The Rise of the New Single-Family Rental Home: A Hedge Against Real Estate Cycles

My column for the July edition of Builder & Developer magazine is now posted online.

An excerpt:

In September of 2015, I wrote a column about the introduction of a new product type to the home building marketplace: the single-family home for rent, otherwise known as build-to-rent (B2R). At that time, just a few builders, including Lennar and Toll Brothers, had dipped their toes into these waters, but today it’s being seen as a clever hedge against the boom-and-bust real estate cycles which can test even the best-run companies.

To be sure, it’s not just homebuilders getting into this game. Wall Street-backed companies like Invitation Homes and AmericanHomes4Rent started the trend by buying up cheap, existing single-family homes in foreclosure back in 2012 when home prices were near their lowest, eventually assembling a portfolio of 200,000 units across the country. Even with that rapid growth, their holdings still represent just 1.4 percent of the estimated 14 million single-family rental homes, with most owned by small “mom and pop” operators.

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Lennar to buy CalAtantic to become No. 1 home builder

Home builder Lennar has announced an industry-changing purchase of CalAtlantic (itself the merger of Ryland and Standard Pacific in 2015):

The business combination will create the nation's largest homebuilder with the last twelve months of revenues in excess of $17 billion and equity market capitalization, based on current market prices, of approximately $18 billion. The combined company will control approximately 240,000 homesites and will have approximately 1,300 active communities in 49 markets across 21 states, where approximately 50% of the U.S. population currently lives.

It is currently anticipated that the transaction will generate annual cost savings and synergies of approximately $250 million, with approximately $75 million achieved in fiscal year 2018. These synergies are expected to be achieved through direct cost savings, reduced overhead costs and the elimination of duplicate public company expenses. Additional savings are also expected through production efficiencies, technology initiatives, and the roll out of Lennar's digital marketing and dynamic pricing programs.

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September column for Builder & Developer magazine now online

My column for the September 2015 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "More Builders are Becoming Landlords" I wanted to review and discuss the nascent trend of builders such as Lennar and Toll Brothers building rental housing (including single-family homes) in order to broaden their business scope and provide steadier cash flow.

An excerpt:

According to recent U.S. Census data, in 2014 just under 65 percent of new home starts were for the traditional single-family home, with the balance mostly comprised of multi-family projects with five or more units.   And yet as recently as 2009, single-family starts stood at 80 percent versus just under 18 percent for larger multi-family developments, which means that the share of multi-family housing starts nearly doubled in just five years.

So if the share of new, single-family home starts is not returning to normal as originally planned, how are builders coping in this strange, new world?  For some, such as Lennar and Toll Brothers, by joining it.

To read the entire column, click here.

To read the entire September 2015 issue in digital format, click here.

More Builders Becoming Landlords to Improve Cash Flow

Over the last few years since the end of the housing boom and bust, the pendulum which used to favor single-family home starts has been swinging towards multi-family ones. Although the reasons for this are varied -- including increased demand in urban markets, tougher mortgage approval guidelines, and Millennials contending with weak wage growth and student loans -- the general idea was that this swing was cyclical, and that demand for the standard single-family home for purchase would eventually rebound.  The problem is that it hasn’t really worked out that way -- at least not in a way that mimics historical norms.

According to recent U.S. Census data, in 2014 just under 65 percent of new home starts were for the traditional single-family home, with the balance mostly comprised of multi-family projects with five or more units. And yet as recently as 2009, single-family starts stood at 80 percent versus just under 18 percent for larger multi-family developments, which means that the share of multi-family housing starts nearly doubled in just five years.

So if the share of new, single-family home starts is not returning to normal as originally planned, how are builders coping in this strange, new world? For some, such as Lennar and Toll Brothers, by joining it.

In March of this year, Lennar introduced an 80-unit pilot program of single-family homes for rent near the city of Reno, Nevada in the community of Sparks. Located in the 640-acre Pioneer Meadows master-planned community complete with biking and hiking trails, the Frontera community offers six plans ranging in size from 1210 to 2182 square feet of living space, two to four bedrooms and attached two-car garages. Other features include stainless steel appliances and granite countertops in the kitchen, full-size washers and dryers, walk-in closets for the master suite, wood-style window blinds and even regular lawn maintenance.

