The next trend in real estate?Dean Foust
Had a chance recently to catch up with a friend who is a real estate attorney (representing developers of various ilk). We talked about the homebuilders, and he surprised me with this prediction: Given that the big homebuilders are sitting on thousands of parcels of land they don’t want, and given that some seers in the industry are now predicting it could be several years before demand builds back to the levels of recent years, you’re going to see a number of regional managers for the big builders — say, the folks who run the Phoenix, Tallahassee or Richmond operations for a big builder — spin off to do their own thing. He’s in discussions with some regional managers who fit this profile and who are looking for an attorney, but doesn’t want to name names at this hour.
Why would they go out on their own in this kind of market? Because they believe that the big builders are dead money for the next several years -- the stocks will, at best, tread water, meaning there's no upside in hanging on to their stock options. But more to the point, they know that the builders are desperate to get their land holdings off the books. So they get a pool of patient, long-term investors, offer to take some land off the builders for, say, 40 to 50 cents on the dollar, then hold tight for another year or two until demand catches back up with supply. (Being backed by patient money is key.)
Then they start building. And if the market rebounds even modestly, building on cheap land will provide fat margins.
The big, publicly traded builders in recent years argued that they could sustain their heady growth because the industry was so fragmented (the biggest builders only represented something like 20% of the market) and there was ample room for consolidation. They could squeeze out the small builders. But now I'm wondering if we might see the opposite, at least for the next few years, as mid-level execs jump the mothership at form their own firms.
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