houston single-family home sales hit a record-breaking 10,975 sales, up 23% from a year prior and the first time that sales exceeded 10,000 in a single month. 

Many of those home sales are occurring within master-planned communities in Houston’s outer neighborhoods. Johnson Development Corp. previously told Bisnow that it has seen very strong single-family home sales at its master-planned communities in Richmond and Fulshear, while Howard Hughes Corp. reported a record second quarter of home sales at its Bridgeland community in Cypress.

Developers of master-planned communities typically acquire land parcels of 500 acres or more, and then sell smaller sections of that land to homebuilders. Most homebuilders keep a two-year supply of homes on hand as they continue to locate and buy new tracts.

“You want to be able to get some large tracts, but ideally, the perfect circumstance is for most builders to buy around 100 acres. Fifty to 100 acres is an ideal scenario: It's small enough, you're going to get probably two years’ worth of supply out of it,” Laguarta said.

Gosda noted that because demand is so high, it is becoming harder for Houston homebuilders to find appropriately sized land tracts at the right price point and which fall within a good school district and have access to existing utilities.

Even multifamily developers are shifting their attention to the suburbs. JLL Vice President Chris Bergmann Jr. told Bisnow that over the past two years, the once-popular urban market has become oversupplied with new mid-rise and high-rise apartment buildings.

“Now, as of February, January, people have started to look in the suburban market, and [that] has pretty much shut down urban land acquisitions for multifamily,” Bergmann said.

Though residential demand is primarily driving Houston’s land activity right now, industrial demand is also playing a role. Jaggi pointed to the rise of e-commerce as a significant factor, along with rising sales in categories such as grocery, home improvement, furniture and exercise equipment.

“I think that basically what we've seen is [an] appetite with developers and users because their existing projects are doing well. So obviously, it's all based on supply and demand and occupancies,” Jaggi said.

Though land deal volume has fallen this year, prices have yet to come down. According to Gosda, that’s because there is a disconnect between what sellers are asking for and what buyers are willing to pay at this stage.

“There always is a disconnect on the land markets. They're very slow to move pricing down. Land's fairly resilient, particularly well-located land. And most landowners know that and they're going to say, 'OK, we're going to hold off and we're going to wait,'” Gosda said.

“There's a lot of money looking for deals; it's on the sidelines, it's hungry for investment. But they're looking for heavily discounted pricing. And I'm not seeing much of that.”

Jaggi said pricing has remained fairly steady since the onset of the pandemic and could remain that way through the end of the year. If economic conditions remain difficult in 2021, distressed sellers could end up placing more supply on the market.

“I think that [prices] will potentially soften right after the first of the year. And then hopefully, we will find a vaccine and we will all be back to work. And then I think we'll see them go back up,” Jaggi said.