Whether you’re involved in property development or keeping an eye on the real estate market, it’s hard to ignore the tremendous growth happening in two southwestern states: Arizona and Texas. Lenders, land developers, construction firms, and the like are seeing significant demand across both the Grand Canyon State and the Lonestar State.
Let’s explore some of the primary factors affecting their respective development landscapes and cast light on the similarities and differences that make Arizona and Texas standout players in the realm of residential land development in 2023.
People lay down roots where they can find work. Even with the rise of telecommuting, people still congregate near economic hubs and cities where gainful employment paves the way to a better quality of life. In this respect, both Arizona and Texas offer appealing prospects for workers and their families.
Arizona has experienced significant employment growth in recent years, and is expected to continue on this trajectory through the coming years. This growth can be attributed to several factors, including increasing population, business-friendly policies, and economic incentives. The state is home to a nationally low income tax rate (2.5%), a well-trained workforce, and proximity to several nearby business hubs in California and Nevada.
Texas is renowned for its vibrant business environment, which has turned the state into an economic powerhouse. Dallas, Houston, and San Antonio are all well-regarded economic hubs. The state offers many incentives for businesses, and, as a result, attracts many people from throughout the country. Additionally, the state’s location in central U.S. also makes it an attractive location for logistics companies serving both coasts.
Urban metropolitan areas
Lifestyle plays a huge role in where people choose to settle. More than work, they want a place where they can enjoy nightlife, entertainment, dining, activities, community events, and more. here again, city living offers a big draw—and both Arizona and Texas have plenty to offer.
The Phoenix Metropolitan Statistical Area (MSA) attracts a significant number of residents. According to 2023 estimates, the Phoenix metro area is projected to have a population of 5 million people. The population growth in this area has been increasing constantly, and experts predict this growth to continue in the coming years. Beyond MSA, Tucson is thriving as a growing urban hotspot populated by a young age group that enjoys a high standard of living.
In Texas, Houston, Dallas-Fort Worth, San Antonio, and Austin, offer an incredibly diverse range of lifestyle opportunities. As a result, Dallas has an estimated population of 7.8 million, Austin is expected to have 2.2 million, and Houston is projected to reach a whopping 7.3 million. Each metro area offers a unique vibe, which also encourages strong tourism that bolsters the economy and encourages urban investiture.
Economic climate observations
Have you noticed how the landscapes of Arizona and Texas have been changing lately? It’s not just the new skyscrapers popping up left and right or the increase in job opportunities; it’s the palpable shift towards a pro-business economy. Both states have become magnets for businesses seeking a favorable climate for their operations to thrive.
This transformation has brought about significant improvements for the overall economy, including increased investment, higher wages, and lower unemployment rates. Both states offer a range of opportunities for businesses. In Arizona, the substantial Arizona State University (ASU) Research Park located in Tempe, Phoenix, offers an attractive environment for businesses dealing with cutting-edge research and development. Similarly, in Texas, the oil and gas industry serves as a significant employer and contributor to the economy.
As Arizona and Texas continue to attract more companies—and more residents—it’s fueling demand for housing and real estate expansion. As a result, residential land development is experiencing a boom period that’s likely to continue through the coming years.
Diversification of the economy
The strongest states have diverse economies—and here again, Texas and Arizona are leading the way. Arizona’s economy is currently moving away from its reliance on industries such as construction and the hospitality sectors, shifting towards knowledge-based industries such as health care, finance, and insurance.
Texas has similarly begun a shift toward investiture in white-collar work. Over the past several years, the state has worked hard to attract a range of industries, including tech, biomedical, and renewable energy. By doing so, Texas is not only creating new jobs, it’s also diversifying from traditional sectors such as oil and gas. From tech startups in Austin to wind farms in the Panhandle, Texas is embracing innovation and investing in the future.
The environment plays a significant role in residential land development. It affects land value and the success of development projects. Despite both being Southwest states, Arizona and Texas are home to unique environmental considerations having an impact on land development:
- Soil composition. Texas is known for its flat, fertile soils, which are ideal for agricultural production. On the other hand, Arizona has a combination of desert and mountain terrain, making it ideal for recreational activities such as hiking and sightseeing.
- Water resources. Texas has abundant sources of freshwater, including the famous Edwards Aquifer, which serves as a primary source of water for much of the population. Arizona, on the other hand, has faced many challenges in meeting water demands due to a shortage of surface water and over-exploitation of groundwater resources.
- Air quality. Texas has witnessed significant improvements in its air quality thanks to certain regulations implemented by the government. Arizona has also made similar efforts in recent years, and currently ranks in the middle of the pack.
Property tax implications
One of the first things firms look at when considering a new residential development is the tax structure of the area. Here, there’s some divergence between Arizona and Texas—despite strong activity in both states.
In Arizona, property taxes are relatively lower compared to Texas. The effective property tax rate in Arizona is 0.60% compared to Texas’s 1.9%. Yet, Texas has no state income tax, which could offer investors a significant advantage—it’s why so many businesses and families continue to move to the state.
Lower property taxes in Arizona mean lower revenue for the state, which could translate into fewer public services and amenities for residents. In contrast, Texas generates revenue from other sources like sales tax. This allows the state to reinvest in public goods and services like schools, healthcare, and transportation.
For sale residential vs. build-for-rent developments
Speaking of property taxes, it’s worth noting how they impact specific residential land development trends in Southern markets. Take Build-for-Rent (BFR) developments, for example. These are purpose-built residential properties that effectively straddle the line between traditional rental housing and homeownership. The property tax environment of a development area plays a big role in whether BFR is a viable strategy.
The BFR trend has been especially popular in Phoenix, which currently has the highest number of BFR units in the country. The low property taxes in Arizona make these developments particularly attractive to investors and allow developers to pass on savings to tenants, resulting in lower rental prices.
In Texas, developers have observed a growing desire for homeownership among millennials who are increasingly looking for more affordable housing options. Unfortunately, Texas has a high property tax rate that makes it difficult for developers to invest in BFR projects, raising the cost of entry.
Development in Arizona and Texas is booming
The market for residential land development is experiencing a big surge in Arizona and Texas. Both states share similar trends across their economic climates, population growth, diverse economies, and business-friendly environments. For developers, it’s these factors that are driving demand for residential expansion—and making these markets worth developing in. As they gain momentum, it’s important to measure the pulse of these states to capitalize on the abundant opportunities that lie ahead.