Multifamily to the Rescue? Not so Fast
From MultiFamily Executive, by Les Shaver: If you want to get the straight story on why not to get too bullish on multifamily for-rent as an antidote to acute for-sale pathology–at least for a while–have a gander at Multifamily Executive senior editor Les Shaver’s account of a forecast of 2009 and beyond by two industry economists.
Shaver reports on how the industry’s fortunes may lag the dislocation in other parts of residential construction and development thanks to already-financed projects late in the come-to-market pipeline. Once the recent implosion in credit availability and other economic convulsions wind into multifamily development’s landscape, starts will feel gravity. Shaver, reporting from the National Association of Home Builders’ Fall forecast conference in Washington, D.C. , took in the predictions of outgoing NAHB chief economist David Seiders and multifamily research consultant Ron Whitten. He writes:
Ron Whitten
The decline in starts will likely come soon. Witten predicts that by 2011, starts could fall to around 125,000 units—numbers not seen since 1993. “We’re going to be in for a couple of years of deterioration in multifamily starts,” Witten added.
At the core of this drop-off is financing. The amount of equity needed to completed apartment construction deals has risen significantly. During the boom, apartment developers could get by with 25 percent equity or less on deals. Now, lenders are asking for around 40 percent equity. And even with financing, apartment owners don’t know what the economy will look like when the properties open in a year or two.
“A decision to start today exposes me to a lot of risk going forward,” Witten said.
Risk everywhere you look, at least for the moment. A fact of life. Anybody can be justified in having been thrown back on one’s heels in this environment. Still, it’s no time to shift to inertia. All the good ideas won’t fly right now. So pick two or three of them and run like hell.
Stock Staggers
From PROSALES, by Craig Webb: We’re getting calls from friends in the business. They’re shutting down plants; they’re facing workers, telling them the jobs are gone, at least for the time being; they’re exiting markets.
Stock Building Supply, which seemed as if it went through 2006 and even into 2007 with a new press announcement every other week on a course to acquire nearly every lumber yard in its path, is now fully retrenching. Backlogs of home sales that had buoyed lumber and building materials suppliers well beyond the mid-2006 peak in housing now have depleted to a mere trickle. Visibility into when demand may reappear is anybody’s guess.
ProSales editor Craig Webb provides the first details on Stock’s massive downsizing announcement– cutting 3000 of 18000 jobs –this morning amid its United Kingdom-based parent company Wolseley Plc.’s quarterly financial woes.
Stock gets more than 70% of its revenue from new residential construction, particularly by America’s biggest tract builders, so it is particularly sensitive to the severe slump in that part of the U.S. housing market.
The 86 as-yet-unnamed branches to be closed represent around 25% of Stock’s revenue and 28% of its headcount, Wolseley’s board said in a statement.
“The board believes that for the foreseeable future there is likely to remain significant overcapacity in the building materials distribution segment, in which Stock operates,” Wolseley said.
Home Builder Quarterly Earnings–A Term Loosely Applied
From BIG BUILDER staff: Among home builders right now, there’s NVR and then there are the rest. Amid a broader swath of corporate earnings announcements and outlooks that are currently pounding the equity markets, home builders reports are mostly more of the same as they’ve been for a year-and-a-half. They’ve been down so long, it’s almost time for things to look like up from here.
Strategically, they’re in limbo, and they don’t have a lot of big-time options while home buying endures an almost-general neuropathic seizure of uncertain credit and tumbling home values. Tactically, they’re all doing what they can to manage the cards they’ve had in their hand from the time the market fell off a cliff in mid-2006: pulling out the stops on price and free-features to sell homes, conserving cash, improving balance sheets, and trying to weather worsening conditions.
Here’s UBS senior housing and building materials analyst David Goldberg’s helpful watchlist of opportunity and pain areas for public builders, as many of them release end-of-quarter financial performance data over the next couple of weeks:
We’re focused on four key themes: 1) whether the magnitude of impairments will continue to decline, in line with what we’ve seen over the last 2 quarters; 2) CF generation + liquidity; 3) to what extent builders have altered products to compete with foreclosures; & 4) whether opportunities are materializing to acquire desirable land at distressed prices. Additionally, given our concerns about liquidity, we’ve included debt maturity schedules for the builders.
How is it that NVR can be such a positive outlier as its home builder peers scrap for cash flow and tax claw-backs and squeeze expenses at every turn? To say it’s luck would be facetious, but true. And all the same, in this environment, anybody would have to be very good to be lucky.
