Latest / The Land Development Podcast with Ryan Glick / Industry News: Land Banking Hits 41%, Apartment Starts Surge, and States Push Housing Reform - TLP178

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Industry News: Land Banking Hits 41%, Apartment Starts Surge, and States Push Housing Reform - TLP178 · The Land Development Podcast with Ryan Glick

• 0:00
  SPEAKER_01: Why does the developer have to be the bad guy?
• 0:02
  SPEAKER_01: I actually I didn't I didn't know.
• 0:04
  SPEAKER_01: This is funny.
• 0:05
  SPEAKER_01: When I got into the business, I didn't underst because I didn't have a preconceived understanding of how negatively people felt about developers.
• 0:15
  SPEAKER_01: And that was something that I learned after getting into the business.
• 0:18
  SPEAKER_01: And people were mad at me.
• 0:20
  SPEAKER_01: And I just thought I was trying to, you know, just do business, just build housing.
• 0:23
  SPEAKER_01: It's not, it's not good or bad.
• 0:24
  SPEAKER_01: It's just business, right?
• 0:26
  SPEAKER_01: And and people don't feel that it's just business.
• 0:28
  SPEAKER_01: They feel that it's personal and that we're building in their town and it's a personal attack on them.
• 0:48
  SPEAKER_00: Hey, what's going on, everybody?
• 0:49
  SPEAKER_00: Welcome back to the Land Development Podcast.
• 0:51
  SPEAKER_00: I am your host, Ryan Glick.
• 0:53
  SPEAKER_00: We have an industry news episode for you today.
• 0:56
  SPEAKER_00: And joining me as always is Charles Covey.
• 0:58
  SPEAKER_00: How's it going, Charles?
• 1:00
  SPEAKER_00: Hey, Ryan.
• 1:00
  SPEAKER_00: Good to see you.
• 1:01
  SPEAKER_00: Good to see you too.
• 1:02
  SPEAKER_00: We've got uh wasn't that you know, there hasn't been a whole lot going on in our industry, but we've got some, we do have some interesting things, some changes in some numbers, some new data released.
• 1:11
  SPEAKER_00: So we're gonna get into, as always, three different topics today, and we're gonna start out looking at some changes in how builders and developers are acquiring land.
• 1:20
  SPEAKER_00: And then from there, we're gonna look at the newly released June new construction data from the US has U.S.
• 1:26
  SPEAKER_00: Census Bureau.
• 1:27
  SPEAKER_00: And then lastly, we're gonna talk uh uh, I guess I should say on the show, we talk a lot about how real housing reform needs to start at the state and local levels.
• 1:38
  SPEAKER_00: And so uh we're gonna look at some examples of a few recent wins uh from around the country with housing reform.
• 1:45
  SPEAKER_00: So, with that said, let's go ahead and go into article number one, which comes to us from John Burns research.
• 1:55
  SPEAKER_00: Headline reads the land grab goes off balance sheet, land banking now, 41% of how builders get their dirt.
• 2:03
  SPEAKER_00: From this article, John Burns says the old playbook of buying land and waiting for it to appreciate is basically over.
• 2:10
  SPEAKER_00: In their words, passive land appreciation is dead.
• 2:13
  SPEAKER_00: Builders are getting their land a different way now.
• 2:16
  SPEAKER_00: Over the last 12 months, 41% of builder land came through land banking, up from 34% the year before.
• 2:23
  SPEAKER_00: For the big public builders, 73% of their land is now optioned or controlled off their balance sheet, so they are not tying up their own cash in raw dirt.
• 2:33
  SPEAKER_00: The market is splitting by local by location quality.
• 2:37
  SPEAKER_00: A and B locations are still seeing 7 to 10% lot price appreciation.
• 2:42
  SPEAKER_00: Meanwhile, C and D locations, especially overbuilt pockets of Florida and Texas, are going the other way, and the gap between the two keeps widening.
• 2:52
  SPEAKER_00: A and B locations are the prime spots established in Phil and inner ring suburbs with deep, steady demand.
• 2:58
  SPEAKER_00: C and D are the further out, more marginal markets, the exurbs and fringe areas that run hot in a boom and cool off first when demand softens.
• 3:08
  SPEAKER_00: Capital discipline and location quality matter more than ever, and holding raw ground on your own books is falling out of favor fast.
• 3:15
  SPEAKER_00: What are your thoughts on this when you uh see this article?
