Why are some builders more successful than others?

Although it's certainly easy to blame the ongoing economic malaise for trying times in the building industry, there are still some builders who are actually doing pretty well -- relatively speaking.

So what's their secret? Ridiculously cheap prices? Creative architecture? Mind control? According to Erik Cofield in the video below -- and who heads up North American sales for Buildtopia, a widely used web-based management software for builders -- it's a combination of both old-fashioned advantages such as a strong foundation (including funding, land and product), a well-oiled and evolving sales machine, and the ability to leverage technology.

July column for Builder & Developer now online

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

For this issue, entitled "Tracking Shadow Inventory," I've been recently working on a project for a multi-family client to track non-traditional apartments in Southern California such as REO units, sales of non-owner-occupied homes and compare both the cost of ownership versus these apartments as well as what the new owners could rent them for and break even. Since the subject seemed so timely, I thought it was well worth covering it in more detail.

From the column:

...For apartment builders and owners, today's low interest rates means that potential tenants can often find a nicer and larger home for close to what they would otherwise be paying to live in a typical apartment. In some cases - such as when putting 20 percent down and borrowing the rest at 4.5 percent or so for 30 years - the monthly payment for both attached and detached homes plus taxes and HOA fees (when applicable) could still up to 25 percent less than what a tenant would pay for a traditional apartment...

To read the entire column, click here.

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

Multi-family goes green

Although multi-family housing is currently the healthiest among the various real estate sectors, it has not necessarily been on the forefront of the green building revolution which has characterized single-family homes. Although that is quickly changing, there still remains a great deal of confusion about current standards, costs and regulations that are starting to emerge from various cities across the U.S.

Multi-Family Enjoys Sustainable Advantages

Fortunately, for builders and operators of multi-family projects, higher unit densities, smaller square footages and shared common areas or services make them substantially more sustainable than their single-family counterparts -- even before any green building techniques are employed. For example, a recent study funded by the EPA found that a typical apartment uses 38% less energy than a green single-family home. For those households looking to move from a typical single-family home in a far-flung suburb to a green multi-family building adjacent to mass transit options, the energy savings could exceed 70%.

LEED Being Replaced by Other Standards

However, simply building to green standards does not automatically generate cost savings, in large part because standards such as LEED don’t actually guarantee lower energy bills. Instead, they cover a wide range of environmental issues such as selecting specific building sites and using sustainable materials that may in some cases actually cost more to operate.

To address that issue, a number of municipalities and building owners – including the U.S. Army -- are instead turning to metrics which sync more easily with building codes. In California, CALGreen is slowly replacing LEED requirements, while other cities and states nationwide are reviewing adoption of the International Code Council’s own Green Construction Code. The general idea is that LEED can return to its roots as a voluntary set of standards for those developers wanting to go the extra mile, as opposed to a system adopted for establishing mandates.

Still, LEED continues to be very influential, having recently introduced its program for multi-family buildings with a height of four to six stories. And, although the National Green Building Standard started by the NAHB in 2007 has mostly been oriented towards single-family homes, a growing pipeline of multi-family certifications is beginning to gain traction.

The Rise of Benchmarking

One major stumbling block for multi-family operators seeking to obtain green credentials or tax incentives is minimizing energy use, and for that they’re increasingly turning to benchmarking. With benchmarking, operators regularly monitor energy use to determine whether a building is improving in comparison to itself, other buildings in a portfolio, and against similar structures. Yet even as cities are starting to mandate benchmarking using tools such as the EPA’s Portfolio Manager, the wide disparity in energy use for garden, mid-rise and high-rise multi-family buildings has made it difficult to create universal standards. Moreover, because the use of energy by individual tenants is protected by privacy laws, most energy audits remain focused on major building systems and common areas. Until individual energy usage is shared between utilities and the Department of Energy or local jurisdictions, benchmarking for multi-family buildings will remain incomplete.

