Recently, I attended a program on current market trends sponsored by a highly respected and well-known industry organization. It was an annually recurring program. The same speaker has presented this program since its inception more than fifteen years ago. He is an experienced and respected market researcher. His data and observations were accurate and, for the most part, incontrovertible.
There was one area, however, with which I have to take issue. On the subject of the inventory of residential product, the speaker observed that not only was it decreasing, but opined that the glut of foreclosures has run its course. All evidence points to the contrary. Industry and financial publications continue to report that there are mortgages in default that number in the millions. Purportedly, these loans have been kept off the radar screen for a variety of reasons including the lenders’:
· Need to clean up their foreclosure procedures and practices;
· Desire to keep REO off their balance sheets;
· Reluctance to further depress the values of these properties by flooding the market with millions of additional homes.
Laurie S. Goodman, senior managing director of Amherst Securities Group, participated in a Senate subcommittee hearing in Washington on September 20th, as reported in The Wall Street Journal’s online publication, Developments, on September 22nd:
“Ms. Goodman outlined the size of the foreclosure problem with extensive research behind her well-supported points. There are 4.5 million non-performing loans, of the total 54.9 million nationwide, Ms. Goodman notes, but she emphasized that there are an additional 10.4 million borrowers that are reasonably likely to default.”
If this is true, then the cautious and far-sighted developer isn’t going to be deceived by the appearance of a shrinking inventory of available homes. He will not commit to beefing up both the size of the development organization and the size of current and projected land acquisitions.
It seems safe to say, under these circumstances, that there will be no market for large raw land deals in the Greenfields perhaps for years to come. This means that, in most areas, the land development practice of creating large master-planned communities with the necessary long development time line and commitment of huge amounts of capital at the front end may be years away.
It seems safe to say, then, that the land acquisitions that will be made will be very specific with regard to certain factors:
· They will be relatively small in size. If the market of available housing is flooded with low cost resale product, it’s wise to limit the size of your commitment to the more expensive new product that has to compete with it;
· They will be in A locations. If your new construction product has to compete with lower priced properties that are reasonably new, well-constructed, close to schools, shopping, employment centers, and recreation facilities, and, in many cases, amenitized, your location has to be outstanding. You can’t compete on price, so you must find something else that gives you a competitive advantage.
· They will be entitled. The costs of zoning and, in some areas, growth plan amendments adds too much to the cost of the new product and begs time delays that can eat through the bottom line and destroy the projected return on investment. All other factors being equal, a rezoning may be acceptable, particularly if it is a down zoning procedure.
· They will be infrastructured, or partially so. The cost and delay of putting in the infrastructure can have the same effect on the project’s bottom line and projected return as discussed above regarding entitlements.
· The prices will be discounted. These properties often will be owned by lenders who have acquired them through foreclosure, or deed in lieu of, and are motivated to get them off their balance sheets. I have seen some instances where the acquisition price consisted of an agreed minimum sum per homesite with a possibility of a kicker on the end if certain retail price levels are achieved.
When all these pieces are assembled, they spell out the obvious. For the foreseeable future, most residential developers will focus on infill properties that are in A locations, have entitlements and infrastructure in place, and can be acquired at a discount or through a well-structured acquisition price.