• 3:18
  SPEAKER_01: Well, we've got to look at the accounting function here as the first one.
• 3:22
  SPEAKER_01: So the I think the chief reason that this happens is because owned land is sitting on the balance sheet is inventory.
• 3:30
  SPEAKER_01: So that ties up capital and it it hurt hurts returns.
• 3:34
  SPEAKER_01: So if we think about it from a purely accounting standpoint, a builder wants to keep their asset base small relative to their revenue.
• 3:42
  SPEAKER_01: So that's gonna improve some of those metrics that a public company has to answer to, like um uh return on equity or the other one that uh return on invested capital is another one that they would use.
• 3:53
  SPEAKER_01: So from an accounting function standpoint, keeping these off balance sheet, it's almost a requirement because they've got to answer to all these shareholders.
• 4:01
  SPEAKER_01: So that's a big, big, big element.
• 4:04
  SPEAKER_00: I was just looking at another stat here.
• 4:06
  SPEAKER_00: 41% land banking and then 59% spot purchases, you know, purchase for immediate development.
• 4:12
  SPEAKER_00: So what I thought was interesting about this when I saw these numbers is I wonder with the land banking concept versus the spot purchases, you know, how far in advance are some of these different developers and builder groups thinking when it comes to acquiring land?
• 4:29
  SPEAKER_00: I mean, are they are they thinking, you know, five years out, 10 years out?
• 4:32
  SPEAKER_00: How far out are they actually thinking when it comes to this?
• 4:35
  SPEAKER_00: Because obviously land banking plays a role in those situations versus, you know, spot purchases.
• 4:40
  SPEAKER_01: Yeah, it's a fascinating process because they have a giant machine that they have to feed.
• 4:45
  SPEAKER_01: And so if you're uh a DR Horton or something similar, uh in fact, I've got some some friends from AM that are in positions that do some of this planning at national builders and just kind of listening to them talk about how far out they have to think.
• 5:00
  SPEAKER_01: And that 10-year time horizon is not unrealistic for them.
• 5:03
  SPEAKER_01: But they've got such a big monster that they have to continue to feed lots to.
• 5:07
  SPEAKER_01: So they've got to think about what is the blend of of how that mix goes.
• 5:11
  SPEAKER_01: And they they want to keep stuff off balance sheet from a performance standpoint, being a public company, but of course there's give and take, right?
• 5:17
  SPEAKER_01: If they're gonna keep stuff off balance sheet, somebody else is making making some money on that.
• 5:22
  SPEAKER_01: And that creates a lot of opportunity.
• 5:24
  SPEAKER_01: Most of the land making uh groups that I've talked to, they want to they want to try to get that kind of 17 to 22 percent yearly return.
• 5:32
  SPEAKER_01: So if they're gonna try to keep something for a year or two, then that's gonna add 30 or 40 percent to the deal.
• 5:39
  SPEAKER_01: Uh if it's gonna be three, four, five years, that's even you know, even more.
• 5:43
  SPEAKER_01: So that creates opportunity for those uh for those groups that are happy to sell on the land and it pulls, you know, pulls some of the return away for for that builder.
• 5:51
  SPEAKER_01: So a lot of them have a blend.
• 5:53
  SPEAKER_01: They get some stuff that they're gonna own, some stuff that they're gonna have banked.
• 5:56
  SPEAKER_01: But it is a fascinating process for them to look out ahead.
• 6:00
  SPEAKER_01: And they've got a they've if they're doing it correctly, they want to be able to get in a position somewhere before it gets hot, before it becomes crazy.
• 6:08
  SPEAKER_01: If you look at the the markets that I know well in in Dallas Fort Worth, if we look at you know, Frisco originally and then then going north to Celina and to to Prosper First and then to Salina, these are some of the hottest markets in the entire United States.
• 6:22
  SPEAKER_01: And the appreciation there has been off the charts.
• 6:26
  SPEAKER_01: So people that were early, people that, you know, developers that came in and bought a thousand acres 20 years ago, now they can almost name their price, which is kind of wild.
• 6:35
  SPEAKER_01: So you have to really think ahead.
• 6:37
  SPEAKER_01: They've got a whole department that are modeling all this stuff.
• 6:39
  SPEAKER_01: I would assume AI could play a pretty significant role in how this is done over time.