The good fortune part for NVR is part history and part geography. The fact that the company went into and resurfaced from Chapter 11 bankruptcy in 1992 and 1993 is reason for part of NVR luck. Corporate and bank covenants that accompanied NVR’s reemergence as a going concern prevent the home builder from doing what troubles so many of the other home builders during bad times–owning and developing residential real estate. If you’re not in the land game, you miss a lot of the fun during the boom times. You also avoid a weight that can crush you when things go south as they have.
NVR’s good luck has been that they own no land, practically thanks to by-laws. Also, by some stroke of genius, the company’s geographical footprint–from NY to the Carolinas on the Atlantic Coast, and the north central midwestern states–entirely avoids the bloodbath states of Florida, Arizona, Nevada, and California.
Now the part about having to be good to be lucky. They’re quite likely the best-managed, “tightest” operator in the business. A more finite geographical scope accounts for part of this, but within that context, they’re a best-practices leader in sales, sourcing, construction ops, and finished lot dealing. At their game, they’re the best, and part of that comes from inter-divisional competition as well as discipline.
Here’s the topline from Zelman & Associates’ CEO Ivy Zelman on NVR’s latest quarter performance.
NVR reported solid results again this quarter, especially considering the significant deterioration in broader market conditions throughout the period. Despite greater than expected price pressures, NVR’s proactive cost reductions and effective management of overhead contributed to a 160 basis point sequential improvement in homebuilding EBIT margin and strong cash flow generation. As NVR continues to improve its industry-leading balance sheet and outperform the group on nearly every metric, it is difficult to find any faults with the company’s performance. However, given the extremely weak macroeconomic backdrop and the likelihood of further job losses, we believe NVR is near fair value and we maintain our Hold rating.
NVR's Dwight Schar
Have a look at Big Builder’s November 8, 2008, cover story profile on NVR for a sense of what they might be thinking about doing while most of their peers are chasing their tails to keep their balance sheets in good order.
Also, for an insight in to quarterly financials from two other top 10 builders, Pulte and Ryland, Big Builder senior editor Teresa Burney and executive editor Sarah Yaussi provide excellent analysis of the performance data.
- Here’s the Big Builder Ryland pre-call story; and then a report on how the numbers came out in the Ryland call.
- For Pulte Homes, Big Builder offered a pre-analysis; and followed today with a post-up of Pulte’s Q3 earnings.
And stay tuned next week to pre-call and post-financials announcements from Centex and Standard Pacific as the earnings season beat goes on.
But Where are We?
From HOUSINGFINANCE.COM, by Jerry Ascierto: The federal policy blitz that’s pumped billions this way and that into a beleaguered and stimulus-fatigued financial arterial network keeps going. Authorization for the federal government to spend $950 billion to infuse banking and banks with wherewithal to reenter the business of lending, and to buy up collapsed financial assets is one thing. Doing it is another.
In an a new article, “Treasury’s Bailout Plan: More Tortoise Than Hare?” Housingfinance.com senior editor Jerry Ascierto reports on reasons for the time-warp between signing rescue measures into law and signing checks over to banks that so desperately need the funds.
While Fannie Mae and Freddie Mac are still providing short- and long-term debt, construction financing, which grew increasingly tougher to procure throughout 2008, will likely dry up further in 2009. “New projects are going to be halted nationwide, if not globally,” said Dan Fasulo, managing director of market research firm Real Capital Analytics. “Overall, I think next year is going to be a rough year for new development.
The bail-out plan originated practically as a back-of-the-envelope brainstorm from U.S. Treasury Secretary Henry Paulson, and evolved within two weeks into the 400-plus page “Emergency Economic Stabilization Act,” that took two goes to win Congressional approval. So far though, the triage system has yet to come clear, as banks battle conflicting self-interests in valuing their non-performing portfolios to channel them into the government program.
Further downward momentum, increasing defaults and foreclosures, and the inability to lay in a construct to support asset values closer to the asking price will likely increase voluntary participation by banks in the coming weeks and months.
R U Roubini Ready?
“V”s make corporate finance people nuts. They want explanations when “V”s–or variances–reflect cost overruns or revenue misses, and they want offending managers to re-project spending downward to correct for them. But other kinds of “V”s make business leaders a relieved bunch. They’re the ones that have to do with the trajectory of an economic downturn. A “V” bounces back almost as quickly as it deflates.
