Truth & Consequences
Local experts offer an honest perspective on current land development market.
The recent Builder & Developer Luncheon presented by Peoples Company and Diligent Development offered a cautious forecast for home construction this year. Sales numbers seem to be going one direction while interest rates and prices continue to move the other way.
Andrew Warren, former director of development for Price Waterhouse Coopers, stated at that event that the future of real estate development will hinge on three key factors: infrastructure necessary to support growth, regulation with its unintended consequences, and planning that takes environmental changes into consideration.
Several central Iowa developers affirm those concerns. As they shared their thoughts recently on the pace of development for 2023, what they identified as the greatest factors affecting development echo Warren’s observations and provide a framework for construction goals in 2024.
Kevin Johnson
President, Accurate Development
With sufficient lots on the market currently, Accurate Development’s Kevin Johnson says, “We are aways out from needing to develop more lots. We’ll be finishing this year what we already had going, but I doubt we’ll start new projects before the end of 2023.”
Johnson doesn’t see this as a warning sign, but a reasonable consequence of market changes that began last summer. “A year ago we were still selling lots and homes as quickly as they came on the market. Once interest rates started rising, things slowed down pretty fast. With all the factors affecting the economy right now, consumers are being more cautious, and not a lot is selling compared to last year.”
Typically in a boom market like we saw in central Iowa over the past three years, companies would be developing an abundance of lots to meet that demand. And the almost immediate slow down would leave both builders and developers sitting on lots they were unable to sell.
“That’s one of the big differences between now and 10 years ago during the 2008 crisis. The truth is, all the infrastructure and supply issues we’ve been dealing with probably worked to our benefit,” Johnson says.
The freezes in Texas that shut down water pipe production and halted shipping of other construction supplies, the labor and supply issues utility companies battled that prevented electrical work, and even the logjam in the inspection and approval process in some communities all brought the pace of work to what felt like a standstill for some projects.
“There are lots and homes available,” Johnson says, “but not a crazy amount, so taking a wait and see attitude makes sense.”
As the construction season progresses, Johnson anticipates that lot inventory will dwindle and most developers will go into 2024 with smaller projects on the calendar. “We still have a lot going on at Accurate,” he says. “We just finished paving a project we have in Adel. Our Acadia development will be the site for HomeShowExpo 2023. And we’re busy with our Bentley Ridge neighborhood just a mile from the Home Show site so we can have lots ready early next year.”
Johnson expects the company will do fewer spec homes this year, but he anticipates overall sales to return to pre-COVID levels. “Numbers are down from the past couple of years, but that was not the norm. Nobody was complaining about the market four years ago, so if things go back to that pace, that’s still awfully good.”
So many variables come into play in gauging where the market will be a year from now that Johnson hesitates to make predictions. “It’s always a guess,” he says. “If the economy stabilizes, supply chain issues continue to improve, and interest rates settle somewhere in the single digits, home sales will stay strong.”
Interest rates are the biggest variable in that equation, so developers will continue to monitor those changes as they complete projects and plan for 2024.
“I believe builders and developers are the most optimistic people on Earth,” says Johnson. “We wouldn’t be in this business if we weren’t. And the truth is, the market, in Iowa at least, is still in really good shape.”
Accurate Development
9500 University Avenue, #2112 | West Des Moines
AccurateDevelopment.com | 515.327.0800
Tim Portzen
Vice President, Diligent Development
“As developers, we have to prepare so far in advance of the construction season and balance so many factors in doing that, that change is much slower to occur. When you’re steering a big ship, it takes a lot longer to change direction” says Diligent Development’s Tim Portzen.
That can be both good and bad. Juggling the consequences of infrastructure and supply delays meant lot inventory didn’t climb as quickly as demand. “Lot sales had already slowed by the beginning of 2023,” Portzen says. “Now everyone is starting to recalibrate as we keep an eye on interest rates and inflation.”
As much as we might wish it, Portzen says no one expects to see 3% mortgage rates again, “but hopefully we’ll see lot sales looking more like the market average over the past 10 years, if not the record highs of years past.”
Some of the factors that have made it difficult to meet the rapidly increasing demands of the market have eased in recent months, such as infrastructure delays, labor shortages, and overextended contractors. But others will continue to present challenges.
“Some figures suggest the cost of agricultural land has increased 50% in the past two years, and that has affected development costs, too,” he says. “Regulation also continues to add time and cost. It should protect the consumer without overburdening the builder or developer, but regulation is typically reactionary. And once regulation is implemented, it’s hard to change, even if it has negative consequences.”