Currently starting from $1,574 to $2,049 per month (or $.93 to $1.30 per square foot) plus premiums ranging up to $150, these homes are intended to provide a middle ground for tenants who don’t want to rent an older single-family home or traditional apartment, yet are unwilling or unable to purchase a similar home. Yet such tenants will certainly pay a premium over traditional apartments, with similarly sized units at The Trails at Pioneer Meadows starting at $1,242 to $1,384 for 1250 to 1321 square feet, or $.98 to $1.08 per square foot.

Still, Lennar is fortunate in that it has a back-up plan for this pilot program: If they can’t rent them out, they can simply sell them the usual way. In addition, given the complexities managing a community of single-family versus multi-family homes, it’s hard to predict how important this business will be to the company’s bottom line, especially when it already has a pipeline of 20,000 apartments worth over $5.5 billion yet to be built.

Luxury home builder Toll Brothers has taken a different route, opting to focus more on providing multi-family “Apartment Living” and “Campus Living” branded rentals in the metro Boston to metro Washington, D.C. corridor. Including a mix of four-story suburban apartments, transit-oriented units as well as a 38-story high-rise building in Jersey City (with more towers planned), what these communities share in common is a heavy emphasis on resort-style amenities, community events and concierge services coupled with the discretionary build quality for which the company is famous. So far the company is managing 1,141 rental apartments and developing another 1,920 units, and is eying further expansion to Boston, Miami and San Francisco.

However, for those builders not yet ready to dip a toe into the rental market, there are other options. Starwood Waypoint, a REIT which as of the second quarter of 2015 owned over 17,500 single-family homes and reported a stabilized occupancy of nearly 97 percent, has reportedly worked with a dozen builders to help them offload their slowest-selling plans or the final few homes in a community.

Finally, other options include the rent-to-own programs offered by companies such as Home Partners of America. Although such homes rent and sell for a premium versus local comps, the plan is to allow tenants to try out a home before locking in a down payment, with the caveat being that the longer they wait to buy, the higher the price will be.

On the flip side, knowing what the price will be even five years in the future can help today’s tenants work towards becoming a buyer tomorrow.

August column for Builder & Developer magazine now online

My column for the August issue of Builder & Developer magazine is now posted online.

For this issue, entitled "Land:  The New Building Currency," I covered how the ability to buy and hold onto developable land has returned as a crucial form of currency in homebuilding. An excerpt:

A funny thing happened on the way to the housing rebound: land — and the ability to buy and hold onto it — has returned as the primary currency in the home building industry. At least for now, this access to capital will likely have a profound impact as stronger, public builders snap up private builders starved for cash and shut out of the public markets. As a result, look for even more consolidation as this stage of the revival plays out. 

Whereas in 2007, the top 10 public builders sold 24 percent of new homes built and sold, during the first quarter of 2013 that capture rate had risen by six percentage points to 30 percent, at least according to an analysis by Deutsche Bank. That’s in large part due to the $1.5 billion some of these builders spent on eight large acquisitions over the last 18 months. Argues Lennar’s CEO Stuart Miller in a recent article in the Wall Street Journal, “We have the ways to win now: We participate in the natural recovery, but additionally, we’re picking up market share form a group of builders that isn’t able to get financing.”  

To read the entire column, click here.

To read the entire August 2013 issue in digital format, click here.

Land as the New Currrency

A funny thing happened on the way to the housing rebound:  land – and the ability to buy and hold onto it – has returned as the primary currency in the home building industry.  At least for now, this access to capital will likely have a profound impact as stronger, public builders snap up private builders starved for cash and shut out of the public markets.  As a result, look for even more consolidation as this stage of the revival plays out.

Whereas in 2007 the top 10 public builders sold 24% of new homes built and sold, during the first quarter of 2013 that capture rate had risen by six percentage points to 30%, at least according to an analysis by Deutsche Bank.  That’s in large part due to the $1.5 billion some of these builders spent on eight large acquisitions over the last 18 months.  Argues Lennar’s CEO Stuart Miller in a recent article in the Wall Street Journal, “We have to ways to win now:  We participate in the natural recovery, but additionally, we’re picking up market share form a group of builders that isn’t able to get financing.”

Miller should really thank the bond market for this largesse, which allowed public builders to stay afloat through the Great Recession as long as they remained current on their debt or were able to refinance it.  Meanwhile, the small or regional banks which have been the life blood for private firms not only stopped making construction loans, but forced many builders into bankruptcy by calling in loans early or enforcing personal guarantees.  It also hasn’t helped that close to 500 banks have failed since the beginning of the downturn.