Another letter shape people refer to when they talk about economic cycles is “U.” “U”s hurt more and they hurt for longer. It takes longer for recovery to come. What we all have reason to dread is “L”s when it comes to down turns. They’re the ones that can last a decade.
When people take a breather from the blamefest [see the item below], the next big wave of waggery will come over who’s going to be right about the duration and depth of the economic downturn. Only a few months ago, it seemed, the Wall Street Journal’s esteemed panel of economists were mostly arguing about a 25% to 50% likelihood of economic recession, and only a few went so far as to say we were already there. Now, at issue is when the recession officially counts as starting, how deep it’ll be, and when it’ll evolve into the next bull cycle.
- Here’s the New York Times’ Floyd Norris’ take on debate over the onset and why it matters.
In the 1960s and 1970s, it was common for home builders to go on extended vacations when slowdowns–or stops in starts–occurred. Sometimes the holidays started in the winter and extended through the fall into the following winter. Sometimes it was two years.
Now, land, debt, carrying costs, overheads, operational costs make it so that home builders, public and private alike, must keep their machines going, or go kaput. They almost have to keep spending and producing to have any hope of cash generation. Not a happy predicament.
A home building public company CEO who knows what he’s talking about thinks it’s going to be the first quarter of 2010 before those in the residential for-sale new construction business see signs they like of a pulse in the market. Meanwhile, it’s limbo. It’s patience. It’s stop spending wherever you can.
Perhaps an iota of consolation can be drawn from the widening gyre of misery. Home builders were first when it came to feeling the gravity of business falling off a cliff. Now, everybody else, all over the world is feeling the downward pull.
Nouriel Roubini, the New York University economist and professor who’s been taking us all to school on a what a huge mess we’ve got ourselves into, guested hosted CNBC’s Squawk Box this morning. For those who wanted a schmear of bleak with their bagel and coffee, Roubini didn’t disappoint. Tie loosened, hair touseled, you wonder what Roubini does in the green room to make himself look like it’s 10 p.m. at 6 a.m.
“I believe we’re going to have two years of negative economic growth,” Roubini said on CNBC. “The last two recessions lasted only eight months each … This time around this is going to be three times as long, three times as deep. This is going to be the worst recession the US has experienced since the 1980s.”
To be so keenly aware of the massive financial dislocation playing out and to have no stake in denying it must have a rather onerous and disturbing effect. He looks that way.
When it comes to business insight, about the best most of us could hope for is intelligence–if not visibility–on the timing of the continued strains to operations and cash generation. So pour a stiff one, have a look, and get ready to go through your 2009 budget yet again with an even sharper pencil and an eye to Spring 2010. Getting there won’t be easy for anybody.
What to Blame, Not Who
Look, greed was good for the economy. It did more than put marble counter tops into houses sold in 2006 for 25% more than they’re worth now. It moved cars of dealers’ lots like hotcakes, … big cars with cupholders and gps and back-seat video monitors. It increased per store sales at J. Crew and Target and the Coach outlet store. It financed ludicrous player salaries, and lavish business retreats, and lusty expansion initiatives based on pro forma [false] secruity.
Few people didn’t get it pretty wrong. But, like it or not, part of our colorful, combative cultural DNA causes us to revert to Us v Them defense tactics when the going gets rough. And boy, if the going hasn’t at least threatened to get rough for someone by now, he or must be living underneath a rock.
Don't blame Alan
Still, at HousingCrisis.com, we feel there’s far too much emphasis on who to blame for the dislocation in the economy, and sufficient attention to the causes. Careful, dispassionate, non-ideological approaches to root causes for the breakdown would allow us to sleuth our way to a place and a logic to address and plan a work-out program that makes sense rather than to throw solutions out after one another on a trial by error basis.
One of the clearer ways to go to school on the sequence and structure of today’s economic earthquake comes from Jamie Pirrello, CFO of Michael Sivage Communities and a longtime friend and contributor to Big Builder print, Web, and in-person intelligence.
Now, you’re almost ready for engagement. If you’re going to take a side on whose feet to lay the housing and economic crisis at, and it’s not simply an ideologicical default switch that causes you to name a list of usual suspects from the opposing political party–that’s really gotten us far to a solution, now, hasn’t it?–then it’s necessary to follow the money from the hole it’s disappeared into back to the tree that it grew on in the first place.
Barry Ritholtz’s The Big Picture blog has been fighting the good fight to filter out political cross-fire from economic analysis. His latest attempt to focus attention on the true causes of the destabilization came in an analysis yesterday, called “How Lending Standard Changes Led to the Housing Boom/Bust.”