• 6:45
  SPEAKER_01: Whereas there was kind of an artfulness, the guys that were really good could could pick the things that were going to be next.
• 6:51
  SPEAKER_01: And now I think AI may be able to tell them with a much greater degree of certainty where's the momentum, and there's a tremendous amount of data they could feed into it.
• 6:59
  SPEAKER_01: So I I think that this is is the AI creates a great opportunity here for the groups to really think ahead and plan this out.
• 7:07
  SPEAKER_01: But it it is a whole machine to plan out when you need hundreds of thousands of lots per year, and you've got to plan out 10 years in advance, you might have literally millions of lots that you have to uh account for.
• 7:21
  SPEAKER_01: So it's wild.
• 7:23
  SPEAKER_00: With that said, let's go ahead and move on to the second article, which comes to us from the U.S.
• 7:28
  SPEAKER_00: Census Bureau.
• 7:30
  SPEAKER_00: Headline reads June starts jump 19%, but it's all apartments.
• 7:34
  SPEAKER_00: Single family is still stuck.
• 7:36
  SPEAKER_00: So this is kind of a recurring theme, it feels like, from our prior episodes where we've been looking at housing starts.
• 7:44
  SPEAKER_00: And uh, so let's go ahead and get into this one.
• 7:47
  SPEAKER_00: Housing starts had their best month since March, jumping 19% in June to an annual rate of 1.43 million.
• 7:54
  SPEAKER_00: But here's the catch: almost all of it was apartments.
• 7:57
  SPEAKER_00: Multifamily starts exploded 76% in a single month, up to 532,000.
• 8:03
  SPEAKER_00: Single family was basically flat, down a hair to 895,000 and down 3.2% from a year ago.
• 8:11
  SPEAKER_00: Permits actually fell 3% to 1.37 million, so the pipeline is not filling back up.
• 8:16
  SPEAKER_00: Geography matters here as well.
• 8:18
  SPEAKER_00: Year to date, the West is the weak spot with starts down 4.4%, while the northeast, midwest, and south are all up a little.
• 8:26
  SPEAKER_00: So the headline reads like a boom, but for single family builders, it is still a grind.
• 8:32
  SPEAKER_00: I guess it's a little surprising to me seeing these numbers.
• 8:34
  SPEAKER_00: Does this surprise you at all?
• 8:36
  SPEAKER_01: Well, on the on the apartments, this is a likely a signal noise scenario.
• 8:41
  SPEAKER_01: So we'll say signal is meaningful information and noise is less than meaningful information.
• 8:47
  SPEAKER_01: And this big one-month uh apparent explosion of starts doesn't mean a ton because multifamily tends to be pretty lumpy anyway, whereas single family, you're going to have a consistent pipeline of things that are always dosed in on a monthly basis.
• 9:03
  SPEAKER_01: Whereas multifamily tends to be up and down.
• 9:06
  SPEAKER_01: Looking at that larger metric of a year or two years to establish trends would be better.
• 9:11
  SPEAKER_01: So I think the number the the information here shows because the the permits for the year are are actually down maybe single-digit percentages.
• 9:19
  SPEAKER_01: So we'll call it flat effectively.
• 9:22
  SPEAKER_01: Then, you know, certainly multifamily is not ramping back up by any means.
• 9:27
  SPEAKER_01: Uh, just happened to have one month with a lot of starts.
• 9:30
  SPEAKER_01: Last month was lower, could be lower or higher next month, who knows, but probably not a meaningful number overall.
• 9:36
  SPEAKER_00: As we talk about, it's always lagging data though.
• 9:38
  SPEAKER_00: So it's always trailing by about a month from when we can look at the data from the prior month.
• 9:43
  SPEAKER_00: So this is June data.
• 9:45
  SPEAKER_00: We know we're looking at this in late July, but it's June data.
• 9:48
  SPEAKER_00: So again, very, very lagging.
• 9:50
  SPEAKER_00: It doesn't always tell the story of the moment, but uh it's uh it's the data that we have access to right now from the U.S.
• 9:56
  SPEAKER_00: Census Bureau.
• 9:57
  SPEAKER_01: Hey Ryan, that permits number there, is that is that single family, multifamily, or is that combined?
• 10:02
  SPEAKER_01: That permits number.
• 10:03
  SPEAKER_00: It's combined, it's combined, yeah.
• 10:04
  SPEAKER_00: Ah, okay, okay.
