Land

A Land 'Reload' Is A Pain Point Builders Did Not Expect In 2023

Having to go out now – in a business backdrop where land sellers never got the memo that they'd better concede on lot pricing – and buy land feels, to some of the builder execs we've heard from, just wrong. That doesn't mean they won't do it.

Land

A Land 'Reload' Is A Pain Point Builders Did Not Expect In 2023

Having to go out now – in a business backdrop where land sellers never got the memo that they'd better concede on lot pricing – and buy land feels, to some of the builder execs we've heard from, just wrong. That doesn't mean they won't do it.

May 19th, 2023
A Land 'Reload' Is A Pain Point Builders Did Not Expect In 2023
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Homebuilding strategists who put together business plans and budgets late last year faced a long treacherous list of gnawing business, operational, and financial challenges.

But, except for clairvoyants, a land reload wasn't one of them.

Fast forward a few months to now, and what's everybody talking about most?

... We'll get there, but first let's highlight a few of the imperatives and trouble-spots most homebuilding team leaders thought would shape and stress-test their mettle for a time of volatility, suddenly-high interest rates, and an ever-threatening Recession that seems to be twiddling its thumbs until more people are proven wrong about when it will arrive.

Here's roughly how that game-plan looked for a lot of homebuilding organizations – small, medium, large, and national – as they mapped 2023 through the lens of say October 2022.

  • Backlogs were at risk of cancellations for both financial and psychological reasons
  • Pace was a wild-card subject to a fully-loaded toolkit of concessions, incentives, discounts, and mortgage mechanisms aimed at rekindling absorption rates
  • Spec inventory overhang was a crapshoot, susceptible to air pockets, deep discounts, or worse
  • Completion schedules continued to be elongated, a dampener of would-be buyer enthusiasm given the volatility in mortgage rates
  • Margins – thankfully as robust as they'd practically ever been – were as Lennar executive chair Stuart Miller described them, to serve as a shock absorber to buy time to cut costs, catalyze sales, and rebalance resources with revenue.
  • Cost initiatives – Take down variable costs based on fewer projected new permits and starts, reduce overheads, walk from land deals – particularly any with any kind of escalators – where it made sense, and renegotiate trade and manufacturer contracts with terms favorable to reduced prices assuming weaker demand volume.
  • Net, net it was about conserving cash, generating cash on turns in inventory, and ratcheting down future land and input costs – not to mention reduced general, sales and administrative cost reductions – for staying power, a move directionally downward with some product prices, and a good positioning, once the Fed began to reverse its trajectory on its fund rate policy.

Remember all that? It was going to be a tough, tough Spring, and a grindingly slow Summer, and an iffy Fall, with a glimmer of better expectations for '24, once it was clear the Fed was done with its heavy lifting on inflation's battle front.

As everyone knows now, sales pace, volume, and even price in many more cases than expected broke out well beyond plan.

All but a few of those telegraphed input cost concessions, favorably renegotiated terms for controlled lots, new purchasing contracts, etc., ... bye bye.

So, businesses of all sizes that counted on – and are pulling off splendidly – a strong period of less cost-encumbered cash generation from a better-than-expected showing on the sales, price, and pace front have good strong, liquid businesses.

They're also facing that almost entirely unexpected 2023 challenge. It's one that they're starting to feel, like a heat that's potentially going to get really hot, burning hot.

In fact, they're burning through lots faster than they thought they would, and now they're facing an excruciating scenario. The context: a U.S. banking system in the continued throes of a slow-moving crisis, a reckless and perilous debt limit standoff, this little Recession that can't make up its mind about when to start, and a Fed that's actually still contemplating moving higher with its fund rates increases. The situation: They need to get money and buy lots for growth in 2024, '25, etc.

Having to go out now – in a setting where land sellers obviously never got the memo that they'd better concede on pricing due to an inevitable cascade of effects that would occur as the Fed crushed housing demand, or else... – and buy land feels, to some of the builders we've heard from, uncharacteristically wrong.

And that's saying something, since normally these types of people wake up and feel their first rush of dopamine at the thought of doing land deals.

There's deals out there," the president of one of the nation's stronger multi-market private homebuilders. "They're not anything I can ever go near, because they wouldn't pencil for what we do."

Fact is, a land reload in a market with so many "ifs" – many of them, red-flag "ifs," at that – could make for an inflection point in the ongoing national consolidation and concentration of more new-home development and construction among fewer larger players.

Among the problems for smaller and mid-sized private homebuilders who may need to restock their land pipelines is the nation's regional and local bank paroxysm, which seems to have a long tail rather than an acute open-and-shut span of resolution. It's not like these institutions wouldn't be willing to lend builders capital for acquisition and development financing, but those banks' regulators are putting greater pressure on them, which makes it harder to make commercial loans, given the risk in their low-interest reserve bonds.

Typical participants in syndicated financing deals – common lines of capital particularly among larger regional and multi-regional private homebuilders – are either not renewing their positions in some of the syndications, or in some cases opting out of them due to the strains they're under from federal regulators.

All this to say that America's regional and local bank business community will not likely be the go-to resource many builders turn to when it comes to having to replenish their lot pipelines, which will put those builders that most rely on that resource at a big disadvantage – possibly an existential one – if the '23 Reload kicks in full-bore.

Debt options are out there, but especially in light of the pricing power land sellers held on to through a relatively brief downturn of 2022, those private equity, friends and family, country club, and other capital sources make internal rate of return hurdle rates hard to, well, hurdle.

A land reload flip of the switch would – naturally – put big, national publics in yet even greater position to dominate the best money-making land deals, with Asia- and Canada-based sponsored portfolio operations also in the vanguard.

Private builders that actually have a land-asset runway out ahead of them will find themselves to be the belle of the ball among an atypically thick and well-heeled pool of would-be acquirers.

This means that private operators that actually do need to reload – not likely to attract much interest from prospective acquirers in that case – will face some of the most formidable competition for lots they ever have. And they'll have fewer and more expensive borrowing channels than they've become used to.

And, by the way, that little matter of the ever-soon-to-arrive economic Recession. You know, the one that's going to bring up unemployment; crush inflation after all; and, hurt the housing market.

That makes now a nerve-wracking moment for those who tend not to be able to help themselves when it comes to sitting down and talking land. They're, as you might put it, between a rock and a hard place when it comes down to needing a land reload at this juncture.

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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