Even the remaining usual suspects who have historically made construction and development loans remain skittish, as the FDIC estimates the value of such outstanding loans fell by nearly 70% since early 2008.  At the same time, all of the nation’s top public builders have remained solvent since 2008, largely by writing down nearly $40 billion in their land portfolios – a trick their private brethren could rarely pull off.

As a special bonus, in 2008 industry lobbyists also convinced Congress to refund nearly $8 billion in taxes paid during the boom years to help them stay afloat when new home demand collapsed.  Without those refunds, we probably wouldn’t be seeing the type of consolidation we’re seeing today.  And, for those private builders not wanting to be snapped up by larger prey, the public market is also an option, with three companies already going public since January 2013 as well as others waiting in the wings for their debuts.

Still, there are already rumblings that an industry known for forgetting its lessons in over-building in cycle after cycle may already be pushing too fast on land purchases.  Throughout 2013, land prices nationally rose by about 13% -- the first annual gain since 2005.   In coastal areas of California such as San Diego, San Francisco and Orange County, land prices have reportedly jumped by 40% over the past year.  For private equity firms such as Paulson & Co., Starwood Capital and other groups which started gobbling up land in the land price trough of 2009, their timing has been prescient, with many lots going for as low as 20% of prices during the previous peak. Eventually, these higher land prices will certainly result in higher-priced homes, which is manageable as long as we remain in a relatively low interest rate environment.

Due both to rising demand and the growing scarcity of buildable lots today, look for new home prices to rise by 10% to 15% in 2013 – and certainly more in popular areas where builders are deliberately hiking prices aggressively between phases in order to slow down absorption and let their construction crews catch up on back orders.

Yet there is still opportunity for smaller builders who are nimble and creative enough to address challenges largely ignored by larger volume builders.  In Los Angeles, there is now a boomlet for new, single-family homes built on small lots.  The idea is that by providing outdoor spaces such as patios and rooftop decks but discarding the traditional backyard, sales prices can stay attainable.  Over the next 18 months, 250 such homes will be offered in existing communities such as Silverlake, Echo Park as well as the eastern San Fernando Valley.  Prices usually range from $500,000 to $800,000 for 1000 to 2000 square feet of living space in two or three stories – on lots as small as 600 square feet.

Multigenerational housing goes mainstream

Photo credit:  NY Times

Over the last year, the concept of multi-generational housing has been steadily gaining attention from the mainstream press, many of whom have been focused on the NextGen line of new homes offered by Lennar.

In the last few months alone, I've been asked to weigh in on this subject by FoxNews, the L.A. Times and American Public Media's Marketplace, so I thought this was a timely subject to address here.

Lennar’s NextGen homes offer a ‘home within a home,’ offering its own private living quarters suitable for everyone from visiting in-laws or unemployed family members to unrelated tenants helping chipping in for the mortgage payment. And yet Lennar is far from the only builder offering this concept, as variations from builders including Taylor Morrison, The New Home Company and even affordable housing providers such as Bridge Housing and Jamboree Housing Corp. have been built.

Although once quite common, the trend of living with relatives declined with the rise of the suburbs, but is now staging a comeback due to economic conditions.  For example, the share of multi-generational households approached 25% in 1940 before steadily dropping to just 12.1% by 1980.  By 2010, however, that share had rebounded back to 18.3%, and, according to a study by the Pew Research Center, is far higher for minority communities in which family elders are readily welcomed as active members of the household.

In 2009, 25.8% of Asian households, 23.7% of black households and 23.4% of Hispanic households included multiple generations versus just 13.1% for white households.  It’s also much more common for foreign-born households (24.6%) versus those born in the U.S. (15.6%).  The highest percentage of these households by age group included those 85 and older (21.5%), 25 to 34 (21.1%) and 55 to 64 (20.9%), which would point to the elderly as well as recent retirees and boomerang children.

According to Adrian Foley, President of Brookfield Homes’ Southland Division, although they are also addressing the multi-generational trend, the overall demand for such homes may be limited.  “I think that it’s not a passing fad because statistics don’t lie, but I don’t think it’s for everybody and won’t be a paradigm shift for the industry,” he offers.  “We might have some pent-up demand that will level out and then get back to normal demand.”

For Brookfield, although most of their move-up homes have long included areas for visiting in-laws, it’s only been recently that their plans include separate sections which can be locked off and include their own entrances.  Their interior designers then model it as a combination of alternative uses that can be adjusted as a resident’s life journey changes.