• 10:05
  SPEAKER_01: Yeah.
• 10:06
  SPEAKER_01: Well, I I read I read that multifamily was down five point something, so that number, those numbers put together make sense.
• 10:12
  SPEAKER_01: So it it looks like single family is just essentially flat.
• 10:16
  SPEAKER_00: Yep, yep, exactly.
• 10:19
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• 10:23
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• 11:26
  SPEAKER_00: All right, let's get back to the show.
• 11:29
  SPEAKER_00: All right, well, let's go ahead and move on to our third and final article here, which comes to us from the National Association of Home Builders.
• 11:37
  SPEAKER_00: Headline reads three quick entitlement wins, New York reforms, Houston keeps its lot sizes, and Georgia speeds permits.
• 11:46
  SPEAKER_00: So this is one that I alluded to at the beginning, just that we talk a lot and we have talked a lot about how you know the federal government's there to can do certain things, but for the most part, when it comes to housing, a lot of the reform that needs to happen needs to happen at the local levels.
• 12:02
  SPEAKER_00: And so uh this article caught my attention because it talked about some recent wins from around the country, and I just wanted to point these out for us.
• 12:11
  SPEAKER_00: Uh so from this article in New York, Governor Hockel signed a budget with the biggest reforms to the state's environmental review law.
• 12:21
  SPEAKER_00: I'm not sure how you pronounce this, if it's SECRA or SEQRA, however you pronounce it, in decades, aimed at cutting the delays and lawsuits that stall housing.
• 12:30
  SPEAKER_00: So that's one of those that uh, you know, related to environmental reviews.
• 12:34
  SPEAKER_00: That's that's one that, I mean, I've had multiple environmental people on the show.
• 12:39
  SPEAKER_00: And, you know, when we talk about some of that stuff, it does add to the timeline.
• 12:43
  SPEAKER_00: And so this is something that's supposed to be, you know, speeding up that process, which will help cut down the timeline overall in theory.
• 12:50
  SPEAKER_00: We'll see if it really does.
• 12:51
  SPEAKER_00: Uh down in Texas, Montgomery County near Houston floated raising the minimum lot width from 40 feet to 50 feet, which would have meant fewer lots per acre and pricier dirt.
• 13:02
  SPEAKER_00: Builders showed up in force at the commissioner's court and the proposal got pulled, keeping the 40-foot standard in place.
• 13:08
  SPEAKER_00: So I think that was a big win and important for uh for lot sizes in general.
• 13:13
  SPEAKER_00: I mean, we it's something where we've been wanting to go the other direction.
• 13:16
  SPEAKER_00: So it's kind of interesting to see that they wanted to go from 40 to 50, whereas it feels like we've been wanting to go to smaller form factor um lot sizes for approvals and everything.
• 13:25
  SPEAKER_00: So I think that's also a big win.
• 13:27
  SPEAKER_00: And then in Georgia, Governor Kemp signed SB 447, which speeds up the timeline on land disturbance permits for new developments.
• 13:35
  SPEAKER_00: So this is the uh entitlement and permitting friction that quietly adds costs and months to every deal.
• 13:40
  SPEAKER_00: So it's good to see some of this happening from around the country.
• 13:42
  SPEAKER_00: These are some that were highlighted in this article.
• 13:44
  SPEAKER_00: I'm sure there's more.
• 13:45
  SPEAKER_00: So, Charles, just wanted to get your thoughts on this.
• 13:47
  SPEAKER_00: Anything uh stand out or do you know of any other any other things going on?
• 13:51
  SPEAKER_01: Well, so they I I've been a member of the NAHB and the Texas Association of Builders, and they're good organizations that do a lot of work in the areas where they work.
• 14:00
  SPEAKER_01: And so, you know, been to been to Austin lobbying with those groups before and trying to really advocate change.
• 14:06
  SPEAKER_01: I think the only challenge is that obviously this is an article put out by the NAHB.
• 14:12
  SPEAKER_01: They're highlighting wins, right?
• 14:13
  SPEAKER_01: They're only talking about the good stuff, uh, and there's plenty of other battles that are being fought that aren't being highlighted.
• 14:19
  SPEAKER_01: But it is good to see that there are some wins because there are days in our business when it feels like we're banging our heads against the wall, and uh, you know, we've got NIMBY's yelling and screaming that don't want us to build, and then we've got the the scenario of everybody else screaming that we need more housing.
