The housing shortage is real and we are facing pivotal moments that require comprehensive solutions.
From rising inequality to the stark realities of climate change, the central point to each of these issues is once again, the housing shortage.
We have gotten to the point that the shortage has gone beyond affordable housing, the lack of homes has also resulted in domino-effect repercussions across various aspects of American life.
This crisis is deepening, but raw land acquisition presents itself as a profitable opportunity not just for addressing the shortage but also as the prime means of safeguarding against economic downturns.
The Housing Theory of Everything
This is the theory economists, Sam Bowman, Ben Southwood, and housing advocate John Myers named.
‘The Housing Theory of Everything’ is an insight into how a lack of affordable housing isn’t the only standalone issue. Arguably, the economist says the shortage is also linked with several other problems like fertility, family planning, etc.
This is a shortfall between 1.5 to 6 million homes and it’s glaring. As a result, people are deciding to lean into longer commutes, changing family planning dynamics, etc.
It is not an opinion that housing plays a profound role in wealth distribution. With housing shortages pushing up home prices, existing homeowners, who are generally wealthier, stand to gain the most. Unfortunately, this is at the direct expense of new homebuyers, especially those from economically disadvantaged backgrounds.
As a result, it has created a barrier, specifically homeownership barriers.
Paint this picture:
Around 90% of households in the top 20% income bracket own homes. In contrast, less than half of households in the bottom 20% can say the same.
And there’s a bleaker picture…
There’s a high, high chance that the U.S. could fall short by a staggering 4.3 million apartments by 2035, according to the National Multifamily Housing Council.
A Looming Crisis in Multifamily Housing
Even though an influx of new apartment units was seen in 2023, their financing was secured before the onset of the recent economic challenges, including banks tightening their loan offerings and escalating interest rates. This change in the financial landscape has deterred new multifamily developments this year, pointing to a potential scarcity in properties for renters in a short span.
John Hutchinson, co-CEO of private real estate investment firm Trez Capital, illustrated the situation succinctly: “With people continuing to migrate to cities like Dallas, Houston, Phoenix, and Florida, we're likely staring at another housing shortage, especially given that initiating a project takes about two years.” Hutchinson's predictions suggest a massive shortage by 2025, especially in rapidly growing urban centers.
Investment Patterns and the Financing Gap
Recent findings from the CoStar Group highlighted a worrying trend: apartment building sales have plummeted to their lowest since 2009. Furthermore, the first quarter of 2023 saw a dramatic 74% decrease in multifamily investment volumes compared to the previous year — the most substantial year-on-year decline since the 2009 financial crisis.
Why this downturn? Hutchinson points to the severe constraints in financing. With banks only willing to fund 55% of projects, developers are under significant pressure to finance the remaining, often at prohibitive rates. For developers, expanding their investor pool or partnering with new investment entities becomes imperative. “The funding gap isn't likely to diminish anytime soon,” observes Hutchinson. “Many bankers have suggested they'll remain cautious until next spring. This presents an excellent opportunity for entities willing to venture into mezzanine or private equity funding.”
Raw Land Acquisition: A Golden Opportunity
Given the impending shortage and the constricted financial landscape, raw land acquisition shines as one of the most profitable ventures during this housing crisis:
1. Supply-Demand Gap: The evident shortage of apartments in major cities and the time required to initiate new projects implies a sustained demand for housing solutions, ensuring that raw land remains a valuable asset.
2. Flexibility: Raw land offers adaptability. As the housing crisis intensifies, developers can pivot based on the needs of the market, be it affordable housing or luxury apartments.
3. Alternative Funding Avenues: With traditional banking and financing models facing limitations, raw land acquisition can attract alternative investment methods like private equity. This offers lucrative returns for both landowners and investors.
4. Profit Margins: Given the demand and limited supply, coupled with the flexible funding models, those venturing into raw land acquisition and subsequent development can command higher prices, ensuring wider profit margins.
The Underrated Asset: Land Acquisition Amidst the Housing Crisis
The housing crisis has led stakeholders to reconsider their strategies. Amidst these changing dynamics, one asset emerges as particularly invaluable: land. Land acquisition, often overlooked in the race for ready-to-move homes and apartments, now stands as one of the most potent solutions to address and capitalize on the ongoing crisis.
Land: A Timeless Asset
1. Long-term Appreciation: Unlike other assets, land consistently appreciates over time, especially in growing urban and suburban areas. The predicted housing shortfall further amplifies the potential appreciation rate, ensuring that early land acquisition remains one of the best ways to guarantee significant returns on investment.
2. Finite Supply: As the adage goes, “They're not making any more of it.” The finite nature of land, coupled with the burgeoning demand, means that its value will only soar, particularly in high-growth areas where space is rapidly becoming a luxury.
Just think as you keep hearing the news about it, all those houses that we need built to avoid the crisis… they’re built on what? (land)
The Strategic Edge of Raw Land in the Housing Crisis
1. A Blank Canvas: Raw land offers an unmatched level of flexibility. Whether the future holds a demand for high-rise apartments, single-family homes, or mixed-use communities, raw land can accommodate any of these. This adaptability is crucial in uncertain times, allowing developers to pivot their strategies based on evolving market needs.
2. Cost-Effective: Without the complications of demolitions or renovations, raw land presents a more straightforward development approach. This can lead to cost savings in the initial stages of development, ensuring higher profit margins once the project reaches completion.
3. Attractive for Partnerships: Given the current reticence of banks to finance housing projects fully, having raw land can make partnerships more enticing. Investors and developers are more likely to collaborate when there's tangible asset value upfront, reducing the perceived risks associated with housing ventures.
4. Environmental and Regulatory Benefits: Raw land offers the possibility of sustainable and green building from the ground up. With an increasing global focus on sustainability, this becomes an attractive proposition. Furthermore, raw land often faces fewer regulatory hurdles than renovating existing structures, which can be encumbered by zoning laws and previous building violations.
The Broader Economic Implications
1. Job Creation: Embarking on new development projects on raw land can lead to the creation of numerous jobs, from construction to sales, providing a much-needed economic boost during times of crisis.
2. Stimulating Local Economies: New housing or commercial projects can lead to increased local commerce, benefiting surrounding businesses and leading to further economic growth.
3. Addressing the Housing Shortage: At its core, acquiring and developing raw land can help directly tackle the housing shortage, providing more options for families and individuals in areas most affected by the crisis.
We are looking at a recession-proof model right here…
Unlike other models, it doesn’t depreciate in the same way as other assets, the value isn’t easily affected by economic downturns… put simply- it’s a secure investment.
In the unfolding narrative of the housing crisis, land acquisition emerges not just as a solution but as a golden opportunity.
It's a chance for stakeholders to not only address a pressing societal need but also to reap considerable economic benefits. As the demand for housing continues to outstrip supply, the value of land will only increase, making now the ideal moment for thoughtful, strategic land acquisition and development.
If you’re curious about exactly how land acquisition can stand various business crises and want to learn tips and what to identify tune into Cody’s video that discusses exactly that: