Real Estate of Things
Real Estate of Things

Episode 9 · 2 weeks ago

How the Homebuilding Market Got Here & Where It’s Headed


Predictions are hard — especially about the future.

A couple years ago, no one would have guessed working from home would become the new normal, but here we are.

So, it’s tempting to look at today’s trends in real estate and ask:

Where’s all this heading?

Predictions may be hard, but I can’t think of anyone in real estate more likely to get them right than Margaret Whelan linked, Founder and CEO at Whelan Advisory, who joins the show to discuss what current market trends mean for the future of real estate.

In this episode, we discuss:

  • The high demand and low inventory defining today’s housing market
  • Whether there is a risk of repeating the mistakes that led to the 2008 housing crisis
  • The opportunities in ESG, build to rent, and modular housing 

To stay up to date on The Real Estate of Things, check us out onApple Podcasts,Spotify, or on our website.

Listening on a desktop & can’t see the links? Just search for The Real Estate of Things in your favorite podcast player.

You're listening to the real estate ofthings, podcast welcome to the real estate of thingspodcast, I'm your host, Josh, Craig Co of Lemon one capital and I'm your guesthost. Actually, so, for all of you have a listeners out there. Looking forDollon, don't turn me off just yet. We've got a great episode for you todayand don't worry I'm just here for a guest one time spot. Don't move backnext episode, so today it's my distinct honor to share my guest podcast withone of the most respected and connected and genuinely great people in theentire investment, banking and Home Building Industry Margaret will and CEOof Wale and advisory and capital market, so welcome to the real estate of thingspodcast Margaret. Thank you, jus good, to see you today, yeah. So Fair warning.You are my first podcast guest, so lucky you first of all, and then I'msure I'll stumble plenty, but Delton's told me that as long as we don't curseor offend anyone or bring any lawsuits or get his podcast shut down, thenwe'll call the in so we've got a a low bar and I'm sure we'll be able toovercome all those objections. So we've known each other for I was reflectingcoming in this morning. We've known each other about six or seven years,but typically we only get a chance to catch up on stage at a panel or in ahallway to conference. So I'm excited to get to spend a few minutes with youtoday. Chatting about this explosive home building industry and the craziestof times are in just share some perspective for for listeners, and youknow when I was thinking about interesting guests to join me here. Youimmediately came to mind you bring such a unique perspective from seeing allsides, the industry and your work with growing home builders and largeflippers aggregators, and how those operators interact with the capitalmarkets and Wall Street. So just a really cool perspective, so first,let's help this set the stage a little deeper than that, with some backgroundon you and your company. So maybe you can just share a little bit about aboutyour company and your specific niche sure thank you, Josh An and thanks toDalton and the team for including me as your first guest speaker on the podcast.So my background is that I have been an investment banker working on WallStreet representing construction and real estate companies for my wholecareer now, which is nearly three decades I had been at Ubas for over tenyears, then at JP Morgan. For about eight years and in two thousand andfourteen I started my own business weel, an advisory capital markets and thegoal was to offer a higher level of service to a smaller group of clients.Because what happens when you work at a big investment banks is that for morefocused on volume versus actually success on behalf of the client, and Ihad a goal and really a vision for the business was very different to anythingthat I was seeing, because I, like my client so much and I love the businessand it's I appreciate that you use the word interesting to describe what I do,because one of the things I screen for with my clients, as if the business isinteresting to me so because of that we split our time almost evenly inrepresenting either construction companies or home builders. We onlywork on this hell side or the operator side. We don't work for buyers orinvestors, and then we also split our time almost evenly between raisingcapital versus representing a company. That's ready to sell very interestingso, and so you share a little bit about the about your past lives, but I'malways interested to hear the story of how people either got started in realestate, how they chose it or how it chose them. So what led you down thepath to get in? Initially God. You know something I haven't thought about for along time, but when I started my career in one thousand, nine hundred andninety four graduated from University College of Dublin and Oreland, and Iwas recruited by Marilyn to come over and do essentially a training program.I guess within the Amassment Bank and I worked for a team that was focused onoil and gas and all of the senior executives on the team. The bankers andthe analysts had PhDs in geology, which is something that I didn't have and Iwasn't interested in and then over the next couple of years I moved intoworking on the home building and construction team, which was somethingthat was super interesting to me. I think in part, because as an immigrantto the US, the opportunity for home...