• 14:34
  SPEAKER_01: So it is good to see some positivity because there's certainly, certainly plenty of things going on that uh that don't feel as positive some days.
• 14:42
  SPEAKER_01: So I'm glad to see that there are some wins happening.
• 14:45
  SPEAKER_00: Yeah, it's funny you mentioned the NIMBY's too, because uh I was actually looking at comments on some of our uh posts for the podcast, and one of them that I saw out there on, I think it was on Instagram, on a um on a reel that we had out there was somebody in all caps yelling about keeping uh I think that it was about NIMBYism and it said keep this crap out of Texas or something, and they're basically yelling at the developers.
• 15:12
  SPEAKER_00: So it's uh it's still very prevalent um all over the place.
• 15:16
  SPEAKER_01: Why does the developer have to be the bad guy?
• 15:18
  SPEAKER_01: I actually I didn't I didn't know it's just funny when I got into the business, I didn't under because I I didn't have a preconceived understanding of how negatively people felt about developers.
• 15:32
  SPEAKER_01: And and that was something that I learned after getting into the business, and people were mad at me, and I just thought I was trying to, you know, just just do business, just build housing.
• 15:41
  SPEAKER_01: It's not it's not good or bad, it's just business, right?
• 15:43
  SPEAKER_01: And and people don't feel that it's just business, they feel that it's personal and that we're building in their town and it's a personal attack on them somehow.
• 15:51
  SPEAKER_01: I don't know how that I don't know how that works, but it's fascinating.
• 15:55
  SPEAKER_01: You know, we go to these town meetings that we have to do when we're when we're trying to get a new development entitled, and the the anger and the just the the amount of pissed off people about new housing going up is it's really fascinating to me.
• 16:08
  SPEAKER_01: And uh, it's not something that I really intimately understand because my brain doesn't work that way.
• 16:12
  SPEAKER_01: Uh, but it's been a one of the more interesting elements of being in this business is trying to figure that out.
• 16:17
  SPEAKER_01: Why do people think that way?
• 16:18
  SPEAKER_00: Yeah, and I I wonder too, sometimes about how, you know, with social media making it so easy for people to organize and and try to fight some of these different projects in different places.
• 16:28
  SPEAKER_00: And and in fairness, there are there are around the country there, there's probably some bad projects that go up in different places too, and and some of those like give developers in general a bad name, or you know, a project doesn't work out the way that it was supposed to, and it leaves a bad taste in some of the residents' mouths.
• 16:45
  SPEAKER_00: And so then the developer that comes in after that other developer that messed things up is gonna be in a bad spot.
• 16:50
  SPEAKER_00: But I I do think that sentiment in general from some of the uh I guess from the residents, man, there's a lot of yelling online, a lot of screaming.
• 17:00
  SPEAKER_00: But that's the type of stuff that's promoted, though, because they want that's how you keep the conversation going.
• 17:06
  SPEAKER_00: That's how you keep people on the platforms, is you you want engagement.
• 17:09
  SPEAKER_00: And so people are gonna post and say very polarizing things to keep the conversation going.
• 17:14
  SPEAKER_00: People are gonna put videos out there that get people to comment on them, so they're gonna say polarizing things like call out an entire demographic or an entire uh an entire group of people like all millennials or or things of that nature.
• 17:27
  SPEAKER_00: So it's hard to tell what the real pulse is, but like you said, you've been in the room where people are actually there in real life, and uh yeah, there's people that aren't very happy on something.
• 17:39
  SPEAKER_00: Yes.
• 17:42
  SPEAKER_01: I have I have watched people be thrown out of a meeting for fighting in relate in relation to a new development.
• 17:50
  SPEAKER_01: It's it's wild.
• 17:52
  SPEAKER_00: Yeah, well, uh with that said, I think we'll come to a close here, uh, short and sweet today.
• 17:59
  SPEAKER_00: Any final thoughts, uh Charles, before we wrap up?
• 18:03
  SPEAKER_01: Not for me.
• 18:05
  SPEAKER_00: All right.
• 18:05
  SPEAKER_00: Well, guys, that's all for this episode.
• 18:08
  SPEAKER_00: If you're not already subscribed, please click that button.
• 18:11
  SPEAKER_00: We'd love to have you back for the next one.
• 18:13
  SPEAKER_00: Otherwise, we will see you back here tomorrow for our next interview episode.