San Diego housing recovery expected to slow

San Diego Union-Tribune reporter Roger Showley covered Beacon Economics' lastest economic conference in San Diego on Friday, May 21st. In addition to the recent conference in Los Angeles, I also wrote the sections on residential and commercial real estate for this conference book, one of which was cited in Showley's piece:

"Office vacancies, currently about 19.3 percent, will fall only to 13 percent over the next four years as employment growth remains sluggish. Industry norms consider a healthy office vacancy rate to be less than 10 percent.

“Looking ahead to the rest of 2010 through 2012, the health of the office market will be largely tied to the extent of increased government spending on biotech and technology,” said Patrick S. Duffy of MetroIntelligence Real Estate Advisors, who wrote the chapter on commercial real estate in the Beacon report.

High vacancies will mean bargains for investors in some office buildings, he said, but values will still end up 36 percent below their peak of 2006."

Click here to read entire story.

"What's Next L.A.?" Conference Materials Now Online

The materials provided for Beacon Economics' "What's Next L.A.?" annual conference in Los Angeles on May 5th are now available online.

As part of our ongoing association with Beacon Economics, MetroIntelligence Real Estate Advisors Principal Patrick Duffy wrote the sections on residential and commercial real estate.

If you want to read just the section on residential real estate, click here to download.

If you want to read just the section on commercial real estate, click here to download.

And if you want to download the entire conference book, click here to download.

The next Beacon Economics conference will be May 21st in San Diego. If you'd like to attend that conference, click here to register. For special discounts on registration, please contact us at MetroIntelligence at 818-584-1848.

A Spring Thaw for Development Finance?

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly.

In order to prepare for this new environment, MetroIntelligence is now partnering with George Smith Partners (GSP), a leading real estate investment bank which regularly taps its vast network of sources for customized equity and debt on residential and commercial properties throughout the U.S.

Whether the assignment is finding an equity partner to buy land or refinancing a stabilized apartment property, MetroIntelligence is now able to provide objective reviews of a sponsor’s assumptions in order to bring appropriate opportunities to GSP -- as well as to ensure that builders and developers are fully aware of their options.

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values.

In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started. And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so.

As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios.

Not surprisingly, GSP’s Lee says that most of the projects getting financing today are infill projects closer to employment centers, stressing that broken developments in tertiary markets with high rates of foreclosures will take much longer to rebound.

For builders looking to dip their toes into construction financing for new projects, Lee says that as opposed to the one or two banks actively lending six months ago, today there are closer to four or five banks plus half a dozen hard-money lenders. Nonetheless, both of these types of lenders would want to chop up larger projects into phases to minimize their exposure.

But for builders looking to revive dormant projects, the view is cloudier, with a delicate dance involving a builder with deep enough pockets to buy back his note at a discount with new recourse money that ultimately protects the lender. Of course that assumes we’re talking about a single-family project, as financing for new condominiums is virtually nonexistent.

However, Lee does offer up an intriguing idea in which a multi-family project could conceivably be financed based on apartment underwriting standards but with the appropriate release clauses and a caveat that -- under the right conditions and assuming available mortgage financing – the units could eventually be sold as condos.

As for traditional apartments, with the worst of the downturn likely behind us, lenders are starting to wade back in with the right operators in the best markets but still with extremely conservative LTV ratios.

Certainly, any return to the days of easier credit will be long and arduous, especially given that total outstanding AD&C loans were reportedly down by 23% year-over-year in the fourth quarter of 2009.

Yet for those builders and developers who can adapt to the new environment and partner with the right sources for capital, a greater share of both the market and its future spoils await.

Want to see if the financing quotes you're getting for your projects are competitive? Interested in rolling over maturing debt for land, apartments or other commercial uses?

Contact MetroIntelligence at 818-584-1848 for more information!

May column for Builder & Developer magazine now online

My column for the May 2010 issue of Builder & Developer magazine is now online. In this issue, entitled "Green Building Grows from Infant to Toddler,"I review the pros and cons that builders have so far encountered by building green homes as well as future growth prospects. An excerpt:

Now that green building is leaving its infancy and becoming a full-fledged (and often cranky) toddler, although its support among both the public and the industry remains high, some solid pros and cons are beginning to emerge.

According to the 4^th Annual Green Building Survey by the law firm Allen Matkins, Construction Technologies Group (CTG) and Green Building Insider, support among over 1,600 design and construction professionals for green building remains extremely high at 92%.