...ownership was attractive to me and thenbeing a part of the whole cycle of that and the opportunities in the US, Ithink, for women and women in construction and finance are greaterthan they are in Europe as well. So all of that came together and then thereare several times over the course of my career, where my industry choice wasquestioned in particular, going into Y tk, Josh you're, probably way too youngto remember y Tok, but everyone decided that they you're, probably in highschool. Everyone on Wall Street, decided that they should go to siliconvalley or go and work for a Tech Company and everything had to be techrelated, and there were lots of home building executives of jumping ship,home building investment, bankers, construction, bankers, jumping ship togo to California, and you know, make their fortunes on the tech side of theindustry. And, of course none of it worked. Nothing has really evolved,unfortunately, in the housing and presidential real estate world in termsof leveraging technology. So a lot of people then did what they call B TB,which is back to banking or be doc which isback to consulting, and I wroteit out. I stayed I was at UB s at the time as an equity research analystthrough Y to K and then through the early two sand with Sarbanes ox lit anda wall went up between investment, banking and Equity Research. I hadstarted my career in equity research, but there really was no wall. We werevery deal oriented. I worked for a team and investment banking teams was verysuccessful in the transaction side, and that was the part of the business thatwas most interesting to me. So as a wall wend up between research andbanking, I decided to jump from BS to J P Morgan as a managing director, sameroll Adeck same clients, but with a similar, slightly different jobdescription, interesting yeah. So we definitely have a lot of parallels. Iam an immigrant as well, so I'm from Canada, I didn't be worked in the inthe work in the go oil space. I did not Berton Bifield a little bit but afarming background, so we work or work worth on the land and found our way toreal estate. So it's always so interesting to hear very rarely does doyou. Does anyone go through? You know the early years thinking they're goingto spend their world and their life in mortgage or in real estate, but amazinghow people always just tend to find themselves here in some really coolstories about how we all got to this place so well. I love the business andthe opportunities that it provides for stability within communities and forfamilies, especially immigrant families. You and I have created, and it's asimple enough industry, but because of this sick locality, the seasonality,the Laborat to cycles, you keep us all on our toes right, absolutely yeah. Weknow we talk about it all the time here about you, although you know it's toyour point, it's really a simple industry, whether we're lending moneyor building houses. It's not that complicated, but we really lean into itas a noble purpose, right we're providing housing stock for Americawhere Rehab Know rehabit properties were re stabilizing neighborhoods. Sowe really lead into that as a company, and I think a lot of us do across theindustry, which is why we get to meet so many interesting, interesting peopleand why we have building some some great companies along the way. So Ialso love the background of Lima One Josh, you know being thrated by twoMarines, because it's so important to welcome veterans who go out and puteverything at risks and put their careers on hold to welcome that themback into the industry. So I love the background of your company to yeah. Iappreciate that yeah. We, I certainly leaned into it. When I was looking tojoin, we talked about it all the time most of our conference rooms are arenamed after whether some some marine heritage. So it's yes, something we'rereally really proud of and hold the whole deer. So, let's five in so we'vegot a really diverse listener base Margaret. We know a few months intothis and they, and just like our client base ranges from small entry level,investors and home builders doing a few transactions a year to large scalinghome builders who build hundreds of MOPS per year, but regardless of placein the industry, O questions, I could ask all the time kind of fall aroundthree broad topics, one just general markets perspective about where we areabout a looking to our Christo ball to about the financing side of thingsabout. What's changing? What do we need... know? How do they get more for lesstends to be the angle and then three kind of segments of industry? Where isit heading? Building types this you know: Buzz Ward of the decade build forrent this blurring of lines between builders and landlords and flippers andwholesalers. So, let's I think, we'll have a good conversation kind ofweaving those three general lines. Broad topics at Youd say into some somequestion. So let's talk about the three big ones for sure, so I'm sure we'vegot way more than we have time for, but we'll see what we can get to and an tokeep everyone on their toes. So let's talk about the the broad market as awhole. First, you being you know extremely dialed into all pockets ofthe country. I know you don't just focus your based on the East Coast, butyou certainly have clients from coaster coast and you, you know from buildersto large flippers. You know what is your kind of crystal ball tell youabout where we are in the overall home building cycle, and I know, dependingon the talking head, that you listen to, you were somewhere in the two to fourmillion homes per year, short of demand. It looks like we need somewhere in theneigborhood of another ten million homes, the next decade for rentalproperties. So on the surface it appears that we have a really longrunway ahead of us that we have a lot of green passer. But what are youseeing? What's your perspective of where we are in the overall cycle? Well,I definite hot topic right now, isn't it. I was in New York last week and Ispoke at two different conferences, John Burns and you'll housing outlawconference and then Lincoln International. One of the UTICA inesinvited me to speak about Amina and Housing and construction. So in termsof the the general market perspective having been around this industry forthirty years I'll tell you one thing for sure, which is that you only knowthe market peaked or draft when you're looking in the rear view, mirror right,there's a lot more space looking out in front of the winchilsea rear room error,and I always try to focus on the future, but I believe that we are undersupplied. I believe, there's a lot of demand. I believe there's pent updemand for housing. I don't have a clue if it's one million or two million orfive million. I really trust the research coming out of the John Burdensteam. I've always felt that they, I were more independent, more analyticaland how they approach that and some of the trends that they reference at theirconference last week, for example, were the fact that, even though we know,mortgage rates are going to go up and that's definitely going to put asqueeze on affordability, because monthly payments will spike even of alittle bass. Is rates. Go up that they're still very wealthilymillennials in the market right now for housing, some of whom would be buyingtheir first home. But it's not a typical first home purchase, meaningthat it ud be a smaller or less expensive home in the suburbs, becausea lot of these individuals have been able to save over the last couple ofyears, they have been going out as much. They haven't been traveling. They havebeen having big weddings, they're able to work from places that they wouldn'thave worked from before, because of the the trend towards work from home, whichseems to be permanent and then also because a lot of student housing, ourstudent loans, have been forgiven, and so I think that you have a lot ofaffluent consumers coming into the market. There was definitely a flowdown in immigration because of Covin, but we just saw this week.International borders are starting to open up again and for folks, like you,and I are educated overseas with King to the US for opportunity. We knowthere's Hent of demand and those ten to be affluent educated individuals cominginto the housing market. So I feel like, as far as we can see, there's verylittle invent for there's a lot of demand. There are natural supplyconstraints that we probably haven't experienced to this degree beforewhether it's volatility and availability of construction materialsticks and bricks, whether it's the aging a grain of the US labor pool forconstruction, which is a whole topic on its own, but that is limiting a supply.The second part of your question, after my views on the general market, wasabout financing financing. Of course it supertrace right now and it's not justthe fact that rats are so low and spreads are typing and home values aregoing up, and all of that is leading to really record advance rates on dead,whether it's equity or dead, but the...

