Builders Ride Wave of Historic Housing Demand

By Jay Gonzales

More than a year after the COVID-19 pandemic crippled the global economy, the real estate market in the Tucson region is still riding a wave of historically peak demand with no end in sight.

New-home builders are finding a market flush with buyers. Waiting lists for new homes are long. Interest rates are low. Inventory in the resale market also is at a historic low point, creating a demand that far outweighs the supply.

Across the board, builders, land developers and others in the real estate market agree that the pandemic has had a massive impact, but not in the way they expected when COVID-19 hit with full force last spring. After a brief pause in April, May and a portion of June, the market picked up and sped off into the distance. Everyone in the industry has been trying to keep up since then.

“At this time last year, we saw a spike coming out of COVID. We had no idea that it would continue for a full year and that there would be such pressure on labor and materials to keep up,” said David Goldstein, president of Diamond Ventures, the developer of Rocking K, one of the seven active master-planned communities in the region.

Rocking K is building out 2,000 acres of land south of Old Spanish Trail east of the city limits and has plans for another 2,500 acres on the north side. Filling the first phase of the development is happening faster than expected.

Goldstein said when Rocking K opened in August 2019, he projected a 10- to 12-year sellout of the 4,200 residential units in the first 2,000 acres. Today, he thinks that section will sell out in closer to six to eight years.

“I think it’s just a longer-term trend right now,” Goldstein said. Buyers “want a little extra room. They’re going to spend more time in the house. In some cases, they have another family member living with them. All of that seems to be a trend and I don’t see it changing very much.”

Everyone is riding the wave, from the multimillion-dollar custom-home market to the builders aimed at first-time buyers. At high-end developments like Saguaro Ranch on the far northwest side, and Coyote Creek near Vail, lots ranging in price from hundreds of thousands of dollars to $1 million are flying off the proverbial shelves. KB Home’s Mountain Enclave project, an infill development on Mountain Avenue between Fort Lowell Road and Prince Road, had a waiting list of 400 prospective buyers before a single model was built. Those homes will start at about $310,000.

“Things remain really strong in the real estate market in general. Home building has seen a pretty solid year-over-year increase in terms of the number of permits,” said David Godlewski, president of Southern Arizona Home Builders Association. “We’re about 40% or so over where we were at this point last year. I think people had expected 2021 to be strong, but perhaps not as strong as it’s ended up being. Everyone is encouraged by the amount of activity, but there’s also a question about the sustainability of the market.”

And there’s the rub. How long can it last and what amount of risk are builders and developers willing to take? For the most part, they have to project sales at least two years into the future before committing to a development.

There’s also the specter of the “housing bubble” that led to the Great Recession of 2008 and whether that can happen again.

“What typically causes a housing bubble like we saw is an over-abundant amount of supply and a sharp decline in demand,” said Jon Volpe, CEO of NOVA Home Loans, a mortgage lender based in Tucson.

“We had builders constructing spec homes before contracts were in place,” Volpe said. “Borrowers were buying multiple properties under stated income programs with no skin in the game. It felt like the only requirement to get approved for a home loan back then was having a pulse. Fast forward to today, we have some of the tightest inventories ever. Demand is extremely strong and increasing due to demographics.”

For now, builders said they are going full speed ahead because they believe the developments already in the works will absorb the current market. As they plan new developments beyond what’s already for sale, there’s some uncertainty as to how long this can go, and it’s complicated by how long it takes to ready a property to build.

From the time a piece of land has been purchased and is ready to begin development, it’s a two-year process to complete all the engineering, planning and permitting and then add the infrastructure like utilities and roads, said Greg Mohl, VP at Sunbelt Holdings. Sunbelt has six developments in the area with a half-dozen home builders in those developments.

As a land developer, Mohl said, the trick is to project when it’s time to get to work on a land holding to ready it for the builders.

“The risk involved there is if we start a bunch of that development, two years from now do (builders) want it?” Mohl said. “There’s certainly a lot of analysis that goes into trying to figure out how that’s going to look two years from now.

“Right now, anything that we have ready to go, we’ll sell pretty much right away. And the prices are higher than they’ve ever been. Demand is highest that we’ve seen. It’s just a matter of can we get this stuff ready to go?”

While the builders and developers have a long way to go to fill in the properties that will be on the market now and for about the next two years, there is some concern about growth after that.

Will White, who runs the local office of Land Advisors Organization, a national company that brokers land deals here, is sounding a bit of an alarm that land is going to get harder to come by because of the demand and because a vast majority of the area’s empty space is land held by the state of Arizona. Land Advisors’ clients are mainly companies developing master-planned communities.