Not surprisingly, the growth of the global green building sector is on a tear, totaling over $500 billion in 2009 and expected to continue growing at a compound annual growth rate of nearly 110% between now and 2015.

And yet as these same professionals now have a few projects completed, they’ve come to realize that accompanying the greater complexity of green building is the perception of more construction risk.

To counteract that risk, some important strategies have emerged, including retaining specialized consultants (including those certified by groups such as the U.S. Green Building Counsel’s Leadership in Energy and Environmental Design, or LEED), measuring and re-commissioning existing systems to maximize energy savings, regular testing and, to tie it all together, shifting the risks through insurance contracts.

You can read the entire column by clicking here.

What's next for L.A. commercial real estate?

Want to get an idea of how MetroIntelligence Real Estate Advisors sees the past and future of L.A. commercial real estate? As part of our ongoing association with Beacon Economics, we've been writing the real estate sections for their conference books. Here are the bullet points summarizing our thoughts for the coming year and beyond:

• As employers resist hiring new workers and opt to cut expenses further by opting for sub-lease space, the office market in Los Angeles County will remain under pressure through the first part of 2012. Look for rents to fall by another 9% by the end of 2010 as vacancies remain just above 18%.
• Although the retail market in Los Angeles has borne the brunt of The Great Recession, the region's population density has helped it plod along much better than many other markets in the U.S. Look for asking rents to continue falling by another 5% by the end of 2010 as vacancies remain elevated before gradually trending down by early 2011.
• While not immune from larger economic forces, the combination of the ports and one of the largest manufacturing sectors in the country will help the industrial sector rebound to healthy levels by mid 2012. For now, look for rents to fall by another 4% by the end of 2010 as vacancies remain stuck at about 8%.

What's next for L.A. residential real estate?

Want to get an idea of how MetroIntelligence Real Estate advisors sees the past and future of L.A. residential real estate? As part of our ongoing association with Beacon Economics, we've been writing the real estate sections for their conference books. Here are the bullet points summarizing our thoughts for the coming year and beyond:

• Falling home prices in Los Angeles County have made them exponentially more affordable, with 37% of households able to buy the median-priced home at current interest rates, up from just 2% to 3% during the last half of 2005 through all of 2007.
• Although the S&P/Case-Shiller Index has shown small increases of home prices in recent quarters, those rises could be short-lived as interest rates rise and support by the federal government in the form of tax credits expire.
• A combination of state tax credits favoring new homes as well as cost cutting by home builders has helped new home sales rebound by 66% since the trough in the first quarter of 2009; yet since prices took longer to crest during the boom, they're still falling slightly even after declining by 24% since peaking at nearly $525,000 in mid 2007.
• Due to price declines of 36% over the past two years year, sales of existing homes - of which about 35% are foreclosures - rose by 75% during the same time period; between the third and fourth quarters of 2009, both sales and prices managed to rise by just over 6%.
• Due to price declines of 24% over the past two years, sales of existing condominiums rose by 110% during the same time period; between the third and fourth quarters of 2009, condo sales continued to rise by 19% even as prices began to rebound by a small yet positive 1.4%.
• Due to larger economic issues, apartments remain under considerable pressure, with vacancy rates rising by 50% over the past two years to 7.5% and forcing rents down by 8% during the same time period to $1,614 per month, which are projected to fall by another 6.7% by the end of 2010.
• Although the pace of new foreclosures did temporarily dipped due to various moratoria throughout most of 2009, they did began to rise again by nearly 7% between the third and fourth quarters of 2009, and more recent indications show rises in loan defaults between February and March of 2010.

To read the entire section, click here to download in a .pdf format.

New-home buyers re-emerging in Southern California

According to a story in the L.A. Times, buyers are increasingly responding to the efforts by builders such as KBHome and Shea Homes to re-configure how they build homes -- as well as the lower price tags:

Buyers purchased 3,447 new homes in Southern California during the first three months of the year, a 17% increase from the same period last year, according to the San Diego research firm MDA DataQuick.

That's a fraction of what sales were during the peak of the region's housing boom; in the first quarter of 2006, builders sold 17,324 new homes in Southern California. Gone too are the days when developers built on spec, confident that buyers armed with easy credit would line up to purchase the finished product.

Still, there are signs of a rebound. Nationwide, sales of new homes jumped 27% in March from the month before and 24% compared with March 2009. A key index of homebuilder stocks is up 16% this year, compared with a rise of 3.4% in the Dow index. One major builder, Lennar Corp., has seen its shares rocket 47%.