“We’re big on efficiency competing with the resale market:  maintenance and cost of household ownership is one big area on which we can compete versus the resale market,” concludes Foley.  “We’ve focused on both the entry-level and move-down buyers, so we’re trying to come up with attached housing that meets the needs for both ends of that barbell.”  Much of that philosophy includes providing accessibility, locations close to activities which aren’t funded by HOA dues, and a cost that’s affordable.

There is, however, some potential confusion about Lennar’s NextGen new brand of homes.  That’s because there’s also the NextGen Home Experience produced by Washington-based iShowMedia.  For over a decade, iShow has been showcasing emerging trends, products and services for the American home at trade shows such as IBS and CES, online, NextGenTV and in traditional media.  With over 25,000 plans, the company is now beginning to leverage their brand name and license their name to various builders through a pilot program now underway.  Most of these partners would build single-family communities instead of condominiums or apartments.

Adds company president Paul Barnett, “People are going to live in their homes longer and that’s why we got into this flexibility.  Aging in place, universal design works for everybody. Not that the whole house needs to be that way, but part of it should.”

Want to know more about this trend and how to address it in your projects?  Contact us at MetroIntelligence for details!

BuilderBytes' MetroIntelligence Economic Update for 4/11/12

Please click here to see the edition of BuilderBytes for 4/11/12 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• Lennar finding success with multi-generational housing, but how big is the market?
  
• Wholesale sales in February 2012 up by 9.3% since February 2011 as total inventories rise by 9.3%
• SmallBusiness Optimism Index fell in March even as owners report largest increase in new jobs per firm in a year
  

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

Want to make sure your company or event is included in the events calendar? Contact editor Dani Smith at dsmith@penpubinc.com.

My Fox News interview on Lennar's NextGen homes now posted online

The interview I did last week with Fox News about Lennar's NextGen homes is now posted online. You can also watch it below:

Since the topic of multi-generational homes is gaining so much traction (besides speaking with Fox News about this, I've also spoken with the L.A. Times and American Public Media over the past few months), I'm going to devote an upcoming column in Builder & Developer magazine on this topic. If you know of any great & creative examples of other multi-generational homes I can cite, please let me know!

Quoted in L.A. times story on new home sales

The L.A. Times' Alejandro Lazo called me yesterday to talk about the latest statistics from Dataquick for Southern California, and, more specifically, what to expect for new home sales in 2012. In brief: a slight improvement which will be more pronounced in urban infill areas than in outlying suburbs unless builders have a compelling proposition to make versus cheaper existing homes (such as Lennar's inter-generational NextGen homes or KBHome's energy-efficient models):

Sales of newly built homes suffered the most, falling 12% in December from the previous month to hit their lowest level on record for that month. Patrick Duffy, principal of MetroIntelligence Real Estate Advisors, said 2012 was not likely to be much better for home builders.

"We can expect a slight improvement," he said. "It depends on the area. Builders will compete in infill areas, in urban markets, because people like new."

"Where it's going to be hard is out in the suburbs," he said...

Click here to read the entire article.

L.A. Times reviews Lennar's new NextGen series

In today's Los Angeles Times, reporter Alejandro Lazo covered the extended family homes Lennar is building in San Bernardino and in Arizona. He had also called me to comment for the article, and I told him about the casitas that become very popular for larger new homes prior to and during the run-up to the building boom. From the story:

The company has built two San Bernardino County models of its so-called NextGen designs for its master-planned Rosena Ranch community. Like a Russian nesting doll with a smaller doll inside, the new residential design incorporates a smaller home with a separate front entrance, kitchenette, bathroom and bedroom...

For now, it seems to me that there are certain ethnic groups which have a history of inter-generational living (such as Hispanics and Asians), but he didn't delve much into that, preferring instead to focus on the economics of doubling up but with the advantage of private spaces.

I think it definitely shows that some builders are serious about innovating in ways to compete with their recent plans of the past as well as deeply discounted foreclosures:

"Here is a clever way of addressing something that wasn't built during the boom years," said Patrick Duffy, principal for research firm MetroIntelligence Real Estate Advisors. The main question builders are asking themselves, he said, is: "How do you make it special, not only against foreclosures, but a cheaper home that they themselves built only a few years ago?"

Click here to read the entire story.

September column for Builder & Developer magazine now online

My column for the September 2011 issue of Builder & Developer magazine is now posted online.

For this issue, entitled "Is Your PR Strategy Up to Date?," I wanted to review how rapid changes in social media continue to impact today's PR strategies. Although many builders and associates are far beyond the curve on this issue, they can quickly catch up!