...availability of the capital is higherthan it's ever been before. We've also seen the US housing market emerge as abride spot in the global economy over the last two years, and that hasencouraged a lot of capital come in from Asia. For example, we worked witha large builder in Texas over the last eighteen months, announcer transaction.In July this year they were acquired a half a Billion Dollar transaction byDia House, one of the largest real estate companies in Japan, which has asignificantly lower cost of capital than we do as a housing companypublicly listed in Tokyo, but also as a bar or in Japan, where rates are evenlower than they are here in the US. So the financing is there. The advancedrates are higher. That often can lead to risk in the market over consumptionbubbles, but we're not seeing it as of yet and then your third question wasaround bill. Torrent will get in to builder, and I think I think you justhit on a bunch of interesting topics, one if Ford ability concern is realright. I think not only you know it is just as interest rates start to take uphome price appreciation could only go so much further north o. What is thatgoing to mean? It's really interesting topic that we can debate for a longtime? The other. The point you just made about risk is something we talkabout a lot as a lender. You know when you see this insatiable demand for ourloans. For for volume. you see some lender starting to make somequestionable decisions. I think we saw this movie play out in two Husan andfive six leading into seven and eight melt down. I don't think we're anywherenear that yet don't get me wrong. I don't want to create any crazyheadlines, but you see the same type of decisions being made about. How do wedifferentiate ourselves and there's only so many things you can do so wefeel that is a real risk to the industry. Is Lenders get out of Controland make some decisions they wouldn't otherwise make so? But the thing aboutit is that even if the landers go crazy and didn't learn from the last townturn, it doesn't matter because it's so hard to finish a lot right now todevelop dirt, get an tidle get it through the process, so you can buildon it and you can find sticks and breaks and you can't find Labor. Sothere's a natural constraint on the supply side versus demand. Good pointyeah, so I mean how do you see that, in balance shaking out like a what is thenext e twelve twenty four months look like? Are we able to? I think I see himfrom a starts and permits things are ticking up. I've been trending theright direction for the last year, or so do you see kind of a leveling out ofstarts, or still this kind of up into the right as builder try to catch upfrom from that where they were left off for the last few years. I definitelythink starts are leading to cater right by about six months of demand, and Idefinitely think we're going to see starts continue to grow over the nextcouple of years. There's no reason to believe that we won't fully agree onthe on the whos start in those houses in one of the status saw a couple oyears ago, and I haven't seen it published since is the WHO's buildinghouses, and I think the last at was somewhere in the neighborhood of sixtyto seventy percent of all the homes built in the US are built by. You quote:Unquote a small home builder, someone who builds less than a couple hundredhouses a year. Do you feel that being the same today or have you seen a lotof M A or a lot of these smaller builders cut pushed out because oftheir inability to get a lot? First of all, they're, not developers or youknow whether they can't get supplies, they can't hedge out contracts and theycan't scale up. What do you like? What are you saying to dare or are smallthese small guys still really prevalent or they kind of pushed out? That's agreat question Josh. So the thing about it is that of the million or so startsa year. So much of that is concentrated in the top forty or fifty NSA's aroundthe country. What we calls us, the refer to its the smile markets withinthose markets is incredibly concentrated markets like Tampa some ofthe four MS, as in Texas, where you could have sixty seventy percent ofhome starts represented by the top eight or ten builders in the market,major concentration. So then the barrier Tan try is very high for asmaller private builders, which is pushing them into maybe CR d locationsor different types of product. To try to differentiate themselves, but thatis a trend I mean I remember when I started up my career in the early S inthis industry. The top ten builders had...

