Follow the rooftops

Executive Summary
Industry. Homebuilding Trend. Development pushes east and north. Key. Homebuilders are confident demand will remain strong.

It all starts with the rooftops.

To get a sense of where the Gulf Coast's economy is headed in 2016, consider homebuilding and residential land development. Everyone watches this barometer closely because it points the way to future commercial growth.

From Tampa to Naples, builders are pushing boundaries north and east. In Pasco County, many people are watching a 6,400-acre parcel of land for sale at State Road 52 and the Suncoast Parkway. In Collier County, the best-selling community is Ave Maria, a town in the eastern part of the county that attracts buyers from Naples and Broward County.

Population growth combined with shrinking inventory of homes has created the right mix for the recovery in homebuilding and residential land development. “What I would say is we're going to have an economic boom superimposed over a population boom,” says regional homebuilder Pat Neal, CEO and founder of Lakewood Ranch-based Neal Communities. “I think we're going to sell a lot of homes.”

In a presentation to investors recently, Florida homebuilder WCI Communities CEO Keith Bass put the state's current population growth in perspective: It's the equivalent of adding a city the size of Orlando every year. As of Sept. 30, WCI's backlog of orders has surged 41% to 646 homes compared with the same time a year ago.

According to estimates from the Bureau of Economic and Business Research at the University of Florida, the state added 282,256 people or 773 people a day from 2014 to 2015. The bureau estimates population will continue to grow at the same rate for the next five years.

Buyers hail from a broader geography now, too. “It's no longer the I-75 corridor comes to the West Coast of Florida,” says Bob Vail, president of Kolter Urban, developer of 41-story downtown condo tower One St. Petersburg, where the average price is $1 million. “We're also seeing a pretty high number of Northeast buyers.”

The west coast of Florida is benefiting from the fact that there are fewer land opportunities for builders on the east coast. For example, Sunrise-based GL Homes will sell more homes this year on the west coast of Florida than in its home territory on the east coast, says Patty Campbell, president of the homebuilder's west coast operations. “We've had a stellar year,” says Campbell, who expects a repeat in 2016.

Still, not every area of the Gulf Coast is created equal. Neal says job growth has been disappointing in the Tampa area, and buyers of moderately priced homes have relatively high cancellation rates because of mortgage qualification issues.

“We're not building a whole lot of entry level product,” says Tony Polito, director for Tampa and Sarasota for Metrostudy. “Most of the homes being built are bigger and more expensive.”
Nevertheless, Polito expects housing starts to grow between 8% and 12% in the Tampa and Sarasota areas next year as wealthier baby boomers drive demand for pricier homes.

Spec is back
One indication of homebuilding's outlook is the fact that speculative building has returned. That's when builders are confident enough to start building a new home even without a buyer.
For example, Neal says he's doubled the number of specs he's building to 120 homes, which is about 10% of total sales. In many markets on the Gulf Coast, the inventory of homes for sale is below the current demand. “We think inventory favors sellers,” he says.

At Stock Development in Naples, the company has 175 speculative homes under construction at any given time. “We're starting to build specs on Marco Island,” says Brian Stock, the company's CEO.

Large national builders are building spec, too. For example, D.R. Horton is building an undisclosed number of spec homes in 50 communities from Tampa to Naples. “Many people believe we compete with other new homes, but most of the housing transactions are with used homes that are becoming old and dated,” says a company official in an email response to questions. “We believe that offering a brand new home that is available now and is comparably priced with older dated homes is appealing to prospective buyers.”

Spec building is occurring at price levels that previously were the province of custom-home builders. For example, Stock plans to build 10 furnished speculative homes in Lakewood Ranch for $1 million to $2 million each. “They want these to move in,” says Stock.

Randy Thibaut, CEO of Fort Myers brokerage Land Solutions, who recently presented a market trends analysis to the Lee and Collier building industries, says he's not concerned about speculative overbuilding. “Although there's inventory, it's nothing even close to the kinds of inventory we were building in 2005,” he says. “What we see here is very controlled speculative building.”

Thibaut forecasts 12,200 residential units will be pulled this year in Charlotte, Collier and Lee counties, on par with the early 2000s but nowhere near the 44,000 permits pulled in 2005. For the next 12 months, Land Solutions forecasts a 7% to 11% increase in residential permits.

“The bigger problem is going to be supply-related in this cycle,” says David Cobb, South Florida regional director for market tracker Metrostudy.

Overbuilding isn't a threat in Tampa, either. According to market tracker Metrostudy, Tampa is building about two-thirds of the average annual 20-year volume of homes. Polito says high land prices and a shortage of construction labor will keep builders disciplined.

Besides, the buyers today aren't likely to flip their homes for a quick profit and many of them pay cash. “We're not getting speculators and investors,” says Vail, who notes that condo buyers will live in the units that are selling at One St. Petersburg. “We're getting real people.”

Land plays
The boundaries of Southwest Florida and the Tampa Bay region are pushing north and east as the supply of large tracts of available land become harder to find. “The bank-owned land business is way behind us, but there's still lots of capital looking for land deals,” says Tampa land broker Bill Eshenbaugh.

In the Tampa Bay region, the hot areas of residential development include south-central Pasco County and south Hillsborough County, says Bruce Erhardt, executive director with Cushman & Wakefield in Tampa.

Developers are scouting other areas of the Tampa Bay region, too. “People are looking at Plant City and Polk County,” Erhardt notes.

Further north there's a 6,400-acre tract dubbed “Angeline” at the corner of the Suncoast Parkway and State Road 52 in Pasco County. Jay Ziv, senior vice president with Avison Young, the commercial real estate firm marketing the land, says there are plans for two-lane State Road 52 to be widened, opening up a new east-west corridor in Pasco.

The parallel east-west artery to the south, State Road 54, is seeing strong activity in communities such as Trinity and Starkey Ranch. “Starkey Ranch is really hopping,” says Erhardt.

In Southwest Florida, Ave Maria is the top-selling single-family residential community, according to Land Solutions. The new town is located 30 miles inland from Naples, but moderately priced homes have attracted buyers from the east coast.

Indeed, the east-west artery of Immokalee Road that joins Ave Maria and Naples has seen a surge of new residential developments. “There will be thousands of new-home opportunities in the next three years,” Thibaut says.

For more data on the Gulf Coast's economy, see our by the numbers charts.