Tax Incentives Remain Largely Unclaimed

For now, the federal government is continuing to offer tax-related incentives to multi-family developers and operators. Besides 451 federal tax credits, which provide $2,000 for each energy-efficient unit (as determined by a third party) built over the past three years, applicants can seek a 179D tax deduction of up to $1.80 per square foot for the design of new and retrofitted mid- and high-rise energy-efficient buildings. Still, due to the application process or lack of awareness, both of these programs remain underutilized. In the long run, however, building owners will increasingly be asked to provide energy use data to the ultimate arbiter – their prospective tenants.

Talking real estate on "L.A. Business Today"

Recently, I appeared again on the television show “L.A. Business Today,” which airs on Channel 35 in Los Angeles. Hosted by veteran reporters Bob and Sharon Jimenez, the show focuses on interviewing business leaders to discuss economic and business trends in what is one of the most dynamic regions in the world.

In this particular segment, Bob Jimenez asked me a variety of questions on foreclosures, mortgage lending, the mortgage interest tax deduction and the state of the housing market.

Although the segment is currently airing regularly on the City of Los Angeles’ Channel 35, it’s also available on demand on the show’s Web site (please note that viewing it requires Windows MediaPlayer).

You can view the entire show by clicking on the following link:

Patrick Duffy Interview on L.A. Business Today

If you want to just watch my segment, it begins at about minute 14:45.

Enjoy the show!

Los Angeles Economic Forecast Conference - Commercial Real Estate

As part of its ongoing association with Beacon Economics, MetroIntelligence authored the commercial real estate section for the Los Angeles Economic Forecast Conference, which took place on June 21st in downtown Los Angeles.

If you'd like to read the section in its entirety, we've made it available for free on our Web site.

Please also register on our Web site to keep updated on future reports and presentations.

Click here to download the report.

Click here if you'd like to register for updates.

Here were some of the major findings from our report:

• Due to economic uncertainty, businesses will continue to be conservative with capital spending and expansion, delaying such decisions until a rebound is evident (although health care will be an exception).
• Tremendous opportunities abound for well-capitalized investors with the expertise to invest countercyclically in the best submarkets, particularly investors with cash, given the uncertainty regarding future interest rate hikes.
• Investors should temper their expectations by selecting only well-leased assets and looking for cash flows of 6% to 7%.
• Given the low mortgage rates, it’s a good time to lock in long-term leverage at cyclical lows, which will help amplify gains as market fundamentals improve.
• There will be a continued focus on 24-hour markets and global gateways, especially along the coasts with international airports.
• Infill projects will be favored over fringe locations, in large part due to the trend of echo boomers and baby boomers trading space for a more urbanized environment.
• Now is a good time to buy land, but only to hold for the right development opportunity down the road.
• There will be excellent opportunities for lenders and investors to provide both debt and equity to distressed owners hoping to keep their properties.
• Patience is key - transaction volumes will slowly increase and more distressed deals will appear.
• Look for industrial and warehouse space to lead the way, followed by the retail sector and then the office sector.

L.A. County Economic Conference - Residential Real Estate

As part of its ongoing association with Beacon Economics, MetroIntelligence authored the residential real estate section for the Los Angeles Economic Forecast Conference, which took place on June 21st in downtown Los Angeles.

If you'd like to read the section in its entirety, we've made it available for free on our Web site.
Please also register on our Web site to keep updated on future reports and presentations.

Click here to download the report.

Click here if you'd like to register for updates.

Here were some of the major findings from our report:

• Lower home prices continue to make them exponentially more affordable than they were in the past, with 43% of households able to buy the median-priced home at current interest rates. This compares with the low single digits between the second quarter of 2004 and the third quarter of 2007.
• Although tax credits did help housing prices rebound temporarily, since their expiration the S&P/Case-Shiller Index in the county has again began to decline, falling by nearly 3.5% since the middle of 2010.
• New home sales remain in hibernation, down by over two-thirds from their 2006 peak; although new home prices have rebounded slightly from their most recent trough in mid-2009, they’re still off by 20% from their peak in 2007.
• Since rebounding from their trough at the end of 2007, sales of existing single-family homes rose by over 30% by the first quarter of 2011, but remain low due continued competition from foreclosures; after falling by nearly 50% between mid-2007 and mid-2009, prices did recover by about 12% by the first quarter of 2011 but remain under considerable pressure.
• Although condo prices did stage a temporary rally in late 2009 and 2010, by the first quarter of 2011 they remained just below their low point of mid-2009; however, the consequence of lower prices has helped boost condo sales by nearly 30% between the first quarters of 2009 and 2011.
• After witnessing elevated vacancy rates and pressure on asking rents due to a combination of the recession and foreclosed homes being sold to investors, the apartment market is now the strongest sector; vacancies are expected to end 2011 below 6.5%, while rent growth slowly rebounds to 1% per quarter or more.
• Although the rate of quarterly foreclosures did decline sharply from the peak in the third quarter of 2008 through the end of 2010, they’ve rebounded by about 25% as stronger banks begin to release more REO homes onto the marketplace; fewer defaults, however, could indicate that this rising tide of foreclosures may soon peak.
• Permits for both single-family and multi-family units in 2010 rose over levels noted for 2009, but remain well below 2008 totals; looking ahead, increases for multi-family units should out-pace those of single-family homes due to the relative strength of the apartment market.

2011 Los Angeles County Economic Conference materials and webcast now online

Even if you missed Beacon Economics' 2011 Economic Forecast Conference for Los Angeles County on June 21st, you can still download the conference book for free and also watch a webcast of the entire event.

As part of our ongoing partnership with Beacon, MetroIntelligence authored the sections on residential and commercial real estate.

Click here to download the entire conference book.

Click here to see a video of the event.

And please be sure to contact us for any consulting studies you need done!

Tax credit market study by MetroIntelligence gets funding!

We just found out today that a market study we produced in support of tax credits for an affordable housing project in Thousand Oaks, CA received over $11.4 million in federal tax credits. Not only that, but the application received the highest score in the Central Coast region as well as one of the highest scores in the state.

We've completed a variety of such tax credit studies over the years throughout the state, and our projects usually get funding even as the requirements for these studies have become stricter. For more information on how we can help you and your affordable housing project, contact us a MetroIntelligence.

From the press release:

On June 22, 2011 the California Tax Credit Allocation Committee (CTAC) awarded Many Mansions $11,405,569 in 9% federal tax credits to assist in the financing of Many Mansions' planned 60 unit Hillcrest Apartments affordable housing complex in Thousand Oaks, California. Many Mansions' application received the highest score in the Central Coast geographic region and one of the highest scores in the State of California. The Hillcrest Apartments project is a $26 million new construction project; consisting of five residential buildings, a community building, picnic areas, a community garden, and a playground. The project is designed with the latest 'green' features and will be certified 'Green Communities'.

The complex will be a mixture of 1, 2, and 3 bedroom units-all units are restricted to low-income households, half to extremely low-income households who are also currently homeless. The recent Ventura County homeless count in 2011 showed an increase in families with children who were homeless. Many of the units are further designated for individuals who have a disability. Along with the award of tax credits, Many Mansions also received funding and support from many other organizations and agencies. The City of Thousand Oaks Redevelopment Agency provided the initial funds for acquisition of the land and most of the pre-development costs.

Other funding and support came from the State of California-Housing & Community Development Division, the County of Ventura, the County of Ventura Behavioral Health Department, the Ventura County Continuum of Care, the Federal Home Loan Bank, the Mississippi Valley Life Insurance Company, the federal Department of Housing & Urban Development (HUD), the California Housing Finance Agency, and U.S. Bank. The construction loan will be through U.S. Bank. Construction is set to begin in October, 2011 and will take approximately 14 months.

Once operational, Many Mansions will provide a variety of on-site service programs for the residents-an after-school tutoring program (the Homework Tutoring Club), summer camp (Camp Many Mansions), and other programs for the children; case management, job development, and other programs for the formerly homeless adults and families.