“I’ve never seen anything like this in my 20 years since we opened. I’ve never seen it whipsaw like it has,” he said. “Single-family, new-home permits are tracking 50% over last year so it’s not stopping at all. In fact, it’s probably gaining more momentum than it had last year at this time.

“The problem is the region wasn’t ready for that at all. The home builders weren’t ready for it. The developers weren’t ready for it. We can’t feed the machine appropriately.”

White said that combining the low inventory of resale homes with the current demand, the new-home market is having the most trouble keeping up.

“Everything’s backed up. We can’t get the lots even prepared for (builders) to open new communities,” he said. They’re selling faster out of their existing communities, and we can’t replace them fast enough. We’re probably going to run into a traffic jam at some point where the builders just have to sit and wait for the new communities.”

With the topography of the region, growth is being squeezed into three corridors   – to the northwest through Marana and toward Phoenix; to the southeast through Vail along Interstate 10, and to the southwest along Valencia Road where a major development is ongoing near Casino del Sol. Developments are moving farther out of town and buyers aren’t hesitating to go there.

Gladden Farms, which would have been considered the edge of the metro area at Tangerine Road and I-10, is not the region’s farthest development to the northwest. That label belongs to Red Rock Village, a Sunbelt Holdings development on the other side of the Pima County line. Coyote Creek, a custom-home development, Rocking K and Mountain View Ranch, a development being built by Holualoa Companies, are stretching out near and past Vail. Star Valley is an active community west on Valencia Road. And Rancho Sahuarita to the south has been active for 20 years and is still going strong.

Gladden Farms opened 20 years ago and recently took a different approach to attracting home builders to the development, said Dean Wingert, VP of Crown West Realty, the developer at Gladden Farms as well as a smaller project in Corona de Tucson, southeast of the city.

At Gladden Farms, Wingert said sales had picked up in 2019 as they were selling land to builders with the added incentive that it would come ready to develop with roads and utilities already in place. It was embedded in the price, thus taking the risk of those costs changing by the time the property was ready.

Like it was for everyone else, April, May and June 2020 was a time of uncertainty and concern for Crown West. And like everyone else, business picked up midsummer.

“There was probably about a two-month period where everybody wanted to take a time out and we had some deals in escrow that got canceled,” Wingert said. “Certainly, everybody was concerned.”

Sales offices closed their doors and sales were being done virtually. Some builders would meet buyers in person by appointment with social distancing, but those were the aggressive ones, Wingert said.

But after that two-month pause came a realization.

“Builders all realized, ‘Man, we’re selling houses. Despite all of these obstacles, we’re selling houses.’ ” Wingert said. “They were calling us again, saying they were going to need some more lots.”

As the sales picked up, builders and developers cited a number of reasons related to the pandemic. Among them:

• The pandemic opened the door to working remotely, allowing workers from large metro areas to relocate here for the foreseeable future;
• Buyers were leaving large, cramped metropolitan areas for the wide open spaces here;
• Looking for somewhere to relocate, the region’s affordability, not only in home prices but in overall living, was attractive;
• Buyers who were already here were looking for new features in their homes to address changes in lifestyle, such as the need for a home office or a space for schooling;
• The region’s job market and attraction of companies in A-list industries such as bioscience, aerospace and technology;
• Interest rates have remained low, opening the market to more buyers.

A year later, builders and developers universally agree that all those considerations remain in play, are having a huge impact on the market and will for some time.

“It’s the perfect storm,” said Rick Kauffman, CEO of Holualoa Companies. “You’ve got interest rates. You’ve got the COVID impact. You’ve got our excellent job growth. You’ve got our weather. You put all that together and it just makes Tucson a very, very attractive place to be.”

While home prices have increased dramatically since before the pandemic, the region is still considered extremely affordable nationally, Kauffman said. This is certainly demonstrated by where the out-of-town buyers are coming from in every category of home pricing.

Buyers are still coming from Southern California, the Midwest and the East Coast.

Peter and Debbie Backus, developers of Coyote Creek near Vail, say about 60% and maybe as many as 75% of their buyers are locals who are relocating. But they are seeing an influx of buyers from a new region for Tucson – the Northwest, Washington and Oregon.

Peter Backus said those coming from the northwest are coming for one reason – the weather.

“They’re just sick of rain, rain, rain, rain,” Backus said. “The people that we’ve seen just don’t like that weather 12 months out of the year. They want a break. A lot of the people in Washington and Oregon just want to see blue skies and no rain.”

Jeff Grobstein, division president of Meritage Homes – Tucson, one of the national builders with a strong presence in the region, said he’s seeing the same migration as always, from California and the Midwest. While Meritage has subdivisions in the high-end Stone Canyon development in Oro Valley, its focus is on first-time buyers and buyers moving up for the first time.