From the column:

...although social media is becoming a clear priority among U.S. companies, the building industry remains somewhat disjointed. Whereas Lennar has clearly made strides across the social media spectrum – to the point of setting up separate Facebook, Twitter and YouTube accounts for multiple divisions – some other large builders make little or no mention of their social media efforts even on the home pages of their own Web sites. At the same time, while company blogs remain largely nonexistent, useful mobile applications directing buyers to active projects continue to proliferate...

To read the entire column, click here.

To read the entire September 2011 issue in digital format, click here.

Are home-buying perks working?

Tax incentives. Free upgrades. Low mortgage rates. So what perks and incentives are working in today's marketplace -- one in which pending sales rose promisingly in February? Lennar Corp. is reporting that it now has to allocate an average of $50,500 per home, and has also rolled out a 'payment protection program' for recent homebuyers who become unemployed. Not to be outdone, the Calif. Association of Realtors has announced its own payment protection program for buyers who buy a home by the end of the 2009, use a Realtor, are under 70 and not self-employed. From a story in the San Francisco Chronicle:

CAR's offer is essentially like insurance for people who get laid off. It applies to first-time home buyers who open escrow starting today and close before Dec. 31. They must use a California Realtor in the transaction, not be self-employed and be younger than 70. If qualifying people are downsized, they may receive up to $1,500 a month for up to six months to help make mortgage payments...

"Prices have fallen in parts of this state to where they're beginning to make sense again," said Christopher Thornberg, principal of Beacon Economics in Los Angeles. "You're starting to see people move into the market. I know everybody will claim their particular incentive did the trick, but I would argue that price declines trump all."...

Some new-home builders are offering their own buy-downs of interest rates. Miami's Lennar Corp., which has developments in San Francisco and the East Bay, is offering a 30-year fixed 3.625 percent rate on select homes to buyers who meet certain credit and down payment requirements. (Similar to CAR, it also is offering to make mortgage payments for six months for laid-off buyers.) Hovnanian Enterprises recently offered a 3.99 percent rate that met "underwhelming" interest, it told the Wall Street Journal...

In quarterly results released this week, Lennar said it is giving buyers an average sales incentive of $50,500 per home, compared with $48,000 per home in the first quarter last year. The average sales price has fallen from $278,000 to $244,000...

Home sellers "continue to fight buyer psychology," said Patrick Duffy, a principal with Metro Intelligence Real Estate Advisers in Los Angeles. "No matter how low they go, people still worry that prices will continue to decline. They have to make them comfortable that the deal is so good they don't have to worry."

Fraud sleuth goes after Lennar's off-balance sheet finances

Well before the housing boom really took off, many builders began structuring land deals into joint ventures and other deals off their balance sheets, which was a practice I thought had to eventually bite back in the end. Now former felon Barry Minkow -- famous for his ZZZ Best stock swindle of the 1980s -- has turned his attention and his Fraud Discovery Institute against public home builder Lennar. From a Wall Street Journal story:

Shares of Lennar Corp. plunged Friday after a high-profile investigator raised questions on a Web site about the home builder's off-balance-sheet debt and a large personal loan taken out by a top company executive...

In a written report and Web video, Mr. Minkow criticized Lennar's practice of putting large amounts of debt in off-balance-sheet joint ventures, saying there is insufficient disclosure about them to investors. Lennar has about $4 billion in off-balance-sheet debt through 116 joint ventures and has typically given very few details about these arrangements.

The builder's chief financial officer, Bruce Gross, said in an interview, "we have full disclosure on our joint-venture debt. There is nothing concealed."

Mr. Minkow is a convicted stock-fraud felon who was imprisoned for his role in masterminding the ZZZZ Best stock swindle in the 1980s. Since his release, Mr. Minkow has won kudos from the Federal Bureau of Investigation for uncovering frauds on the Internet, in the real-estate field and elsewhere. His recent effort to expose executives and directors who embellish their academic credentials has led to several resignations of high-level officials. Other campaigns against public companies have had mixed impact...

Mr. Minkow also accuses Lennar of perpetrating a "giant Ponzi scheme" in its land deal with the California Public Employees Retirement System that landed in bankruptcy court. He said Lennar moved other joint-venture assets into the venture, known as LandSource and depleted the venture of cash before it imploded amid the housing downturn.

Click here for full story and responses from Lennar. At least they responded (something I couldn't get them to do when writing a story on builder incentives for the L.A. Times in 2007).