The Challenges of Tracking Shadow Inventory

If there is one mysterious unknown hiding in the corner of the building industry, it would definitely be shadow inventory, or that glut of distressed homes held back by banks which could be dumped onto the market at any time. Nationally, these unsold units total as many as 1.8 million homes, which at current sales rates could add another 9.0 months to unsold supply.

Add to that total known REO listings as well as homes bought by investors to either flip or rent out, and you have a fairly significant portion of competition to both homes for sale or rent that often remains hidden from traditional metrics.

For a home builder, this kind of inventory is usually impossible to compete with on price alone, as it typically sells for less than replacement cost, which is why builders are now competing based on better locations, greener construction methods and improving technology.

For an apartment builder or investor, deciding where to build or buy takes on even greater risk if a renter for a typical apartment can find a condominium, townhome or even a single-family home at a competitive price.

Fortunately, there are tools available today to track different markets and submarkets in order to decide where to allocate capital and other resources. Recently, we were asked by an apartment investor to track various regions of Southern California to not only review the health of the multi-family rental market, but to also track potential competition in the form of rental shadow supply. The results were quite interesting.

For example, in just Los Angeles County alone, over one-quarter of all home sales during the first quarter of 2011 were REO units previously owned by banks, which sold at discounts of 24% (single-family homes) to 27% (condominiums) versus the entire existing home market. For new home sales, however, although the difference in pricing according to Hanley Wood Market Intelligence was about the same for single-family homes, for attached homes it was over 52%!

Even for the one-fifth of non-owner-occupied homes bought by investors that weren’t necessarily foreclosures, the units they bought were a bit smaller than those purchased by owner-occupants, and thus could be flipped or rented out for a lower – and more competitive – price. Compared to owner-occupied homes, these potential rental units sold for a discount ranging from 20% (condominiums) to 25% (single-family homes).

So just what does this mean for builders of new homes or apartments? In the case of home builders, it means continued competition for buyers shopping on price alone, so demonstrating the value proposition of a new home is more important than ever.

For apartment builders and owners, today’s low interest rates means that potential tenants can often find a nicer and larger home for close to what they would otherwise be paying to live in a typical apartment. In some cases -- such as when putting 20% down and borrowing the rest at 4.5% or so for 30 years -- the monthly payment for both attached and detached homes plus taxes and HOA fees could still be up to 25% less than what a tenant would pay for that traditional apartment.

Fortunately for builders of both homes for sale or for rent, this current environment will not last forever. As prices eventually stabilize and rebound, buyers will likely tire of buying fixer-uppers with higher power bills in challenging locations. And, as mortgage interest rates rise and the better deals disappear, investors in individual homes will have a tougher time competing against the rental rates charged by owners of larger apartment projects.

For now, however, it remains a game of patience.

June column for Builder & Developer now online

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

For this issue, entitled "New Tools to Prevent Another Boom-Bust Scenario," I wanted to review the reasons for the housing boom & bust and what we can do to prevent if from occurring again. This subject will also be the focus of two separate panels at this year's Pacific Coast Builders Conference in San Francisco.

From the column:

The building industry largely missed the signs of the housing bubble, ignored its profound consequences, and adjusted too late. What went wrong? How can it be fixed? And, going forward, how can we develop a more objective and comprehensive framework of market-based due diligence?...

To read the entire column, click here.

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

Join me at PCBC for two panels

If you're going to be in San Francisco next week for the 2001 Pacific Coast Builders Conference, please join me and other panelists on Wednesday and Thursday to discuss reforming how the industry conducts market research.

On Wednesday from 1:30-2:30pm -- and as part of the Consumer Insights Forum -- we'll be discussing what worked and what didn't and how to get past the lingering crisis. It will present the outlook on home prices and foreclosures and then turn to a sharp focus on consumers and their housing needs, the various sub-segments of demographic groups like the "Millenials," "the aging baby boomers," and "Generation X". In the process, the panelists will offer a glimpse at new tools, methodologies and ways that builders can work with and benefit from these approaches. While housing markets are still struggling, it is a good time to start afresh and think about new and sophisticated approaches to the market.