Monitoring those issues is key as Diligent moves forward. Fortunately, changes like new regulations are slower to take effect and easier to see coming. And as the pace of construction eases, contractor schedules are experiencing less backlog than they faced a year ago, allowing projects to stay on track.
“For developers, 2023 is sort of already in the books. Our part is already complete on what lot delivery will be doing this year. So we’re actually focusing on 2024 right now,” he says. “Part of that task is helping redefine the new norm for both affordability and consumer expectations.”
The booming market of recent years wasn’t the norm, and this transitional period won’t be the norm either, Portzen says. “We’re hearing everywhere about the uncertainty of the 2023 market, but everything points to a healthy construction industry. There are jobs available, there’s still a strong demand for homes, and there are still lots to build on.”
Portzen says a consequence of escalating construction prices is that the definition of “typical” may need to change. The truth is that decades of low interest rates and a strong market meant home buyers and builders both raised their expectations of what a typical affordable new home included. The 1980s standard of a 1,500-square-foot home often with one bathroom and an unfinished basement evolved into the 2,400-square-foot two-story with guest bedroom, office, finished basement, and a three-car garage.
“Builders and developers need to listen to consumers as we redefine our product. What do consumers prioritize? Will they opt for smaller homes that retain the upgraded amenities or choose larger homes with less ‘wow’ factor?” Portzen says.
Understanding that new norm will be key in developing the projects that break ground in 2024.
Diligent Development
12119 Stratford Drive, Suite B | Clive
DiligentDevelopment.com | 515.309.0705
Caleb Smith
Vice President, Hubbell Realty
While the development process doesn’t stop and start on a dime, one advantage of the lengthy time frame for such work is that you can often see changes coming well before they actually hit.
“Around August of last year, we started sensing that the market was nearing a significant slowdown,” says Caleb Smith, Vice President of Land Development for Hubbell Realty.
“When interest rates started going up, people were being more cautious about buying homes. Builders were the first ones to feel that. We saw it in the number of builders extending closing dates.”
Smith says many builders were already sitting on an inventory of lots and were not looking to add more, so at that point Hubbell recognized the demand for its projects was going to change.
“I would say everyone has a reasonable expectation that 2023 is going to be a tough year, with significantly fewer sales and numbers down across the board primarily tied to interest rates and uncertainty about the economy.”
Land prices and regulatory demands have also played into both lot availability and development progress. “Land has jumped up at about the same rate as infrastructure items—pipe, concrete, steel, even fuel,” Smith says. “And any time costs are going up that quickly, it makes developers move a bit more cautiously.”
Add to that the significant changes central Iowa has seen in stormwater regulation and lengthy review processes, and it’s no surprise that a development today takes much longer to bring to market than it would have 10 years ago.
“I spent 20 years as a civil engineer,” says Smith, “so I understand that side of the process. But the expectations and the detail required in the approval process today are so much more time-consuming, not just for the developer but for the city staff who has to review it.”
Although all municipalities base their individual codes on the same guidelines, each interprets them differently, which adds further to the costs and the timeline. “Each project is different, depending on the community where it’s located, so it’s impossible to streamline everything,” Smith says.
He believes 2024 will bring its own challenges with a Presidential election cycle coming to a head. However, Smith anticipates the low point of the current slowdown to be behind us by the end of 2023.
“New home inventory has been fairly high since late last year, but as builders work through that, I expect they’ll be back for more lots as we ramp up for next spring. At Hubbell we’re focusing on evaluating which areas are going to be most in need of lots, and we’re pushing ahead on those projects to meet the shortage.”
As far as predictions go, Smith says, “My wish list would include interest rates below 6%, new-home inventory at a reasonably low level to bring back the demand, and that the political process of the 2024 election would go smoothly and quietly.”
Ideally, the current slowdown will level out by late fall and 2024 will see a return to the “normal” pre-COVID pace. All things being equal, which never happens in the construction industry, that’s still the optimistic view.
Hubbell Realty
6900 Westown Parkway | West Des Moines
HubbellRealty.com | 515.243.3228
Jenna Kimberley
Vice President, Kimberley Development
As a builder and a developer, Jenna Kimberley has seen the challenges faced at every level of the construction industry the past couple of years. And she says what affects one ultimately affects the other.
“Overall, less land is in an active stage of development right now. Fewer lots are coming on the market, not just due to the state of the economy and the market slowing. But it’s taking longer to develop property,” she says.
With supply chain issues, delays in approval timelines, and labor shortages in all segments, some phases of development are taking months longer than planned. “We’ve incurred huge delays on infrastructure,” she says. “Plus with the boom central Iowa has seen in both public and private development, there’s been an even higher demand for contractors.”
