Local builders are enjoying stronger sales than they have in years, and they're planning more new houses to meet the demand.
There's just one problem: They're running out of places to put them. After years of almost no new development, homebuilders see an increasing shortage of "shovel-ready" lots in the Portland area.
Shortage has been good to the housing market, with low inventory of available homes driving up what buyers are willing to pay. But builders worry a shortage of lots could limit construction and raise construction costs, potentially damaging an industry just beginning to recover from the housing crash.
And getting raw land ready to build is a process that can take up to two years. There are engineering, environmental and traffic studies to conduct before the land can be divided into lots. Only then does the actual development -- clearing and leveling the land, building roads and installing utilities -- begin.
"The development business is a hurry up and wait game," said Gordon Root, a developer and president of the Home Builders Association of Metropolitan Portland. "There's not any question about that. It just takes time."
In the boom years, as homebuilders were rushing to create the excess supply that haunted the real estate market for years afterward, lot developers -- the leading edge of homebuilding -- were overproducing to an even higher degree to meet the demand.
But when the market collapsed, lot production dropped to almost nothing. Even with anemic new-home sales, lot development has been even slower since 2009.
Lending lags financing demand
Builders who survived the downturn, seeing a new surge in demand for homes, are in a hurry to catch up with it by ramping up the number of available lots. But lenders, they say, haven't caught up with the need to finance more.
"Even with builders consuming far more lots than we've been creating, banks don't like to lead us very far," Root said. "While the market's really come back for homes, development financing is still pretty dry."
Builders spotted the coming shortage long ago, and those with the means started buying up all they could in the areas they wanted to build.
Arbor Custom Homes, the largest of the local homebuilders, has built up more than 2,000 houses' worth of land with plans to deliver 300 new homes this year. At one time, the company saw its excess land supply as a liability, and in fact sold a significant chunk last year -- lots it said were underperforming -- to national builders Lennar Northwest and D.R. Horton.
Now, thanks to the company's relationship with construction lenders -- some of whom own mortgages on Arbor's land, and thus have a financial stake in the projects' success -- it is able to secure financing to develop its land into buildable lots.
"We feel very fortunate in that respect," said Brad Hosmar, Arbor's chief operations officer. "We have a good relationship with a couple of lenders. We've weathered the worst of the storm, we feel more confident, and now we can go out and develop lots again."
Some smaller homebuilders, such as TA Liesy Homes Northwest LLC of Clackamas, have had to start learning to work like the big guys.
Tom Liesy has increased his company's production over the last two years to build up a year's supply of land.
That won't be enough, so Thursday he arranged to buy unfinished land that his company will develop -- backed not by a bank, but by outside investors.
"The really scary part of it is, there are no lots," Liesy said. "So if we don't start getting creative about ways to bring new lots online, it'll be a problem for me, my company and many people in the same position as I am."
Private equity is one of the few options for new-lot development, said Todd Britsch, president of New Home Trends Inc. of Bothell, Wash. Well-capitalized national builders could also bring new lots to the market, but fewer are active in Portland than other markets.
But ultimately, Britsch said, builders and developers are going to need more financing options, and that may be slow to return.
"It's available, but we're very conservative on all our underwriting standards," said John Satterberg, president of Community Financial Corp., a major construction lender. "The land acquisition and development loans was one of the biggest risks to the banks when the crisis hit."
Cheap lot options
Smaller builders who don't have a supply of land built up might have to be willing to take what they can get in terms of location.
Builders have been nibbling away at the supply of bank-owned lots since the crash -- with home prices low, the only profitable way to build. Now, they're taking big bites at that foreclosure inventory, said Britsch. Lennar and D.R. Horton each bought big pieces of that stock, too.
The dregs of that supply -- poorly located or planned developments that might have sold anyway during the boom years -- are available for cheap.
"Some of this never should have been developed," Britsch said. "We saw everybody building anything. You can't do that."
By Elliot Njus, The Oregonian
