‘The System Is Shocked’: Houston Land Sales Plummet As Cost Of Capital Overpowers Scarcity

No one is making any more land.

While Houston is often touted as having plenty of room to expand, land in the sought-after urban center has become scarce. But amid the high cost of capital, few developers are rushing to snatch up what remains.

Houston land brokers say developers don’t want to pay the high prices of two to three years ago, before the Federal Reserve began raising interest rates, leaving land buyers and sellers in a state of disequilibrium.

“The system is shocked,” said Simmi Jaggi, the managing director of national land advisory services for JLL. “Right now, a pro forma is very, very challenged.” 

Commercial land brokers say they have to work twice as hard to get the same number of transactions done as before, with landowners comfortable waiting as long as it takes for the sales price they desire. Those stagnant high prices mean only the best-capitalized investors can afford to develop in Houston and only certain asset classes are worth the cost of building.

The average sale price of a lot, primarily for single-family homes, jumped from $127K in 2020 to over $166K in 2021, Houston Association of Realtors data shows. It increased slowly for the past three years to rest at a $189K average through May 28. Those sales prices are not broken down by size and do not necessarily reflect a consistent metric, but they do indicate which way things are headed.

Meanwhile, developers’ cost of capital is double, triple or even quadruple what it was when land traded at peak pricing, said Christen Vestal, development partner for Provident Realty Advisors. This has largely discouraged buying as prices haven’t come down to bridge the gap. 

Houston lot sales peaked at 7,901 transactions in 2021, according to HAR data. That dropped to 6,916 in 2022 and 5,826 in 2023. Just 2,230 lots have traded hands this year. 

The scarcity of land in Houston’s urban core is nothing new, Jaggi said. Houston has significantly urbanized over the past 10 to 15 years, leaving fewer options for land buyers.

What’s changed recently are the market conditions, including interest rates, construction costs and rising insurance and taxes, Jaggi said. 

“It’s just a game of numbers,” she said. “The numbers have to work in order for them to buy the land, get the construction loan, [etcetera].” 

Buyers and sellers are both hesitant to be the first to jump right now, said George Craft, managing shareholder focused on commercial real estate at Winstead law firm. An interest rate cut could potentially be around the corner, so sellers are incentivized to wait and see if they can get a higher sale price as borrowing costs come down, he said.

“Both buyers and sellers are in a prolonged wait-and-see phase right now,” Craft said. 

Landowners tend to be generational owners or well capitalized, meaning they don’t need cash flow from the land, said Reed Vestal, co-founder and managing partner of Junction Commercial Real Estate, which serves as the equity arm for Provident. Landowners are among the least sophisticated of all commercial real estate owners and aren’t as driven to make a deal, he said. 

“Land guys are like ‘No, we want this, and we’ll wait until kingdom come,’” Reed Vestal said. “Time value of money says you should take a lower price, take your money and put it in another deal.” 

But their carry costs are minimal, and they can “wait until the cows come home,” he said. 

Even if there is land for sale with agreeable pricing, it comes down to whether buyers can get deals capitalized from a debt and equity perspective, according to Vestal.

“Industrial and single family are probably the two that you can get capitalized at the moment,” Vestal said. “Whereas multifamily, condominium complexes, speculative office deals are basically nonexistent.” 

Industrial developments benefit from being on the outskirts of a city, with access to freeways and logistics, Jaggi said. 

Retail is in high demand, at about a 5% vacancy rate in the first quarter. Yet retail in Houston is typically a component of much larger projects, so it cannot drive development on its own in the way a five or 10-story retail development in New York could, she said. 

“Even though retailers are sitting around screaming for space in the urban core, and actually throughout the entire city, it's literally a function of numbers,” Jaggi said.

The owner of a billion-dollar company, a private investor and the CEO of a real estate acquisitions company are an example of developers who can make the numbers work. Leslie Doggett, John Goff and Doug Schnitzer joined forces this month to acquire one of “the most important” parcels in Houston, a 6.3-acre tract at the southwest corner of Post Oak Boulevard and BLVD Place, for a mixed-use development.

Their development will include some retail, along with office, hospitality and residential assets. 

But that's an anomaly. Jaggi has seen land deals decrease about 30% this year, and she doesn’t expect that to pick back up until interest rates drop, she said. The Federal Reserve has held interest rates between 5.25% and 5.5% since last July, but hopes are still alive for cuts this year.

The market conditions and land scarcity have made part of Christen Vestal’s job more difficult, she said, since she evaluates five to six land sites for industrial development a day. 

“Half of my job is to evaluate land sites and quickly go through them and let the broker know if you’re interested or not interested. Ninety percent of the time, it’s a no,” Christen Vestal said. “You’re kissing a lot of ugly frogs before you find a prince.” 

Provident has the advantage of being privately owned and well-capitalized, meaning it can take recourse loans, she said. This month, Provident purchased 16.5 acres at 8020 Northcourt Road in northwest Houston. 

Provident purchased the land from a radio tower operator, and it plans to demolish three radio towers to make room for a 244K SF industrial spec building. This comes after Provident completed one of the biggest dirt jobs in the state to build the 1M SF Port 99 industrial development on a site that was half-covered by a sandpit in Baytown. 

“A true greenfield site where there’s nothing on it [and] it’s just super easy, there’s none of those left,” Christen Vestal said.

Houston is known for being the largest city in the country without zoning, but regulations can still be a hurdle to land acquisition and development inside Beltway 8, the toll road that encompasses the vast majority of the city, Craft said. There are available land sites along the Interstate 10 corridor, but many are within municipalities other than Houston, including villages like Hunters Creek, Hedwig and Spring Valley, he said. 

“They’re much more regulated in what they allow … They regulate height, they regulate setbacks, the amount of ground coverage you have to have, landscaping,” Craft said. “There’s more of that NIMBY mindset along that stretch of I-10.”

Capital for development is sitting on the sidelines, but it will likely continue sitting until questions are resolved around the economy, the interest rate environment and it being an election year, Craft said.

“If you're a potential buyer, in many cases, it doesn't harm you to wait six more months to see what changes,” he said. “There's just a lot of uncertainty.”