The timing of a new project’s entry into the market is always a nerve-wracking undertaking. During boom times when new homes are in high demand, speed to market is critical. Competition for lots has been fierce and the success of a project depends on the ability to make quick decisions. In today’s market, quick decisions can come at the expense of well-informed analysis, as the lost opportunity of a good project can outweigh the consequences of a less than stellar performer.
Conversely, when the market contracts, the risk increases and the process should slow down enough to allow for careful consideration and informed decision-making, such as when the market will begin to expand again and what is the demand for a certain product.
Many market variables must be considered when determining the most appropriate time to bring a project online, including the state of the general housing market, employment trends, energy costs, spending consumption, planning and zoning, public improvements and financing alternatives, among others. . The list grows longer and more complex when trying to predict what each will do in the future. However, understanding the status of a competitive market area (CMA) around a proposed project will inject objectivity into the process and is an essential step in developing a timeline for when to bring the project to market.
Understand the current market: Each active new home project in the CMA should be analyzed to determine its absorption, current inventory levels and remaining lots to assess potential construction delays. The CMA can be further segmented by product type, lot size, and price to determine where the new project might follow behind another impending close.
Understanding the futures market: Once a construction pattern has been established for active projects in the CMA, the next step is to apply the same routine for all known future projects. Information about future projects is usually more difficult to obtain, but knowing the rights status and expected start date will help clarify the future competitive environment.
The trend for future lots in Utah reflects how developers have reacted to recent market expansion. Currently, there are a combined total of 241,022 future lots in the Great Salt Lake and St. George market areas, including concept, preliminary and final lots for single-family and attached products for sale. Over 31,000 of these future bundles are considered “in development,” meaning that some sort of actual development has begun on the bundles. The number of projects going through the authorization process continues to increase due to demand and the current low stock of available batches, but the process itself is slowing down due to many factors and therefore limits the number of approved batches and developed.
With 31,000 future lots currently in development and another 22,500 finished lots in the field, builders should theoretically have a choice of lots; however, this is not necessarily the case. Based on the current rate of absorption, the 31,000 future batches in development represent a 16.3 month supply, which may help relieve some pressure from the already low batch supply, but it will not solve the lack of inventory. The approximately 22,500 vacant serviced lots on the land represent an 11.8 month supply, so the need for more lots is badly needed. Zonda considers a healthy level of vacant developed lot inventory to be between 18 and 24 months old, therefore the current level is well below breakeven.
It is often said in the home building industry that “timing is everything”. But in today’s market environment, forces beyond your control may dictate the ultimate performance of your project. What can be controlled is understanding the current and future competition around a proposed project, in order to make a logical decision on when it is appropriate to bring a project to market.