With that focus, he said he thinks interest rates are the primary factor for the staying power of the current market. But for those moving from other markets, it’s affordability and the equity that buyers bring from wherever they’re coming from.

“There’s no question in my mind a lot of the demand is still driven by interest rates,” he said. “We still have phenomenal interest rates that (are) helping drive a lot of our sales.

“You have people coming out of other states that are bringing some equity to the table.  It doesn’t really matter where it is in the country, the tide has risen. People in all parts of California can sell a home for $500,000, $600,000, and can come down here and pay cash, or they can get a mortgage.”

Along with the usual, Anjela Salyer, division president of Mattamy Homes, which bases its Arizona operation in Phoenix, said she sees a few other factors in play.

“People are seeking out an environment that has the same climate as Phoenix, but where you can find more affordability in housing,” she said. “I think we’re seeing a lot more of a younger demographic flocking to Tucson. The millennials continue to enter the home-buying market, seeing the value in homeownership and taking advantage of the low interest rates, comparing high rental costs to affordable home rates.”

For one of the region’s stalwarts, Rancho Sahuarita south of Tucson, business continues to buzz for a development that began more than two decades ago. There is still some concern, although it’s not in the demand for homes.

“I think we’re in a really good place to finish out the residential that we have in escrow going into 2022. I think the demand is there,” said Jeremy Sharpe, the developer of Rancho Sahuarita. “What concerns me is the lack of labor and the cost of materials. Our home builders are taking two months longer to build a house once they have permits. On top of that, it’s taking two months longer for us to get entitlements.

“That being said, we’re always hedging. We’re always watching it. I want to sell as fast as we can and get lots on the ground as fast as we can to meet the needs of our residents and of home buyers.”

In terms of what’s being built throughout the region, it’s all over the board.

Like Mattamy Homes, KB Home is focused on first-time buyers and is selling many of its homes virtually, a process that was inconceivable pre-pandemic but fits perfectly with its primary clientele.

“Most of our buyers are local that decided not to rent any more – first-time buyers, millennials,” said Amy McReynolds, division president for KB Home. “Honestly, this pandemic adjustment that we’ve had to make with some of this virtual, online, digital and social media, it’s been really good in targeting the millennials.”

The digital platforms allow buyers to go online and make custom choices for their homes. When it’s time to meet in person, most of the work is done.

“We pivoted very quickly on the sales floor, quickly in the studio,” McReynolds said, recalling how the sales process evolved during the pandemic. “People are often challenged with change and had we pushed this through without the pandemic, it probably would have been a little slower process. This forced us to be fast and pivot quickly and make adjustments.”

On the other end of the price spectrum, sales have picked up dramatically at one of the more unique developments in the area, Saguaro Ranch, at the north end of Thornydale Road, technically located in Marana but far from the town’s signature farmland. Access to Saguaro Ranch is through a mountain tunnel at the end of Thornydale Road.

For the cost of a lot that would be a minimum of one acre and a home to go on top of it, the bottom price at Saguaro Ranch is around $1.8 million. A dozen lots have sold there in the last nine months with a top price of $1 million. This comes after a period of time when only a couple of lots would sell in a 12-month period, said Mike Conlin, the development’s manager. Lots are prepared and released slowly in consideration of the pristine environment. Scott Lundberg, president of Saguaro Property Development, said there is an “80/20 rule” in which only 20% of the land there will be developed.

“It’s kind of the undeveloped pocket right in the middle of all this busy stuff,” Lundberg said. “Because of the 80/20 rule – I call it a rule – we’re going to be very less dense and have our space to be private.”

Nestled between Dove Mountain and Stone Canyon, Saguaro Ranch is finding that some of its buyers are not just looking for a winter home, but are actually making Tucson their home. It’s something that Rich Oosterhuis is seeing at Dove Mountain where he is the director of sales and marketing for The Ritz-Carlton Residences, Dove Mountain.

“Our big push this year has been people coming who are now going to be full-time residents,” Oosterhuis said. “Whereas in the past, this might’ve been their second or, in some cases, their third home, we’re seeing people building a little bit bigger in terms of square footage because this is going to be their full-time spot.”

Dove Mountain is seeing the same influx as the other builders and developers, from high-end to first-time buyers. They’re coming from the Northwest, California, the Midwest, the East Coast, and from within Tucson – stretching the boundaries of the metro area.

“I think we’re going keep seeing it in Tucson and Dove Mountain and Marana,” Oosterhuis said. “We’re kind of the little hidden spot that people are discovering, and it’s just sort of booming now.”