Land sales slow, but healthy housing market will fuel activity

Key Takeaways:

  • Land sales in the first half of 2018 lagged the pace recorded during the final six months of last year. Despite the slowdown, land sales in Greater Phoenix are ahead of the pace from the first half of 2017.
  • Prices for land parcels inched lower despite continued strengthening in the local housing and commercial real estate markets.
  • Permitting for single-family units continued to surge, while multifamily permitting has leveled off a bit. This year, single-family permitting is forecast to reach its highest annual total since 2007.
  • Following an increase of more than 30 percent in 2017, land sales slowed by approximately 25 percent from the second half of last year to the first half of 2018.
  • Sales prices for land parcels fell during the first half of this year, with the median price reaching $3.59 per square foot, down from a median price of $4.19 per square foot in 2017.

Permitting Overview:

  • With the housing market strengthening, single-family permitting issuance is on the rise. Nearly 12,000 single-family permits were pulled during the first half of 2018. Single-family permitting rose by approximately 18 percent from the second half of last year to the first half of 2018.
  • Single-family permitting averaged 2,000 permits per month in the first half of 2018. This is a 14 percent increase compared to the first half of 2017. The current forecast calls for approximately 26,000 single-family permits to be pulled in 2018.
  • Multifamily permitting slowed modestly from the pace recorded during the second half of 2017. Approximately 4,200 multifamily permits were issued in the first half of 2018, down from more than 4,500 permits in the second half of last year. Permitting for multifamily units is up 3 percent from the first half of 2017.

Land Sales:

  • Sales of land parcels during the first half of 2018 were up more than 20 percent from the same period in 2017. There were fewer transactions in the first half of 2018 than there were during the second half of last year.
  • Sales prices for land parcels dipped a bit in the first half of this year. The median price in land sales was $3.59 per square foot, down from a median price of $4.19 per square foot in 2017. There are a few factors that may be driving prices down, including rising construction costs and a limited number of prime infill sites selling.
  • The number of sales of land for residential uses in the first half of this year was nearly identical to levels from the same period one year ago. Transaction activity peaked in the second half of 2017.
  • The median price in land sales for residential uses was $3.71 per square foot in the first half of this year, up from a median price of$3.48 per square foot in 2017.
  • Sales velocity of land for commercial uses has been very consistent over the past 18 months. Transactions in the first half of 2018 were down just 3 percent from levels in the first half of 2017 and were identical to the figure from the second half of last year.
  • While transaction activity for commercial land has been consistent, pricing has been somewhat volatile. The median price for land for commercial uses was just $3.49 per square foot in the first half of 2018, down approximately 25 percent from the median price in 2017. Pricing peaked in the first half of last year.
  • Following a spike in activity from 2016 to 2017, land sales for industrial uses dipped 8 percent from the second half of last year to the first half of 2018. Industrial development is forecast to peak in 2018, with many of these land parcels acquired in recent years.
  • The median price for land for industrial uses was trimmed nearly in half during the first half of this year. The median price in land sales for industrial uses was just $2.38 per square foot, down from $4.48 per square foot in 2017. The decline was most pronounced in the Southeast Valley, where the median price was just $2.24 per square foot in the first half, after being in the $4 per square foot to $6 per square foot range in recent years.

Outlook:

Sales of land parcels in Greater Phoenix slowed during the first half of this year, following a strong close to 2017. This decline in activity occurred even as both the housing and commercial real estate markets continued to improve. Sales velocity is forecast to pick up in the second half of 2018, although there are a few potential threats that may limit activity.

The first is the prospect of rising interest rates, which could slow the pace of economic growth and provide a drag on housing in the form of higher mortgage costs. The second is rising construction costs, which are eating away at profits for homebuilders and making it more difficult for new projects to pencil.

Finally, there is the pace of new home price appreciation, which is lagging the rate of gains for existing home sales. An acceleration in new home sales prices would likely support greater activity in the sale of land for residential uses.