On Thursday from 1:30-2:30pm -- and as part of the Innovation Strategy Forum --we will learn how online consumer focus groups can discern the housing tastes of consumer segments. Explore integrated strategies to create "buzz" about a masterplan through social media, community events, and, most importantly, active listening to consumers. Then, delve into the demand microcosm of a housing project, watch the latest trends in scanning prices at the very local level, and follow how local job and commuting trends can shed light on project or masterplan absorption. These and other tools will show how innovative research approaches can benefit builders and developers.

Participants for both of these days include the following:

Moderator: Gerd-Ulf Krueger, Principal Economist, HousingEcon.com
Patrick Duffy, Principal, Metrointelligence
Rita Lamkin, President, Preface Inc.
Rick Sharga, Senior Vice President, RealtyTrac, Inc.
Belinda Sward, Executive Managing Director, Strategic Solutions Alliance
Alexander Villacorta, Director, Research & Analytics, Clear Capital

If you've not yet registered to attend PCBC, you can do so by clicking here.

Hope to see you there!

L.A. Economic Forecast Conference Coming Up: June 21, 2011

Please join us on June 21st, 2011 at the Bonaventure Hotel in downtown Los Angeles!

Special discount available through MetroIntelligence- click here.

MetroIntelligence Real Estate Advisors, Beacon Economics and the Graziadio School of Business and Management at Pepperdine University invite you to join us at What's Next LA? Entrepreneurialism and California's Competitive Future. This year's event delivers a stellar line-up of leading economic and business thinkers including the following:

• Christopher Thornberg, Founding Partner, Beacon Economics
• Brad Kemp, Director of Regional Research, Beacon Economics
• Linda Livingstone (emcee), Dean, Pepperdine University Graziadio School of Business and Management
• Randy Churchill, Director - Emerging Company Services, PriceWaterhouseCoopers
• Christos Costakos, Former Chairman & CEO, E*Trade Group, Inc.
• Alexander Haislip, Financial Journalist and Author
• Scott Lenet, Managing Director - Los Angeles, DFJ Frontier

Attendees will hear a new outlook for the U.S., California, and Los Angeles economies, delivered by some of the state's most reputable forecasters, and revealing insights into the direction the economy will take in the near and long-term future. Some questions addressed will include the following:

• Is California going to stumble or stride down the road toward economic recovery in 2011 and 2012?
• How high do oil prices have to rise to significantly affect the economy?
• How will the housing market's battle with distressed properties affect home sales and prices in California and the nation over the next few years?
• Inflation? Hyperinflation? Deflation? Why are experts all over the map?
• Are the conditions for business success still in place in California today?
• What are the greatest barriers to California’s existing businesses? To entrepreneurialism?

The program will also cover one of the most pressing and hotly debated topics in the state: entrepreneurialism and California's competitive future. Charges of a hostile business climate in the Golden State have exploded in intensity since the downturn began in 2007. We have invited an exceptional line-up of experts from the worlds of venture capital, technology start-ups, banking, and journalism to debate critical questions that go to the heart of California's future success.

Conference attendees will receive the following:

• 2011 Los Angeles Economic Forecast Book - a data-packed analysis of the region's economic indicators
• Sections on residential and commercial real estate authored by MetroIntelligence Principal Patrick Duffy
  
• Quarterly updates to the forecast for one full year
• Chance to interact with forecasters and speakers
• Prime networking opportunity
• Breakfast buffet
• Hosted self-parking

Special discount available through MetroIntelligence- click here to register.

May column for Builder & Developer magazine now online

My column for the May 2011 issue of Builder & Developer magazine is now online. For this issue, entitled "A New Dawn For Solar Energy" I discuss how the combination of higher oil prices, falling prices for solar power technology and tax incentives are encouraging more builders to offer these systems in order to separate themselves from the existing housing stock.

From the column:

Although it’s difficult to find anything positive in the likelihood of higher oil prices for the foreseeable future, one silver lining is that it makes renewable energy much more competitive. For the homebuilding industry specifically, a combination of lower prices, constantly improving technology and financial incentives, including tax credits and lease programs, are allowing builders to bolster their own solar power initiatives while also better separating themselves from older (and often discounted) resales...