Experts say new-home sales have been helped by state and federal tax credits, as well as by new tactics by builders adjusting to the no-frills post-bubble environment...

Shea Homes, a privately held builder based in Walnut, has also introduced a line of smaller homes with modern design, scaled-down master bathrooms and interior spaces that can be reconfigured, said Patrick Duffy, principal for research firm MetroIntelligence Real Estate Advisors.

"They have gone back and they have reengineered their entire production process," Duffy said. "Where can we find economies of scale, where can we cut price, where can we simplify?"...

Click here for entire story.

Green Building Grows from Infant to Toddler

When green home building standards and practices were first introduced to the residential development industry, there seemed to be that nagging question of, “Is this just another short-lived trend?” Undoubtedly plagued by bad memories of well-meaning technologies of the early 1990s that didn’t perform as planned and disrupted production schedules, it’s easy to see why many of the nation’s builders wanted to see just how serious their buyers were about green building before re-engineering their designs – and their companies – to compete.

Now that green building is leaving its infancy and becoming a full-fledged (and often cranky) toddler, although its support among both the public and the industry remains high, some solid pros and cons are beginning to emerge. According to the 4^th Annual Green Building Survey by the law firm Allen Matkins, Construction Technologies Group (CTG) and Green Building Insider, support among over 1,600 design and construction professionals for green building remains extremely high at 92%. Not surprisingly, the growth of the global green building sector is on a tear, totaling over $500 billion in 2009 and expected to continue growing at a compound annual growth rate of nearly 110% between now and 2015.

And yet as these same professionals now have a few projects completed, they’ve come to realize that accompanying the greater complexity of green building is the perception of more construction risk. To counteract that risk, some important strategies have emerged, including retaining specialized consultants (including those certified by groups such as the U.S. Green Building Counsel’s Leadership in Energy and Environmental Design, or LEED), measuring and re-commissioning existing systems to maximize energy savings, regular testing and, to tie it all together, shifting the risks through insurance contracts.

Interestingly, support for LEED continues to fall, dropping by nearly 5% to just 62% in 2009 as builders push back against the costs for certification while other programs such as the Green Point Rated program from Built it Green manage to better target residential projects -- especially those in the multi-family arena. But while the specific certification programs evolve, the reasons for building green remain the same, with nearly 98% of respondents seeking to save on energy given that such costs are expected to continue rising. In addition, 88% of respondents also report that they’re more likely to include energy savings and sustainable building elements in future projects – an impressive 14-point bump from the previous year.

One new wrinkle from the green building evolution is the green lease, in which tenants are also held responsible to ensure savings from the original investment by the builder. Such leases could include everything from environmentally sensitive paints and cleaning supplies to waste recycling and ensuring that all repairs and maintenance are completed to adhere to the original plans. Finally, although just over 40% of respondents view the issue of carbon offsets as an important strategy, until a national program is instituted the purchase of offsets will likely remain stuck at about 7%.

From the point of view of McGraw-Hills Construction’s Smart Market Reports from 2006 and 2008, green homes have become a crucial market differentiator and continued to grow in number even as the overall new home market declined. By 2013, the reports predicted the residential green building market to range from $40 to $70 billion as interest among potential homebuyers now spans all income levels.

For younger generations such as the Echo Boomers, building green is now an expectation strongly related to both better health and saving on energy and other operating costs. And even when remodeling existing homes, homeowners are increasingly spending more on green features as opposed to those which merely increase comfort or improve aesthetics.

So what is the greatest obstacle preventing green building making that leap from toddler to adolescent? In many markets, there still aren’t enough builders doing it.

April 2010 column for Builder & Developer magazine now online

My column for the April 2010 issue of Builder & Developer magazine is now online. In this issue, entitled "New Home Quality and Customer Service Improving in Recession," I wanted to review how builders have leveraged the downturn in volume to improve building quality, led by homebuilding giant Pulte Homes. You can read it by clicking here. An excerpt:

If there is one silver lining to be found from The Great Recession, it’s been the significant increase in both product quality and customer service from the nation’s largest home builders, which should position builders to grab market share from the existing home market in the years ahead. In fact, according to the 2009 New-Home Builder Customer Satisfaction Study by J.D. Power & Associates, overall customer satisfaction among 26,231 buyers of newly built homes averaged 811 on a 1,000-point scale, up by 32 points in 2008 (the survey can be found online at www.jdpower.com/Homes.)...