...about ten percent market you're overalland today it's forty so well. I imagine that it's going to mature a at somepoint. You know because they're, just their markets concentrated marketswhere demand is great and where there's a real benefit to being a highproduction builder, and that's where the builders tend to focus theirefforts versus parts of the country like the the Atlantic or at the Midwestor even California. Right now, where you have negative demographics, whoactually more people leaving than migrating into those cities, Yep. No,it's right- and I know you work with a lot of scaling builders as they're.Looking at you know, raise equity or or kind of grow up the capital stack. Areyou seeing a lot of these smaller builders because of the scarcity oflots? Are they branching out to also become you know an infill fix in flipbuilder? Are they also becoming a land developer? Are you seeing diversity ofbusiness models? Now, starting to become more than norm, well that that'swhat you're hoping for right. So we can find a deal to work on together. Sogoing back to what you and I were talking about a little while ago interms of interesting business models. One client we had in California aboutfive years ago, Thomas James Holmes, which was an infill builder, o pardon,build or scraper there's different ways of describing what they do. But Iremember explaining to an investor, because we were representing Tom andJim on selling the company that these this business was the biggesthomebuilder. No one had ever heard of right. They'd have a billion dollars inannual revenue, but they are only selling about a hundred homes a year,because the price point was higher, so the business model was where theystarted was to go into West La and buy a fifty plus year old home for amillion or so dollars. Woman in fourteen months, alabrand new home onthe same lot for three to five million now they're doing that up and down thecoast and over into the rockies and Phoenix we have clients doing the exactsame thing on the east coast as well. I think it's, a fantastic business model,in particular California, has relaxed some of the rules around zoning rightnow to the point that you can replace one single family, a lot with two newhomes because of the affordability constraints, some buyers or owners ofdirt, or doing that with town home, some are doing with a traditionalsingle family home and then what we call an Adou and excel accessorydelling unit on the same parcel. But I do think those business models are veryinteresting and it's really the Blue Ocean theory. You know where thestrategy is that you go where others are not that that the strategy of theBlue Ocean is go where there's less competition and we're definitely seeingsome smart, thoughtful young executives come into the industry with strategieslike that. No, we love those customers as well. We think it's a great strategyI'll be difficult to scale, which is why there's a ability to white is a bitof a blue ocean still right. How do you recreate that re, highly repeatablescalable company, which is the the challenge, but for those who can figureit out and manage it like it is, will allow one development and have highlyrepeatable great teams that can go and repeat the same process over and overit's a great model we, but on the lot development side of things. So youseeing your more builders become both a developer builder or I still knowbuying finish lots. Is that a thing of the past or are we still able toactually get some o or the nationals just grabbing everything? That's that'sout there and available well, the control and the ascendest y definitelysits with the owners of the dirt rat, and so you have lots of differentfinancing available around bird. You have to take entitlement risk which issignificant in some parts of the country like the coast, but much lessso in parts of the country like Texas in the southeast, where owningofficials are a lot more commercial and flexible, then you have to get the dirtdeveloped, which means actually moving land putting in the infrastructure toget to the point where you have finished lots, but I would say, on thehomebuilder side coming out of the GFC. The downturn last cycle is that many ofthem benefited significantly coming out of the GFC versus coming out of the SNLcrisis in the early S, because, instead of only a hundred percent of their dirt,half of it was optioned and you're still seeing that. In fact, it's been avery challenging market to call for the last few years I rememberin June of twothousand eighteen, when rites jumped up...