As other developers have mentioned, supply and labor shortages for utility companies have been an ongoing concern, affecting development timelines, project costs, and builder schedules. Add in ever-increasing regulatory costs, and developers are facing an uphill battle.
Kimberley says, “The robust housing market and historically low interest rates that started back in 2020 kicked off a buying spree among developers and investors. Combined with an increase in farmland values, we’ve seen the price of development land in some areas increase 96% in just four years.”
With the market cooling off, some developers may be faced with lots that will be overpriced for the market by the time they’re developed. “We’re being cautious and have pulled back on some plats because we anticipate a continued slowdown,” Kimberley says. “Between the Fed continuing to raise interest rates and the new normal of high costs, the market will continue to slow from the pace of recent years.”
She says that combination of volatile factors makes building affordable homes increasingly difficult. “Affordability won’t be achieved until government regulations ease. Those restrictions put more costs onto developers and builders and ultimately the home buyer.”
Recent statistics from the National Association of Home Builders estimate that government regulations account for over 30% of the cost of development on a single-family home and over 40% on multifamily properties. Because of that, the HBA is working to get legislation passed that decreases regulatory red tape and aesthetic design requirements, which do nothing to improve the health and safety of the consumer.
“Our bill is awaiting approval from the House and has already passed the Senate,” says Kimberley. “Stormwater regulations put in place in recent years add to the demise of affordable housing and put a disproportionate amount of the expense on new construction. I fear we’re on a path that makes home ownership a privilege reserved for the wealthy elite. But as the primary tool we have for building wealth, home ownership shouldn’t be out of reach for the average American.”
While many newer regulations have worthy motives such as encouraging aesthetic standards and neighborhood beautification, Kimberley says those goals can often put home prices out of reach for the very residents that would benefit most. “All this unfortunately means that nothing is happening to make lots and homes more affordable.”
Easing up on the development pace may provide time for better solutions.
Kimberley Development Corporation
2785 North Ankeny Boulevard, Suite 22 | Ankeny
KimDev.com | 515.963.8335
Eric Grubb
Owner, Solid Ground, LLC
“It is important to digest the numbers over longer periods of time and not just year over year,” says Eric Grubb of Solid Ground. “But factors like higher prices, higher interest rates, and general economic concerns will typically slow development.”
Because the development process, from land purchase to delivery of buildable lots, can take years, Grubb says it’s probably too early to tell whether the decline in lots entering the market early in 2023 is actually a trend.
“Developers respond in a variety of ways to changes in the market. Some projects may be pushed off, some plats may be smaller in size, etc.,” he says. “But if a developer is already well down that development path, the company is going to continue moving forward unless something catastrophic forces you not to. So some of those statistics really need to be looked at in a multiyear context.”
Grubb agrees with other local developers that land prices, regulation, and the economy are significant challenges they’re facing right now. “Land prices have risen right alongside home prices and are ridiculously high,” he says. “With development and construction costs and interest rates all literally double what they were, the prices sellers are asking just don’t work anymore. But it’s going to take a couple of slower years to reset those seller expectations.”
A reset likely needs to take place on the regulatory side as well if codes are going to reflect affordability issues.
“Codes regulating things like minimum lot and home sizes, landscaping requirements, infrastructure specifications, and stormwater concerns are constantly being updated and generally go in one direction: more restrictive and more expensive,” Grubb says. “All these costs are ultimately passed on to the homeowner. So when you hear numbers like up to 25% of the cost of new homes is regulatory in nature, it is substantial.”
When you combine them with rising interest rates, increasing labor and supply costs, and elevated land prices, those additional regulatory costs make it virtually impossible for builders to build homes that the average buyer can afford.
“Both 2020 and 2021 were the anomalies, and we aren’t getting back to that pace or level of affordability probably ever again,” he says. “Affordability will be the challenge in 2023, though, because the price increases we’ve seen the past couple of years will likely be here to stay.”
As a developer, Grubb says the supply chain issues have been less severe, but each of those delays compounded the problems for builders. “We have seen higher costs for things like steel, concrete, PVC piping, diesel fuel, etc. There are also isolated problems for developers specifically with things like electrical transformers. But the main supply chain challenges have been felt by builders rather than developers.”
Looking ahead, Grubb anticipates activity to stabilize at a reasonably strong level.
“I would expect the sales and development pace to end the year more like that of 2016–2020,” he says. “There are dozens of reasons people buy or sell a home. So barring a major recession, I think the industry will have a decent year, even in the face of all this uncertainty.”
Solid Ground, LLC
17389 Berkshire Parkway | Clive
SolidGroundIowa.com | 515.975.7441