Capital

Leveling The Field: How Outlier Local Builders Can Win On Land

Land deals are out there to be had. Getting them to pencil — especially with upward or downward pricing flexility in the mix — puts capital and its cost in focus.

Together with

SNAP.BUILD

Together with

Capital

Leveling The Field: How Outlier Local Builders Can Win On Land

Land deals are out there to be had. Getting them to pencil — especially with upward or downward pricing flexility in the mix — puts capital and its cost in focus.

Together with
June 21st, 2023
Leveling The Field: How Outlier Local Builders Can Win On Land
SHARE:
SHARE:

What to make of this week’s word of an upward jag in confidence and accelerated new-home production among builders?

  • For the U.S. economy, a surge in residential construction and investment signals housing – and the demand fueling it – stands ready to do its part to redirect the economy from weakening to a bounce back.
  • For builders, the high-level take-away suggests a likewise pivot from playing decidedly on defense to a more aggressive growth posture, albeit recognizing lower margins and narrower margins for error in those growth initiatives.

Let’s unpack this.

Single-family housing starts in May came in hot. Homebuilder confidence is up, evidence of a widening belief that Federal Reserve policy has begun to loosen its grip on homebuyers’ capability and willingness to pull the trigger on new home purchases.

Commentary from National Association of Home Builders chief economist Robert Dietz says as much.

The May housing starts data and the latest builder confidence NAHB/Wells Fargo HMI survey both point to a bottom forming for single-family residential construction earlier this year. There have been some improvements to the supply-chain, although challenges persist for items like electrical transformers and lot availability. However, due to weakness at the start of the year, single-family housing starts are still down 24% on a year-to-date basis.
And while single-family starts are down year-to-date, single-family completions are down just 1.2% as projects started at the end of last year finish.”

Further insight, from Wolfe Research homebuilding and building products equity analyst Truman Patterson, reflects a constructive view of the near-term outlook and some of what underlies it, greater than anticipated success on the part of homebuilders to clear their backlogs and secure a better sales-per-community-per-month absorption pace than they’d reckoned they would during 2023 budget planning five or six months ago.

Wolfe Research’s Patterson writes:

We continue believing SF Starts move higher as the builders have liquidated legacy 2H22 specs that were in part driven by accelerating Cancellations, and are now repositioning to optimize both regional and product Inventory mix.”

This is good news for homebuilders. Demand, as homebuilding executives we know put it, is “not so bad.” In some places – mostly at a submarket and specific subdivision level – it’s better than that. One way or another, with the first most important goal of finding “market clearing” asking price levels that have found traction among undeterred buyers, an ongoing requirement – to feed the machine – becomes an equally important priority.

Privately-operated small to medium-sized local and regional builders, in particular, report that they’re facing an unexpected riddle, far different than the “market clearing price” riddle they thought would challenge them most of 2023.

A “not-so-bad” Spring Selling season – featuring lumpy and spotty pricing and absorption pace trends that included “hot” markets and submarkets – means a good number of them have begun to worry about how to position for growth without taking on undue risk. They find themselves having to add to their lot pipelines perhaps more and sooner, and at perhaps higher prices, than they’d forecast. While they don’t necessarily fret that deals out there don’t exist, what they do worry over is paying too high a price, or paying too much in capital costs to continue to retain flexibility in their home prices of the future and still make money.

There simply is never a time to let their foot of the gas in the land and lot race,” Brad David, executive VP of development and construction at Snap.Build, a partner of The Builder's Daily. “There are private money options that exist specifically for this requirement.”

A further challenge, however, is that local and regional banking disruption means builders’ access to operating and acquisition, development, and construction lending is a) not what it was 24 months ago, and b) getting tighter and more-expensive.

Traditional lenders typically have leverage requirements that force builder/developers to build a capital stack that includes the senior lender, a mezz or equity partner, and a significant percentage of borrower/sponsor cash,” says Snap.Build’s Brad David. “As a private lender, we have the flexibility to offer our builders 'runway' they can’t get other places. We don’t use specific spec to pre-sale ratios. If we like the builder and the project metrics, we can fund. Our primary goal is to allow our builders to build more houses and make more money.”

Reconciling capital access needs in backdrop of higher-for-longer interest rate, stubbornly inflationary expenses – especially on lots and their development, not to mention sticky product and materials costs – can squeeze both margins and margins for error. The dilemma for many operators is this: When building, selling, delivering, and closing homes has become an interlaced, intricate process of pricing, cycle-time, input costs, selling costs, etc. on a home-by-home, community-by-community basis, it’s a full-time job, especially for small-to-midsized entrepreneurial operators.

Navigating ever-more-nuanced operational real-time, site- and customer-specific dynamics means most operators need to double-down on their focus on those moving-part details.

Through a streamlined loan approval and funding model, we allow our builders to build more houses,” says Snap.Build’s David. “We do this in three specific ways:  (1) Best in class deployment of capital, with the most efficient draw management in the industry. (2) Strategic relationships with take-out partners, institutional investors/buyers, relationship with national mortgage solutions, etc. We are consistently focused on ways that we can level the playing field for our builders as they compete against the national behemoths. (3) Tracking the performance of our builders and helping them to identify areas where they can approve. Because we are tracking data of other builder sizes, regions of the country, etc., it gives our builder a unique way to benchmark themselves.”

With capital options like this, small-to-mid-sized entrepreneurial homebuilding operators can be more confident they don’t have to be defensive as they move ahead on offense.

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.

ABOUT

Snap.Build provides builders with funding for residential construction projects. Snap.Build offers a non-recourse loan structure, competitive rates, and efficient loan closing.

Website

MORE IN Capital

A Homeownership Model Rethink Widens Attainable Access

For Tamara Knox and Josh Morris, a not-so-chance encounter, hours into their first day as grad students at Cambridge, MA-based MIT, kindled in each of them the spark of why they've gone on to devote themselves – together – to solving for part of housing's access, attainment, and affordability axis.


Will A New Raft Of Regional Bank Woes Impact Homebuilders?

Half of newly constructed single-family homes are built – and many more developed – by firms that rely on bank financing for real estate acquisition and development of projects, construction resources, and operating expenses.


A Homebuilder's Dilemma: How Much Spec To Build For 2024?

"What is the optimal scale of spec inventory?" With economic signals sending mixed messages, a thin line separates maintaining sufficient inventory to meet demand and avoiding the financial strain of having too much.


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.

ABOUT

Snap.Build provides builders with funding for residential construction projects. Snap.Build offers a non-recourse loan structure, competitive rates, and efficient loan closing.

Website

MORE IN Capital

A Homeownership Model Rethink Widens Attainable Access

For Tamara Knox and Josh Morris, a not-so-chance encounter, hours into their first day as grad students at Cambridge, MA-based MIT, kindled in each of them the spark of why they've gone on to devote themselves – together – to solving for part of housing's access, attainment, and affordability axis.


Will A New Raft Of Regional Bank Woes Impact Homebuilders?

Half of newly constructed single-family homes are built – and many more developed – by firms that rely on bank financing for real estate acquisition and development of projects, construction resources, and operating expenses.


A Homebuilder's Dilemma: How Much Spec To Build For 2024?

"What is the optimal scale of spec inventory?" With economic signals sending mixed messages, a thin line separates maintaining sufficient inventory to meet demand and avoiding the financial strain of having too much.