...and home sales slowed really sharply,and because of that, a lot of the builders slammed the brakes on buyingdirt. They were controlling more dirt at all. Balanced the Aland banking landbanking is very popular right now kind of cycles. A little bit, but it's verymuch in vote right now, so we're definitely seeing the trend towards allvallancy cellar financing of dirt, but that I don't believe that's the reasonthat the availability of finished lots of slow down. I think it's more just abottle neck relative to demand yeah. I like your coming. He eons the one ofthe dirt controls the market. That's definitely accurate, so you startedtake taking me down next train, I thought was, was on the capital side ofthings and how builders were financing themselves these days, so that capitalstack whether it's we, you know kind of trends you seeing in terms of dead orequity or landbanking or medis financing. What how are these guysevolving with the times and finding the capital to help them SCO that or equityor Decuit, as I call mes so it really depends on the size of the builder. Wehave over twenty publicly traded home builders today, including a couple ofnew on stream finders, when public via traditional IPO land c went public inthe last year of the s back, and then we have some private builders that havepublicly traded debt like madame or Russian Woods, David weekly and thenwhat we find as we are. We had a lot of value for clients, private buildersthat are outgrowing friends and family money, they're pivoting. Their growthis accelerating and not turning the capital as fast as they need to insult.There will approaches and say we need growth capital, and then we sit andhelp them think through what they're three to five year model might looklike what the peak capital need might be. How much leverage they'recomfortable with relative to the PEA capital needs a how much going to bedead, how it is going to be equity and then grow it out from there, and Iwould say that the sources of capital are changing a little bit. As Imentioned earlier, the Japanese buyers coming in which is a very attractiveevaluation of front selling to a strategic with long term capital. TheJapanese are known for not changing anything, not changing the managementteams, not changing the business plan, no, not reducing the work force, whichis very important to a lot of these legacy. Builders that are have thathave built up a culture and a community within their company, and so I wouldsay the Availa. The only big thing that's changed is the Japanese comingin buying outright, which provides growth capital. We represented acompany called True Mark One of the larger private builders in California acouple of years ago and their sale to Dabani's buyer, and that was becausethey wanted to accelerate the growth. They need a long term capital and thenseparately landbanking. We actually work for two different teams o the lastyear, so tente development, company and land strategies management to introducethem to providers of dead that they would then use to land to the homebuilders in a land banking format kind of interesting. You know it's somethingwe get asked about. All the time or yare we willing to stretch outside ofwere normally just a you know: First Lad mortgage senior debt, but we getasked all the time for some creative things and whether it's others wroth ordoing it or not, scaly it. So it's not why they known or or builders, are justtrying to get creative and on their on their spreadsheets with how they couldhelp themselves grow, and it's a real. It's real neat right, T e, the smalllocal community banks that play such a critical role have only so much run wayto go. So you see more more private enters enter more and more cappermarkets, Wall Street money trying to get really attracted to the space andwants us to grow volume and create some unique ways are doing it. So I thinkyou'll see a lot of innovation over the years ahead of not just you know, likeyou said to not just dead, it's not just equity, it's his De Equity. I likethat term. So, like you, I think you're on now some more creative things comingto bear. So let's talk about some of the current trends in the market. Oneof the the buzz were build for rent you've, seen certainly volume pickupyou've seen a ton of institutional capital come into the space. What areyour general thoughts, your personal opinions on on that build for rentmarket? Is it here to stay? Oh Yeah?...