Who would argue the truth of the following assertion in the column?
Underlying EVERYTHING — housing boom and bust, derivative explosion, credit crisis — is the enormous change in lending standards. I am not sure many people understand the massive change that took place during the 2002-07 period. It was more than a subtle shift — it was an abdication of the traditional lending standards that had existed for decades, if not centuries.
Now, what does that say about who should account for what’s gone wrong? Hardly an American worker or householder alive hadn’t leant into the juggernaut economy of the mid-90s to the mid-part of the current decade. We need to take a look in the mirror, don’t dwell on it, and get on with the work, pain, and sacrifice of digging ourselves out of the hole.
Golly Gee–What is it that Gives Journalism a Bad Name?
Getting ratings can be a vicious game. And why is it people have lost faith and trust in the media?
Maybe it’s because they don’t know how to report the news. This lame CNN clip-job splices inference, innuendo, and hearsay and a couple of aggrieved home buyers into a completely unfounded, and unhelpful, corporate crucifixion. We won’t suggest the possibility that Time Warner and its executives might have venal motivations as they develop sensationalized muckraker wannabee reports that don’t get at the real truth of why the American and global economies have undergone such stress to their systems.
How does CNN owner Time Warner get a way with this? The “heavy-lifting” reporting was to get two families originally found by the Charlotte Observer more than a year ago to go on camera and shed tears. What’s not amazing is that this type of latter-day witch hunt gets viewers, because it appeals to the supermarket check-out counter media set.
Stakes in the pin-the-blame game have gotten pretty serious. We saw a piece in Sunday’s New York Times that hovered around implication and indictment of Henry Cisneros via his association with two companies that stumbled legally and strategically in the past few years. At least the Times did the reporting and seems to have concluded that Mr. Cisneros probably didn’t do anything wrong… But it’s hard to tell from the headlines and packaging of the story.
Multi Tasking
From MULTIFAMILY EXECUTIVE, by The Staff: How many ways are there to say, “have patience?” And while you’re at it, don’t forget the operational improvements that will save you money and grab you the occasional revenue opportunity while you’re in the limbo that the broader housing and credit squeeze have plunged business into for the moment. Those are two of the key take-aways from the two-and-a-half-day MultiFamily Executive and Developer conferences in Las Vegas last week.
If you’re in a pinch to do something now–selling or buying properties–it’s not an especially propitious time, even though the basics of apartment demand look solid and should strengthen over the next few years. Why not now? Well, the unwinding of for-sale housing and the rest of the economy, and, more immediately, acute creditis’ affect on capital structures, make everything but cash conservation and tactical revenue generation exercises in foolishness.
Inhibiting expansive moves right now are both a “shadow market” of condo owners who’ve put their places up for rent, and home foreclosures, which create vacancies that compete with apartment owners. Until demand normalizes on the apartment side, uncertainty reigns. Until lending and investment get a baseline of trust and reliability beneath them, what multifamily developer/owners have is what they get… at least until we see the housing correction shift the homeownership pendulum back toward the 63% or 64% of U.S.
The Multifamily Executive and Developer staff inspected, respected, and dissected the multifamily landscape from every which angle possible in a high-energy, high-value in-person event last week–October 13-15–at the Bellagio in Las Vegas. In an executive roundtable moderated by Multifamily Executive editor-in-chief Shabnam Mogharabi, three CEOs spoke candidly about how strategy needs patience while the economy sorts itself out.
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Bozzuto, Campo, Toomey
“We probably wouldn’t have an overbuilt apartment market if it weren’t for condo conversions,” added Tom Toomey, the CEO of UDR, an apartment REIT based in Colorado. “By 2011, we’ll probably be talking about a shortage of apartments.
“We have plenty of apartments in most major markets in America right now,” said Tom Bozzuto, chairman and CEO of The Bozzuto Group, a Greenbelt, Md.-based company that builds and operates apartment buildings in addition to building single-family homes. Bozzuto said that he had reduced his apartment development staff and was focused on their fee-management business to drive growth for the next year or two.
“We’re going to cut starts dramatically,” added Ric Campo, chairman and CEO of Houston-based REIT Camden Property Trust, adding that he’ll probably stretch out the $1.5 billion worth of multifamily projects in the public apartment owner’s development pipeline. As developers restrict supply, this will create firmer pricing in the future, Campo predicted. “In 2010 or 2011, we’ll have an incredibly robust multifamily market.”
