Why Are Lots So Expensive?

Driving around Anchorage, you see lots of vacant, undeveloped parcels of land.  I’m frequently asked the question ‘Why doesn’t somebody develop such and such a parcel?  And although that seems like a good idea what you see out your windshield or side mirror is not always what it seems to be.

First, over 92% of all local lands in the Anchorage Bowl are owned by some governmental entity, much of which is dedicated local, state or federal park land.  In addition, the military owns a considerable stretch of land reaching from east Anchorage to Eagle River.  Then, there’s preservation wetlands and lands owned by non-profits such as the Great Land Trust and religious non-profits. So when you get right down to it, there’s not a lot of land left for private developers, particularly those parcels properly zoned for residential development.

Second, what land is available is expensive to development or redevelop.  Trailer parks converted to residential development frequently have contaminated soils that have to be mitigated and can take years and tens, if not hundreds of thousands of dollars. It also takes time and money to remove the trailers and there is frequently a payment to the displaced trailer owners. In addition, old utility pipes need to be dug up and the site re-graded. In many cases, a rezone may be required which can take from six months to a year or more.  Large acres of reconstituted gravel pits for residential development require utility and road extensions and extensive grading and fill.  More time and money.

Third, the MOA process for approval has become more difficult in both time and money over the past five years.  MOA entitlement fees, subdivision agreements and inspection fees have all increased. The MOA Design Criteria Manual, to which all new development (both public and private) must adhere to, receives no public review at the assembly level and therefore has no checks and balances with private development. The cost of piping required for AWWU sewer and water extensions has almost doubled over the past five years.

Fourth, although you wouldn’t think so given the almost zero prime lending rate, financing costs have skyrocketed due to bankers perception of risk—most of which comes from federal regulators from depressed residential markets in the lower 48.   If a local developer is lucky enough to get a loan, he can expect to pay between 7 and 8% to extend roads, water and sewer—and that’s after he’s demonstrated or put up in cash and/or equity 40% of the cost of construction.  So if you’re wondering why there are so few new developments in Anchorage and Eagle River, that’s a major reason.  The local residential market has always been built by a series of small builders and developers. We have no regional or national builder/developers. There’s no K B Homes, Pulte or Shea to come in and gobble up the market by building hundreds of lots and homes.  Right now, putting in 30 or 40 lots in a phased development is a pretty big deal.

Finally, one of the real increased costs of residential development is the Municipality’s refusal to participate in the extension of roads on which they do not allow driveways.  It is virtually impossible in today’s economic client for a developer to put in main road extensions, i.e. arterials or neighborhood collectors, which do not allow driveways for lots alongside the road without going nearly bankrupt. In the early l980’s, the MOA shared in the cost of these main road extensions but for the past twenty years, they’ve not participated in any residential development costs.

Rather than funding ‘roads to nowhere’ and by that I mean roads without accompanying water and sewer extensions, the MOA should coordinate with the almost autonomous AWWU so that we as a community can have concurrent development of both roads and water/sewer.  Developers should not have to build roads for which they do not have the right to build lots on.  Nor should they be forced to extend water and sewer mains hundreds of yards to their property without participation from AWWU.

All these policies do is increase the cost of residential building lots in Anchorage and Eagle River to the point where every home built on a sixty foot wide lot will cost half a million dollars.    And, if a buyer can’t afford that price for a home, there’s hundreds of thousands of acres in the Valley where every year more and more buyers are seeking refuge from the high cost of Anchorage development.

The only reason residential building lots in 2010 have not jumped above the $145,000 price point is that local land owners are simply attempting to work off their mortgaged raw land inventory in some marginally profitable manner.  Once those developments that were started pre-real estate recession are completed, lot prices in Anchorage and Eagle River will sky rocket.