Very much so I mean it's fascinating tome built to rend because it's really an extension of SFAR single family rentaland if you take a step back Josh- and you know the history here but comingout of the GFC warm Buffa was on CNBC in stead of there's one thing I coulddo today from the best on perspective. It Ud be to go, buy a hundred thousandsingle family homes and hold on to them or rent them out right and he's knownfor running in when others are running out, and everyone was running out ofhousing at the time and through that conversation that really an industryand then an asset class was formed with single primly rental and traditionallythat had been buying Scotter lot older homes, one at a time initially on thecourt steps and then in scale. It's still an industry, though, where Ithink you have three hundred million Americans living in a hundred millionhouseholds and fourteen million of those are single thirteen. Fourteenmillion or single family rental homes, but only something like four or fivepercent are actually owned by aggregators or institutions, the restRomer Mama, POPs very, very small scale, scattered. So what happened? And Iguess it was two or three years ago- we saw bill Turan start to percolate, andthe reason is that the SR reads that were now publicly treated companieswith tens of thousands of homes really having a hard time growing and whenyou're a big public company. You need to be able to show Wall Street that youcan facilitate that growth with access to their capital, and so because of thenature of the red structure they had to take down assets. They were cashflowing, so they were negotiating with land, sellers and developers, localbuilders, regional builders and some case public builders to take down homesat CO certificate of occupancy. So they would might have a little bit of leaseup risk, but they would take down these new homes and the biggest challengethat the SFAR, like am inbitten homes have had, as public companies is tryingto guesstimate what the maintenance can turnover is going to be month to monthon those properties, that's one thing: Waltraute the stocks for and so to thedegree that they could pivot from older, scattered lot homes to brand newdeliberately packed homes where you can get up to a twenty percent premium onrans versus an older home and had stickier tenants, and that was going tobe super attractive. And what we've seen with Bill Toren is this incrediblywide range of product from very high ends? Thousand Four hundred and sixteenbreaker what I would call horizontal apartments to very traditional singlefamily, three or four breaker, with a single platter, single lot and there'sdemand. For All of that. In my mind, I think that demand is on the margin.Taking tenants from multi family versus single family actually. Could I thinkit's going to add to home ownership, but with a delay, because it allowsfamilies, if you think about it, families or individuals who couldalways rent a new car could never ran to new home. But now these homes arebrand new, their deliberately aspect. They are professionally managed andthat's super tractive to folks that around the moon, people are moving morethan they ever have before in the wake of both the pandemic and the socialunresting protest from last year. So I think that Bill Torrent is definitelyhere to stay. I think it's displacing multi family, more than single family.That's the reason multi family operators are coming into it. We havestudent housing companies, multi family companies from all over the world,calling us saying they want to build a Ren, and it's because they're feeling,like the opportunity, is going to be bigger and keep growing from here yeah.No, I see the world very. Similarly, I think your horizonal apartment theoryis right. It starts to look and feel much more like multi family. It'salmost like the the pendulum swung all the way out to your point of three orfour houses. Breaker really looks and feels like single family has a backyard. Now it's swinging back to somewhere closer to multi family, whereit's eight, ten twelve fifteen units, town houses, it's really just a squishdown apartment and loses some of that appeal of what a true single family is.So I think that we're still trying to figure out how the story is going toplay out, but it's your point about, but you can steal park your car. Youcan still have a dog which you may not...

...have been able to have a multi family.You can make it two or three year commitment and then decide what's rightfor your family, so I think whether or not it's identity, it's still superattractive. No, no disagreement whatsoever. It's I think it's here tostay and here to grow, so we're for definitely all in on it here. So whatabout builders that are becoming also landlords? We work with a lot ofbuilders who are aging, who it's been a family business for twenty thirty years,they're starting to think about their exit plan, maybe part of its to sellpart of it's to hand it over to their legacy families, but some of them arebecoming landlords as well. How are are you seeing? Are you seeing a lot ofthat? I mean we have a or O we'll do a billion and a half or of the fewclients a year, a few thousand clients a year. Your you have a lot of touchacross the nation. Are you seeing or more builders also become landlords tothink about that generational plan? It's definitely a great opportunity fora builder that can afford to hold on to the House for longer with theavailability of financing. You can get a lot of equity out, so it doesn't takeup as much capital as I would have in the past. But I'll tell you something.Josh, my private builder clains have always held on to a lot of houses thatthey build right. Often they'll give give discounts to their staff to theirfamilies, to buy the homes and rent them out. They do it as an investmentopportunity, but they also do it for intelligence information, because ifyou have a busy homeowners association and you want to anticipate what mightbe around the corner, if there's a problem coming it's great to have aproperty, a house in that community right. So my builder clients havealways owned a lot. I do believe I do agree with you that they're doing morenow, they're doing it at a greater scale, but I don't think it's as new asit used to be and we're not seeing from a you know a generational wealthmanagement perspective we're not seeing that as much of a shift, maybe, asothers are with our clients, Yeah Yeah, interesting good perspective.What about modular construction? How does this fit into the the grand scheme,whether it's to reduce ways become more efficient to builda faster? What do you?I know you've been proponed of it for a long time. I think what are you sayingthere, thoughts on how that that evolves? Well, I mean if we take a stepback the opportunity for change and digitization of housing residentialconstruction. The US is absolutely endless. It's there's so much of itthink about the home that you live in today, josh o versus the iphone you useor the car you drive, the the functionality of the car and the phonehas increased dramatically in the last couple of decades. The House is prettymuch the same right and the construction process in terms of if youlook at how cars are built today, but robots versus that they were built inthe past phones and everything else: a construction process for homes. It'sthe same way today in the US as the was when no was building his Ark when themackenzies Titu came out with their report about five years ago, called thepath to productivity in residential real estate. They put us housing at thebottom of the fourth quartile for productivity behind farming andagriculture. I that's pretty embarrassing, as an industry, there'sso much opportunity to improve that I'll. Tell you that a social levelthere's so much focus on ESG right now. It's incredibly disappointing to methat every time I go out to tour with a client- and I love- I love the business.I love getting on the job sites. I love the the smell of the lumber and theSAWDUST, but you go out to a job side and there's a big dumpster in front ofevery house, and the National Framing Council has estimated that a third ofthe materials, the sticks and breaks that are purchased in a hot for eachhouse and up in the dumpster rade and six and bricks are half the calls orbuilding a home, and the consumer ultimately is paying for that. So it'sa substantial opportunity to improve efficiency and reduce waste that Ithink, more sophisticated consumers. A more ESG friend they consumer, they're,going to start demanding or rewarding builders that offer that to them thatoffer the neer on at energy, ready home...