For an update on all the key issues and perspectives, as well as access to slideshows from the show floor, here’s a line-up of reports from the Multifamily Executive and Developer conferences.
- Slideshow: Photos from the 2008 MFE Conference and Developer Conference
- Slideshow: Snapshots from the 2008 MFE and Developer Awards Gala
- Monday, Oct. 13, 2008
- MSNBC’s Tucker Carlson Calls Election for Obama, Holds Nothing Back
- Employee Pool Widens, Concessions Rise In Down Times
- Top Talent Is Found Online, Needs Incentives to Stay
- Small Upgrades Can Drive Up Rents in Select Regions
- Investors Proceed With Caution, Higher Scrutiny for Apartment Deals
- Home-Grown Technologies Tackle Green Building, Leasing Compensation, Lead Management
- Done Right, Mixed-Use Offers Higher Income, Lower Risk
- Multifamily Development Likely to Slow in ’09
- Tuesday, Oct. 14, 2008
- Apartment CEOs Foresee Financing Challenges, Oversupply of Rentals into 2010
- Carol Galante, Symphony House Nab Top Industry Awards Multifamily Executive Conference: Breakout Sessions
- Apartment Deals Under $50M in Major Metros See Some Traction
- Branding, Marketing Key to Retaining Customers During Recession
- 10 Tips for Dealing with Three Resident Groups
- Tech Investments Can Improve Operations, Boost Portfolio Value
- Broken Condo Projects Spell Opportunity for Equity-Backed Investors
- Green Features Will Soon be a Given at Multifamily Properties Developer Conference: Breakout Sessions
- Public/Private Partnerships Need Capital, Social Support
- Deals on Ice as Bid and Ask Spreads Remain Prohibitive
- Gas Prices, Legislation, Environment Will Alter Future Cities
- Wednesday, Oct. 15, 2008
- Local Developers Say Las Vegas is Tough, Not Impossible
- Dr. Richard Florida: Emerging Creative Class Will Demand Sense of Place
- WiFi, Internet Service are Top Demands at Multifamily Projects
Monday Crib Sheet
Let’s start with the 40,000-ft. Monday a.m. fresh-start view. Asian stock markets have parked in big gains, and European bourses seem to be catching some of the same momentum, as pockets of company earnings come in strong and downward pressure on oil prices continues. U.S. stock futures are in rally mode, thankful for a little credit elbow room as Libor rates ease.
Earnings, earnings, earnings will be all the focus for the next couple of weeks, because that’s where we’ll get a look into what our chances are of staying shy of 8% unemployment rates that could accompany even a moderate two- to three-quarter recession.
Notes the WSJ….
On the economic front, investors will look to Conference Board leading economic indicators and testimony from Federal Reserve Chairman Ben Bernanke before the U.S. House Budget Committee later in the day.
If you missed it over the weekend, then, flash back for a few moments to Brian Carney’s “weekend interview” with 92-year old Anna Schwartz in the Wall Street Journal. Firmly, gently, she chides current policy-makers for shifting the agenda from saving banking to saving banks, and for using the tools that should have been used by the government during the Great Depression to combat the current crisis, which is a different matter altogether.
Anna Schwartz
… by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”
Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”
Bernanke speaks at 12:45 today. On his mind, if not in his remarks, will be his hero Anna Schwartz’s assertion that he’s been bringing the wrong tactics into play, addressing liquidity as opposed to addressing a profound lack of trust and confidence that big-stakes players have in one anothers’ structured finance systems.
It’s Pre-Game Day–So Get Smarter
Here are three pieces you can not afford not to have read by the time your friends appear for beers and pizza for a college grid game or two when the Saturday honey-do list is done.
- First, unbuffetted by the financial storm, Warren Buffet buys America’s future, and lets everybody know why in a New York Times op-ed piece.
- Second, it’s James Grant, editor of Grant’s Interest Rate Observer, in a lucid Wall Street Journal analysis of the role of confidence–or lack thereof–amid the grip of global economic turmoil.
If the confidence deficit seems so high, it’s because the preceding confidence surplus was full to overflowing. People suspended critical judgment. They accepted at face value the pretensions of central bankers and the competence of investment bankers. Not one professional investor in 50, probably, doubted that wads of subprime mortgages could be refashioned into bonds that were just as creditworthy as U.S. Treasurys.
- And if you’re the vituperative type, like some of us here at HousingCrisis.com, then you’ll have to take in today’s piece in Business Week, which will give you a leg up in the obligatory blame game debate after a brew or three.
Must reading, all three pieces.