Sponsorships still available for Beacon Economics Forecast Conferences

Looking to promote your business to attendees of the Beacon Economics Forecast Conferences in Los Angeles or San Diego this Spring?

Contact MetroIntelligence at 818-584-1848 for more information!

Why sponsor a conference? Beacon Economics' conferences draw top private and public sector leaders and decision-makers from across the regions in which they host events. These movers and shakers are principal players in the worlds of financial services, banking, real estate, professional services, economic development, local government, trade and interest groups, academia, and many others.

What do you get for sponsoring a conference?

• Widely publicized visibility and exposure to your region's leading business executives, public officials, and other decision-makers.
• Extensive networking opportunities with national, state, and regional firms and organizations.
• Prominent placement in conference handouts and marketing materials.
• Recognition with one-quarter to full-page ads in the event's valuable Economic Forecast Book valued at $75 each.
• Prominent placement of sponsor logos and hyperlinks on the event website
  ...and more!

Contact MetroIntelligence at 818-584-1848 for more information!

New Home Quality and Customer Service Improving in Recession

If there is one silver lining to be found from The Great Recession, it’s been the significant increase in both product quality and customer service from the nation’s largest home builders, which should position builders to grab market share from the existing home market in the years ahead. In fact, according to the 2009 New-Home Builder Customer Satisfaction Study by J.D. Power & Associates, overall customer satisfaction among 26,231 buyers of newly built homes averaged 811 on a 1,000-point scale, up by 32 points in 2008 (the survey can be found online at www.jdpower.com/Homes.)

Now in its 13^th year, the study surveys buyers in 24 different markets and analyzes nine factors including workmanship & materials, warranty and customer service staff, price & value, sales staff, construction manager, home readiness, the builder’s design center, location and any recreational facilities provided by the builder.

Paula Sonkin, vice president of the real estate and construction industries practice for J.D. Powers, argues that it’s actually been the building bust itself that has forced homebuilding companies to bolster their operations throughout the entire process. In the end, that’s been a great boon to buyers, as Sonkin says that builders are offering “unprecedented high levels of quality, value and service at relatively low prices.”

Leading the pack nationally for 2009 was Michigan-based Pulte Homes (which at the time also included the Del Webb and DiVosta brands), which ranked highest among builders in 12 different markets, but builders such as Brookfield, Pardee, Lennar and K.Hovnanian were also leaders in specific markets.

But what I found most interesting about the survey is how different the same company ranked in different markets (in some cases scoring a 5 in one market and a 2 in another), which points directly to the importance of division presidents’ leadership in a largely decentralized industry. Yet in view of the growing importance of a builders’ brand name in a cluttered home buying universe, allowing one division to remain the weakest link in a multi-city chain could arguably be costing its reputation – and therefore potential sales -- for the entire organization.

The study also found that as the importance of workmanship and materials have increased, factors such as the sales staff, construction manager and home readiness are less important than in the past. Still, in 2009 the proportion of homes that were delivered finished and on time increased to 76%, or up from 70% the previous year, which is definitely more good news for an industry still under great duress.

J.D. Powers also survey buyers for its New-Home Quality Survey, which is in its third year for the same 24 markets nationally, and in this case build quality has improved from an average of 11.51 problems per home in 2009 to 9.55 problems per home in 2009. Again, Pulte Homes led the pack nationally, with other builders such as KBHome, Ryland, Standard Pacific and Taylor Morrison leading in individual markets.

What was also interesting from the survey was that while 31% of new-home owners consider their homes to be environmentally friendly, nearly two-thirds reported that their builders did not identify ‘green’ features in these same homes. Adds J.D. Powers’ Sonkin, “Builders that neglect to point out environmentally friendly home features to buyers are missing out a very important opportunity.” And the top three reasons owners gave for choosing a green home? Saving on energy costs, reducing water usage, and minimizing their impact on the environment.

The 2010 survey is now underway, and if recent history is any indication, the nation’s best-known builders will continue to improve their product quality as well as their customer service rankings. The industry may be down – at least temporarily – but I think the survey proves that it is far, far from being out.

New column for March 2010 issue of Builder & Developer magazine now online

My column for the March 2010 issue of Builder & Developer magazine is now online. For this issue, I focused on how builders are downsizing square footage but keeping high-quality materials and focusing on compelling designs demanded by today's buyers. You can read the entire article by clicking here.

