By Ashley Gurbal Kritzer and Angela Gonzales  –  Phoenix Business Journal

In the booming world of homebuilding, major players are stampeding into parts of the country long overlooked. All signs point to an escape from New York — and that’s good news for Arizona.

America’s heartland is positioned for a post-pandemic housing boom if current trends continue.

And in Tucson and Lake Havasu City, approvals to build single-family homes were up 29% through September — even higher than metro Phoenix where approvals were up 21%, according to a Business Journals analysis of 354 markets across the country.

While homebuilders in metro Phoenix know how hot the market is in the region as they constantly fight against undersupply, there are some areas of the country where building permits are even higher.

In greater Kansas City, approvals to build single-family homes were up 26% year to date through September. So, too, were the Rust Belt cities of Columbus, Ohio, and Fort Wayne, Indiana. Near Fort Collins, Colorado, they rose 47%, and the rural area around Clarksville, Tennessee — just north of Nashville and south of the Kentucky border — reported a 63% increase, tops in the country among major metros The Business Journals analyzed. 

Robert Dietz, chief economist for the National Association of Home Builders in Washington, D.C., said it’s no surprise the country’s biggest homebuyers are thundering into more rural, less populous, areas of the country. He said the coronavirus and its effects on remote-work policies have turbocharged buyer demand for bigger homes and a flight from congested urban areas, a trend that’s already triggered a surge in building activity in places long dismissed as too far-flung from hot job markets and top-ranked research clusters. 

Meanwhile, the reverse is playing out for many of the priciest and traditionally most sought after housing markets.

Building up in sought-after locales

Among the 354 metropolitan areas The Business Journals analyzed, 236 reported year-to-date increases in single-family building permits through September, with areas in the Midwest and South recording the largest increases. Conversely, pricier and more congested metros — most notably California’s Bay Area as well as Denver and New York City — saw the largest one-year declines.

“Columbus and Indianapolis — those kinds of cities are going to emerge as winners over the next few years,” Dietz said.

Some rural areas of Arizona also are doing well, including the Sierra Vista and Douglas area of the southern part of the state, where permits are up 27% year to date, along with Flagstaff, up 13%

Other parts of Arizona are showing declines in growth, such as the Prescott Valley and Prescott area, down 2% in year-to-date permits, and Yuma, down 3%, according to The Business Journals analysis.

Mandalay Homes and Mosaic are two Phoenix-based homebuilders that are doing what they can to reverse that trend in the Prescott/Prescott Valley area. They have embarked on a $100 million agreement to build 400 homes in that area.

Bigger homes

Indeed, Covid-19 has relegated people to their homes for activities once reserved for commercial real estate. Home schooling, home workouts,  home offices — all are driving buyers toward larger residences. And because they’re spending less time commuting, those same buyers are proving increasingly willing to move farther from city centers to larger spaces at affordable prices.

Many of these larger homes in the metro Phoenix area are in the southeast Valley, including Queen Creek, San Tan Valley and Gilbert areas.

For example, Scottsdale-based Maracay plans to build 1,400 homes at its Waterston community in Gilbert, along with the nearby city of Maricopa, which also is seeing the construction of larger homes priced under $300,000.

In the West Valley, however, homebuilders are focusing on smaller lot sizes in an effort to lower their price points, offering entry-level options.

The phrase “drive ‘till you qualify” was a mainstay in the housing runup of the early aughts. In those days, spurred by lax mortgage requirements, buyers flocked to the affordability of distant exurbs. The pendulum has swung back in the exurbs’ favor, as the novel coronavirus has consumers rethinking their homes — and driving ‘till they qualify — now that remote work appears here to stay.

“It’s a function of the fact that telecommuting increases the ability of renters and homebuyers to expand their tolerable commute times,” Dietz said. 

Builders ramping up

None of which has escaped the nation’s homebuilding giants.

In recent earnings calls, Miami-based Lennar Corp. said that most categories of its home sales rose significantly year over year and that it was “ramping up” land purchases to keep pace with homebuilding. Likewise, PulteGroup Inc. CEO Ryan Marshall recently said signs of an emigration to the ’burbs already are afoot. 

Pulte’s share price through Oct. 26 was up 10% for the year, and Lennar’s climbed 34%.

“While we can debate the magnitude, ZIP code-level analysis on buying patterns points to a movement of renters and homeowners from urban centers into the surrounding suburbs,” Marshall said during the company’s second-quarter earnings call. 

In an effort to keep up with homebuyer demand, Scottsdale-based Taylor Morrison Home Corp. also is ramping up the pace of land investments across the nation — and the Valley. Sheryl Palmer, president and CEO of the homebuilder, told analysts in a third quarter earnings call on Oct. 28 that the land buys over the next few quarters will support the company’s growth in 2021 and beyond.

The nation’s fifth-largest homebuilder invested $370 million in land development during the third quarter and $1.1 billion during the first three quarters of 2020. At the end of Q3, it had 68,200 owned or controlled lots, representing 4.8 years supply.

Scottsdale-based Meritage Homes Corp. reported record third quarter sales orders. The homebuilder has been gobbling up land across the country in an effort to have 300 communities open by early to mid-2022, buying 4,000 new lots during the second quarter and another 9,000 lots during the third quarter, creating a robust pipeline.

Meanwhile, all signs point to a continued expansion of homes’ average size across the country.

In a September housing report, Moody’s Investor Services said “the new realities of virtual living” have given new value to amenities such as space, flexible layouts, backyards and customized technologies. 

“These factors contributed to favorable demand trends amid the pandemic, which we believe will continue for years to come, including after the vaccine is found and risk of Covid-19 infection subsides,” it said.

Housing experts said the shift could push the average U.S. home to roughly 3,000 square feet, or 37% larger than it was 20 years ago. According to the U.S. Census Bureau, 46% of new single-family homes topped 2,400 square feet in 2019, versus 34% in 1999.

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About this series: The New Math is a weekly analysis exploring the fast-changing economics shaping how different classes of commercial real estate are being used and developed by tenants and landlords in a post-Covid-19 world.

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