By: Jordan McKenzie, EVP of Finance and Portfolio Management, Walton Global

Throughout 2024, the residential real estate market has experienced significant transformation. These shifts have been influenced by a combination of heightened demand, evolving investment strategies, economic pressures, and a variety of emerging trends. However, one constant remains among these fluctuations – investing in land has, and continues to be, a key portfolio diversifier.

In recent years, land has rapidly emerged as a reliable investment avenue, and while initially only accessible primarily to institutions and high-net worth families, it has now become a viable option for individual investors at all levels through structures like Delaware Statutory Trusts (DSTs). As economic pressures rise, land investments offer a hedge, particularly against inflation.

One reason for this is that while traditional asset classes like multifamily and office depreciate over time, intangible assets like land do not follow suit. These more traditional assets also often require significant overhead for maintenance and management, whereas land typically incurs lower ongoing costs.

This is particularly true for pre-developed land, which is a primary focus area for Walton Global as a “land bank” for America’s top homebuilders. Through our multi-prong investment strategy, we identify and purchase land and take it through the entitlement process before divesting it to support crucial residential development.

Even in 2024, the housing market continues to face challenges from the 2008 housing crisis. Lingering shortages have created a significant supply gap as the U.S. is still underbuilt by roughly 2.5 million homes. This underbuilding, combined with the lack of zoned land available for residential developments, have subsequently led to supply constraints for land as well – thus increasing its overall value.

Companies like Walton Global are navigating this hot land market by purchasing assets in bulk and leveraging our relationships in local markets, which allows us to remain competitive and manage this supply shortage effectively. We secure land parcels that may not be immediately ready for development but hold long-term potential.

However, lack of land supply is not the only challenge faced by homebuilders – rising construction costs are at play as well. Top homebuilders like D.R. Horton and Lennar are adapting by leveraging economies of scale and exploring innovative construction methods. For example, 3D-printed and modular houses are being explored as homebuilders seek to manage both material and labor in a more cost-effective way.

Modular construction involves assembling and constructing homes off-site in a quality-controlled environment before transporting to the residential site. Overall, this method leads to a reduction in both construction time and overall costs. Other homebuilders are reporting improved gross margins due to strategies involving optimizing construction and managing trades more efficiently.

Despite some of these innovative tactics, both new home sales and construction starts are still down year-over-year, primarily due to elevated mortgage rates. Historically, this has caused investors to shift focus to emerging product types such as the built-to-rent (BTR) sector for further portfolio diversification. The BTR model makes a lot of sense when accounting for consumer preference shifts, where simply obtaining a backyard is more important and desirable than traditional homeownership.

However, this sector presents its own array of challenges related to borrowing costs and capitalization rates, causing the sector to lose the momentum it picked up in 2022-2023. Recent interest rate fluctuations and concerns about oversupply have led to a slowdown in BTR projects, particularly for local developers struggling to manage timelines and costs. Fortunately, the Fed has signaled upcoming interest rate cuts, which could give this sector a necessary boost and help it remain relevant in the overall housing ecosystem, further validating land as a substantial investment model.

When selecting land, Walton Global also considers parcels within significant paths of growth, following jobs, population growth, and permit activity to guide our focus. This has prompted our recent expansion into markets like Delaware and Alabama reflecting the broader trend of shifting investment focus. These states are gaining popularity due to affordability and the potential for future development.

Hybrid work environments are also driving this population influx as work from home becomes more common and the demand for less densely populated suburban environments continues to rise. Through our platform, investors are strategically positioning themselves to benefit as these regions continue to flourish.

Overall, the 2024 land market proves resiliency and adaptability in the face of economic shifts and evolving investment strategies. Its role as an inflation hedge, mixed with its ability to diversify investment portfolios while lowering risk, makes it a strong and stable asset class in the ever-evolving residential real estate realm.