...or they're, not they're, that energyhomes lower her scores. I think all of that is going to be a focus in adifferentiate or for some of the builders meritae. For example, one ofthe big publics does a great job of that already, but others like poltertrying to catch up. So the process needs to improve when you say modular.That word has different meanings to different people in the industry and infact around the world as well, but in my mind, if you were to get a realdisruptor in our industry, it would be somebody that has a model similar to anAmazon or a Neber Netflix or AIRBNB, where they go direct to the consumer.So if you had a taffle of housing, if you ad man a magnificent good, betterbask product that the consumer could order, direct online skip through allthe traditional sales process and have delivered to their home a couple ofmonths later, even a couple weeks, a couple of days later, I think thatwould be a huge disruptor to housing on a local and a regional basis. ClaytonHolmes is doing it to some degree. You know, Clayton is distorting. A modularcompany will be a home manufacturer that has bought several stick buildersin the last few years last decade or so I do think I spent a lot of time inJapan over the last couple of decades. In my career, when I was at bs, I wasblow Bo head of housing, so I would go over to Asia Lad and the way they builthomes is significantly more efficient than the way we build them here and sayfor two by the way, and so I think that I think there's so much room forimprovement. I don't really don't know what the catalyst is going to be. It'sfrustrating to me that it hasn't started already. Unfortunately, we hadsome really spectacular blow. UPS recently, like a terra, for example,you know it means it's one thing to fail in in an industry that changesdramatically, that you're right, the business slows. The tide goes out and areally magnifies the risk, but this is an industry where there's so muchgrowth available so to fail at that level to write off so much capital in agrowing industry really underscored how they had no idea what the heck theywere doing, unfortunately, which is not to say that other folks won't be moresuccessful at it. I do believe that they will. We represented companycalled Commodore Copper Corporation earlier this year. Manufacture ofmodular homes, out of the Midwest they've got six factories. Werepresented them under sale to Cavo, which was one of the larger, publiclytraded companies and Cave Co and skyline champion. Deir peers are doinga really good job of bringing more affordable product to the market. Theseaus we talked about earlier, especially for the West Coast, where the zoningdensity is improving. So I hope that there's going to be a disruptor I'd,love to see Valor equity or one of these guys, the original masters in anTessa come into housing yeah. No, that would be very interesting. Your pointis not wrong at all right, we're so archaic and how we, how we build housestoday, still it's it's ripe for disruption, but with that kinless willbe it's almost the the iphone stem jobs approaching it. They didn't know oneknew they needed an iphone until they had one right until you could neverlive with that one. So that's Yo, no, there's still such a bad stigma aroundit. For some reason, osome one mentions that they live in a major house. It'slike Oh, is taboo thing of H. W, how dare you so we got to get rid of thatand and figure out, what's going to be, the driver to luck, they'll bill to ran,like Randall Holmes, were considered to boo until people realize at Tackar verysmart to park your family for a couple o years, make sure you like theneighborhood and the community in the school before you make a big investmentyeah. I love your idea, someone someone needs to call Musk and get him in hereto disrupt the industry and see where that takes us so well I'll. Leave thatto you to to make that call. I was talking to the Wall Street Journal acouple o weeks ago, because they're writing an article about ICAN out ofAustin Texas, which is one of these treed printing housing companies, andthey had paired up with Lenard to build a hundred houses in a community whichis fascinating to me. I think it's going to be very interesting to see howthat plays out. I've been around the threed printing for housing for yearsnow, a lot of those companies were born... Chattanooga Tennessee. So I've beenout to see them several times and I do have a real passion for this as a noprofession in the industry and a parent of four young children. I'd really loveto see our industry focus more and waste management yeah, it's smart. Whatis so and the last question about general trends. You mentioned redprinting steel construction. Anything you're noticing there kind of takingoff, as maybe the next thing to watch or for people to get interested in andhelp think about different cation of their other business bottles. Well, airqualities for the importance over the last two years with Covinright. That's definitely significantly increased in terms of consumers beenfocused on the quality of their air and their homes and wellness. Overall, Ithink they want connected homes whatever that means you know, in termsof being able to turn off your right, Certo honor off your AC, your heed,your open, your garage door, your nest, security. All of that, coming as apackage on the margin most of the builders are excited if they offer anice machine and the new refrigerator you know, but I think it's because thetechnology is evolving so quickly and they don't want to commit to somethingthat may be obsolete by the time the community is finished, but I do thinkthe consumers focused on well nose focused on integrated homes. You knowbefore the pro the pandemic and the protests in early two thousand andtwenty, you had a lot of trends at homes being destroyed by naturaldisasters like flooding, size, make issues on the West Coast, fires on theWest Coast and a lot of homes been destroyed. Because of that, which iswhy steel and some of these more durable products are more popular inthe manufacturing process. Right now, okay! Well, you know it's always goodto leave the audience with some nuggets. I think you've given plendy, but maybesome advice, as you think about our general population of listeners. Weknow we've got divers ARY, but a lot of scaling investors, whether it's fixingflip and feel like Thomas James. You mentioned, or builders out there,trying to get such to some scale, to attract large institutional capital,infusions or plan their exit. What kind of advice do you want to leave themthings to do not to do had of best position of themselves and in general,put you on the spot and he kind of nuggets of advice come to come to mind.Well, I think I've noticed about companies that are successful versusnot- and I remember having this conversation with the management ofKatara a couple years ago, and they didn't really listen to me, but we have,we all have to focus right. You can't boil the ocean, don't try to be allthings to all people, just pick one or two strategies, one or two markets andget it right and then build on that versus trying to do too much tooquickly, superficially and then having to retract. So I think focus is a bigone. I think one of the piece of advice I give two operators and our privatebuilder Rave Construction Company's clients- is to spend as much as you canon a great controller. CFO. A professional is incredibly important inthat role to really understand what your PA capital need is going to be andnot to run out of money, because that has happened so many times with so manycompanies in our industry they get hit by a cycle. They underestimate how muchleverage they have or what their confidants are going to be or how muchcash they needed, and they just they burn out and they blow up,unfortunately, so a great finance controller. I also recommend investingin independent auditor as early as the company can afford. The reason isbecause there are a lot of great auditing friends, not just the biggerwell known firms, but even smaller regional firms that can really help youthink, through best practices as a builder or construction company. Thatcan help you think about why your Ebitda is what should be in there. Whatshould not be in there, because that is the daont that most buyers are.Investors are going to focus on more than anything else. I'm sure, from yourperspective, as a lander Josh having audited financials, is going to giveyou a more security in the amassment opportunity with that client andprobably give them more leverage. So I guess those would be focus greatfinance, Acumen and independent outer that they be my three tips. Great tips,yeah is a lender. I certainly appreciate all of thosee and if theseats returned, I think I'd probably...

