Land Shortage Shapes Strategy of Multifamily Builders
Grappling with shortages of developable land, soaring construction costs, rising interest rates and real estate speculators, five top developers who addressed NAHB’s Pillars of the Industry Conference in Miami last week voiced confidence in the outlook for their businesses and discussed some of the things they are doing to ensure that their companies continue to prosper even in the face of adversity. Land prices and the ever lengthening process for obtaining development entitlements were at the top of the complaint list. “Land prices are really up,” said Ron Terwilliger, chairman and CEO of Trammell Crow Residential and chairman of NAHB’s Multifamily Leadership Board. In some markets, such as Washington, D.C. and hot cities in California, it has become “virtually impossible to price for rental” development, he said. “All the land seems to be condo land.” And those condos are becoming even more high-priced because construction costs have been up as well. For example, high-rise costs are up about 40% in Washington, D.C. in the last 18 months, he reported. Supply Side Constraints With the population growing over the next 10 years at least as briskly as it grew over the preceding decade, Stuart Miller, president and CEO of Lennar Corp., said that the demand side for housing is healthy. “But the supply of new product is more and more constrained” because of no-growth regulation of land. Driving escalating land prices is “a real scarcity in finding immediately developable home sites for the demand that is out there,” he said. And with “the ability to move to the outskirts of communities becoming more limited,” Miller said his company is looking for, and finding, new opportunities for growth at infill locations. Lennar last month announced that it was acquiring from Roseland Property Company home sites for 2,500 condominiums in New Jersey and Boston. About 15%-20% of the company’s business today — which is expected to total $1.2 billion on 42,000 homes this year — is in multifamily, he said. Miller said that he is continuing to see a strong desire among households to own a home as “a good place to accumulate capital and a great forced savings plan,” and that urban condos are providing that opportunity, along with the ability to escape worsening traffic and enjoy the amenities of living close in. New singles, empty-nesters and second home buyers are all driving forces in the condo market, he said. Rising interest rates and home prices could create some limitations for the condo market, Miller said, “but we haven’t seen them yet.” Getting Back to Normal Price Appreciation Preparing for the dampening effects of rising mortgage interest rates, Ara Hovnanian, president, CEO and director of Hovnanian Enterprises, said he welcomes “going back to a more normalized pace” of price appreciation and away from the “frothiness” that has characterized both the single-family and condo markets in recent years. In his view, “A solid, slowly appreciating marketplace is better.” Hovnanian also said that he is relatively comfortable with the outlook for slowly rising mortgage rates that are accompanied by a strong economy. Projecting $5.5 billion in sales this year, up from $4 billion in 2004, Hovnanian is opening many new locations in highly regulated markets in California, the East Coast and Florida, and is offering a wide variety of products at many price points to address affordability concerns. With the land market getting “bigger and bigger and scarier” and $100 million transactions now commonplace, Hovnanian said that the trend to “verticality” is accelerating. Developers are going to 10 stories or higher, he said, where it used to be one to three stories. “You can’t get entitlements for the countryside home with the picket fence,” he said, and buyers are making changes on the demand side to accommodate that reality. In the Northeast, he said that it is taking four years to get through all of the entitlements if the land is already zoned for what you want to build. The Wheels Are Coming Off the Condo Market Building mostly mid-rise rentals at a density of 40-80 units to the acre in such areas as Washington, D.C., Atlanta and Florida, Chris Wheeler, CEO of Gables Residential, said his company remains focused on high job growth markets and areas of those markets where you can still find land. Apartments are typically being built on sites of former office buildings and movie theatres. “There are no more garden apartments,” he said, “when you’re paying $40,000-$80,000 per unit for land.” More and more of his product is being built out of steel and concrete than stick, he added. Gables has been repositioning itself by selling off anything that could be considered less than an A+ apartment building in its porfolio as well as focusing all its acquisitions on “the good stuff.” He also said the company is sitting on cash because it wants to be in the position to buy properties for conversion back to rental apartments when the condominium market starts to turn down. “The wheels are going to come off fairly quickly” on the condo market, he predicted, in super-charged markets such as South Florida “where you can convert a garden shed today.” That region was responsible for the conversion of 12,000 units last year, he said, a number that represents 20% of the condo conversions in the entire country. The Feeding Frenzy Continues Located smack dab in the middle of Miami’s condo market, one of the hottest anywhere, Jorge Perez, chairman of the Related Group of Florida, said that his company has followed the huge demand for homeownership in South Florida by transforming itself from a company building 90% rentals 10 years ago to one that is delivering 90% condominiums today. Perez said that his company found comparable costs for the construction of rentals and condominiums, but condo profits are three to four times higher. While bullish about the long-term outlook for the Miami market because of its appeal to buyers from South America, Europe and even the Orient, Perez said that he does have some concerns about the “feeding frenzy that continues today.” Five years ago, he said, “we had real buyers,” but today the condo market is being driven by investors and speculators. Before even breaking ground, 60%-70% of his units are sold in buildings that won’t be completed for three years, he said. Price differences between prime building sites and secondary sites are increasingly being squeezed by the market, he said. “We’re very afraid of the market,” he said, especially of the very high prices that are being paid for less than optimal sites. “We think there will be a correction,” Perez said, “but we have stopped trying to guess when and how deep.” In the meantime, South Florida’s conversion craze is rapidly depleting the area’s rental housing supply, and rents are getting pushed up. Perez said his company has only 10,000 units in its rental portfolio; 99% of them are occupied and the rents are moving up substantially. However, there still remains a huge gap between prices in the rental and condo markets, he said, and there will have to be a correction before the rental housing market completely recovers. “We are staying very liquid,” said Perez. “There a lot of players who shouldn’t be in the market and there will be opportunities to purchase in coming years.” | 