An excerpt:

For years we’ve been hearing about gradual changes in the interior preferences of homebuyers, but during the boom years many builders stuck with the tried and true rather than risk their production schedules – and profit margins – on risky changes. Of course with discounted short sales and foreclosures continuing to dominate most local housing markets, new homes not only have to be competitively priced, but offer updated design cues and interior amenities...

Some builders staying alive by working for banks

As I had written about in January of 2009, in which I suggested that some builders could keep their operations alive by taking on remodeling work and also working for banks to finish up half-finished project, it appears that's just what has happened. From a story in the Wall Street Journal:

Home builders in some of the nation's hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.

The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat...

...builders from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won't lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said...

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid "more a fixed than variable" payment for its work, with some "upside" compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill...

Current tax credit program hits the skids

It looks like the $6,500 tax credit for existing homeowners looking to buy another home has been pretty much DOA for a variety of reasons. From an AP story via MSNBC.com:

It sounded like a great idea three months ago: Hand homeowners a $6,500 tax credit to find a new place to live, giving a thrust of energy to the housing market's recovery.

So far, people are staying put.

In November, the federal government extended a tax credit of up to $8,000 for people who hadn't owned a home for three years. This credit had helped boost home sales last summer and fall. Seeking to build on that momentum, the government added a new credit of up to $6,500 for current homeowners, hoping it would transform them into house-hunters this winter and spring...

But real estate agents around the country say the credit is doing little to elevate sales. Reasons vary.

The unemployment rate is still near 10 percent and consumer confidence is falling. Home prices have stabilized in some markets, but are still a third below their 2006 peak. Droves of people who want to sell are stuck because their home is worth less than they paid for it. Harsh winter weather has Americans shoveling driveways instead of preparing their home for buyer visits...

Agents believe the credit's true test will come in the spring, the busiest home-buying season. Concerns about high unemployment could keep buyers on the fence...

Another problem is that homeowners, in many cases, will need to sell their current home to afford a new one and claim the credit on tax returns. That's a major issue for borrowers who owe more than their home is worth. Nearly one-in-three homeowners with a mortgage is currently in that situation, according to Moody's Economy.com.

Also, $6,500 may not mean much to a buyer with enough equity to sell a property and afford another home. The savings will hardly dent down payments or moving costs. Most sellers employ real estate agents who typically receive 6 percent of the sales price...

Economists argue that a tax credit is rarely the sole motivation for a home purchase. Many believe tax credits just accelerate sales that would have happened anyway, leading to a drop off once that demand is exhausted...

To qualify for the $6,500 credit, buyers must have owned and lived in the same home for five consecutive years out of the past eight. They must sign a contract by April 30 and close before June 30. Lawmakers can extend both tax credits, but it's not clear if they will.

The home's purchase price can't exceed $800,000, and it must be used as a main residence. The income limit for single taxpayers is $125,000; for a married couple, it's $225,000.

A rebound for apartment builders?

After a couple of years in the doldrums, it looks like apartment builders are finally gearing up again for an anticipated leap in demand to occur once the economy rebounds and potential renters now doubling up with roommates (or living with their parents after boomeranging home after college) strike out on their own. From a Wall Street Journal story:

This year, real-estate investment trusts, or REITs, are expected to start close to $1 billion in new multifamily projects, according to real-estate research firm Green Street Advisors. While that still is less than average, it is a significant increase over the $100 million of development starts in 2009.

Analysts caution that the increase in construction doesn't mean there has been an improvement in the business. Apartment vacancy is at a record and unemployment, essential to the sector's health, remains elevated.

But operators are betting that limited new supply, combined with an improving economy, will lead to ideal market conditions nationwide starting in 2011 or 2012...

To be sure, there are risks. Given the multiyear construction window, companies have to start now to be ready in time. If the economy weakens further and recovery is delayed, landlords may be forced to keep rents low or offer free rent to get leases signed...

Landlords also are excited about demand. The 20-to-34 age group, prime renting age, is expected to increase by five million in the next decade, according to Hessam Nadji, managing director of Marcus & Millichap, a real-state-investment brokerage firm. People who moved home or who bunked with roommates during the downturn also might ink leases as the economy improves.

Moreover, construction costs "have fallen rapidly in the last two years," said Tom Toomey, chief executive of apartment owner UDR Inc. A unit that would have cost $300,000 to build two years ago could now be built for as little as $220,000, Mr. Toomey said...