To read the entire column, click here.

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

Reforming Housing Market Research

The building industry largely missed the signs of the housing bubble, ignored its profound consequences, and adjusted too late. What went wrong? How can it be fixed? And, going forward, how can we develop a more objective and comprehensive framework of market-based due diligence?

The first question is easy to answer: blinded by one of the greatest housing booms in history, homebuilders and developers enlisted compliant market research consultants to massage and parse data in support of assumptions that had little basis in reality. I distinctly remember reading a market study a few years ago that proclaimed new construction was able to command a 50% premium over the existing resale stock in a popular, high-income suburb of Los Angeles. And just what was this premium based on? Because they said so!

Not surprisingly, the urban division of that homebuilder was among the first to fail. In its wake, it left the partially finished shell of a large project in the middle of a dense (and formerly gentrifying) neighborhood, thus also punishing thousands of neighbors for its internal myopia. It’s hard to imagine worse PR for the building industry than that.

So how can this be fixed? Hopefully, the industry’s own role in helping to destabilize the global economy by over-building for false demand will never be repeated, but these boom-and-bust cycles do have a tendency to repeat themselves, in large part because solid, objective data is often difficult to obtain.

For example, state-mandated affordable housing study guidelines require consultants to use demographic estimates from private companies such as ESRI or Claritas that, at least for now, can be based on Census data that’s over 10 years old. So, if the mathematical models used by Wall Street firms to gauge risk on mortgage-backed securities failed so spectacularly, why should we assume the forecast models used by demographers are any different?

Although these companies will soon be updating their databases as more findings from the 2010 Census are released, for each year that passes, the data only becomes more stale. Moreover, the changing demographics of the country’s population – which is now projected by the United Nations to grow from 310 million to 400 million in 2050 and nearly 480 million by 2100, will require the building industry to better match supply with demand. To be sure, population growth of two million per year is exciting, but the winners will excel only by ensuring that they’re building for the right buyer (or renter) in the right locations.

Fortunately, soft markets can be the best time to try out new strategies, and formulating a new framework for due diligence is becoming a crucial topic of discussion for builders, developers and investors. At the 2011 PCBC taking place in San Francisco next month, two different panels on which I will be participating -- and moderated by G.U. Krueger of HousingEcon.com -- will focus on reforming how housing market research is conducted, analyzed and distributed.

Split among two different days, the Consumer Insights panel will focus on today’s homebuyer, including those investors buying foreclosures or REOs and the impact of shadow supply. It will also ask how to best quantify the behavior of groups such as Baby Boomers or Millennials, and how they’re reacting – often in different ways – to being surrounded by an increasingly diverse population. The next day, the Innovation Strategy forum will review market research techniques which haven’t worked (such as faulty pent-up demand assumptions), the difference between cyclical and non-cyclical factors, and new tools that we are now using to better gauge housing demand based on job growth.

To be sure, history may repeat itself, but we can at least seek to moderate the damage.

For more information on these panels, the 2011 PCBC or to register, visit www.pcbc.com.

April 2011 column for Builder & Developer magazine now online

My column for the April 2011 issue of Builder & Developer magazine is now online. For this issue, entitled "A New Era for Home Finance: The Building Industry Can Either Lead or Follow," I wanted to touch on the very important subject of the national debt and the potential impact on home mortgages and the tax deduction for mortgage interest.

From the column:

As I sit here writing this column, the U.S. national debt is climbing past $14.25 trillion, or an average of nearly $46,000 for each citizen. Each day, that national debt rises by about $4.1 billion, as 40 percent of the 2011 federal budget is made up of borrowed money. Of the Obama administration’s proposed $3.7 trillion budget for 2012, 30 percent will go to Medicare and Medicaid, 22 percent will pay for Social Security benefits, 19 percent will go for defense-related programs and nearly 13 percent, or $474 billion, will be used to service the existing debt. So just what does that have to do with mortgage finance? Everything...

To read the entire column, click here.

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