Recorded at SVN | Saunders Ralston Dantzler’s 2023 Lay of the Land Conference, Dean Saunders, ALC, CCIM invites various residential development experts to discuss the emerging residential development trends within the Florida real estate market. The Residential Panel features Noah Breakstone of BTI Partners, Daniel B. Green of Wheelock Street Capital, and Jim Bavouset of Lennar.
Below is an excerpt from the interview. Listen above for the full podcast.
What are some of the recent challenges you’ve seen? (Jim Bavouset) I'm a firm believer that there's a deal for any time period. Sometimes it's going to be cash on the barrelhead and if you time that right, from a land seller's perspective, good for you. In times like now, there are capital constraints, there's some hesitancy on: “If I underwrite to today's market, I'm probably not going to pay you the value that you would need for your land.” So we need to come up with something more creative in times like these.
Over the past six months, as the capital markets changed a little bit, we've started wondering, “Are homebuyers going to be as aggressive as they were during the pandemic? And how do we structure our deals so that we can continue our business and still give our land suppliers money in the value that they deserve?” That's come through some structuring: getting some money on the barrelhead now and having participation in the future. So as we go through this, that will probably increase.
If we start to see a pullback and we start to see a recession, we'll look to have more to come and more profit participation. We don't need to make outsized returns, we just need steady returns to turn our cash, build our homes, sell our homes, close our homes. We don't need to buy one deal and make three times our money, we need to do 20 deals and make 1.5 to 2 times our money.
What lessons were learned in the mid-2000s? (Dan Green) It's leverage. That's what caused our issues in the last downturn. It was overleverage, over debt, and too much debt because it was very easy to get. So, when you put leverage on real estate, that helps your returns on the equity side, but when you put leverage on the wrong kind of real estate, which is land, land eats 24/7 and very rarely gives back. That was the problem we had. We overleveraged land. Now in these times, we use leverage very, very lightly on land. It’s only for development and short term debt. We don't use it for acquisition.
What new trends are you seeing in the marketplace? (Noah Breakstone) I think one of the changes, obviously, is in technology. Again, we're going to see WiFi being very actively used in technology and home integration and it's becoming very consumer-friendly. I think those are very important ingredients. Whether it's a manufactured home off site or separate components or modules that are done, I think the industry is becoming much more sophisticated and efficient in how it delivers the home. In these times, it's going to be very important.
Also, 30 year mortgages 12 months ago were almost a little over 3%. That same mortgage today is 6.5% and it did get up to 7%. With the Fed increasing interest rates, we're going to see mortgage rates creep up again and that's purchasing power right there. So, I think homeowners are going to be looking to have a less amenitized community, they will be concerned with costs, and I think we're going to be in a higher interest rate environment. I don't think we're going to go back to 3% mortgages and as we go forward in our communities, we need to be price sensitive to that. Housing affordability is a very critical component.
How do you address housing affordability? (Dan Green) You've seen square footage creep up over the last decade because it's been affordable. Money has almost been free and now that money is starting to cost again, you're gonna see those square footages come back down. Then the lot size starts to come back down, but for the most part, jurisdictions have understood the lot size.
You got to give Lennar credit. I deal with them in California and in tight jurisdictions where land has always been very expensive. The type of plan and architecture they build, even on small square footage, the product that they put together is just amazing. I think we've got to see more than in Florida because land is expensive and development is very expensive now, the most expensive I've ever seen in my career.
What I do see in this cycle is some jurisdictions don't like some of the finishes on certain houses. When those architectural features get governed, it is going to cost money. Every time you make a regulation, it costs money. So, we're going to see that in the houses we have to deal with it, but it's just the cycle time. They've seen a bunch of growth come through in the last five years and now they “need to react”. Unfortunately, they're reacting as we're calming down in the cycle.
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