...say most of the same, I think focus isreally critical. To my some of my questions you can see. I when my headwas at thinking about a lot of builders, are diversifying and becoming more thanout. O ther may be geting over their skis a little bit in terms of whetherit's just speed of growth, whether it's diversity, a business, bottle that wesee you know people getting getting out of the wheel house and it shows, butyeah people come with a button up business plan at financials is, wouldspeak volumes to how seriously you take your business and how seriously weshould take you and and help you so well Margaret. I think we couldprobably go on for a few hours, but we've accomplished our our mission. Ihope, but don't think we offended anyone and I don't think we'll get thepodcast shut down so we'll leave it in good hands for doling to pick up nexttime, and I really appreciate you taking the time to share some insightswith us and I look forward to seeing you on the conference circuit againhere soon yeah. Likewise, thank you very much for the opportunity good tosee you Josh Great. Well, thanks for listening everyone, and we we'll seeeverybody soon take care. Are you a real estate investor lookingfor the right lender that can finance all your deals and help you scale leavea one. Capital has the best meet of loan products in the Industry Bar, notwhether that's Fixin, flips, fixin holes, building, new construction forbuying rental properties. They have incredible financing solutions for it.All a reliable comments in Flinder is one of the most important parts of yourinvestment tea and that's exactly what you get with Lema one. Let leave onecapital show you how they've helped thousands of real estate master scaleand increase their wealth check out Lema oncoming hundred two five: NineTer, five, nine five to speak with the consultant in preparation for your nextproject. Thank you for joining us today on thereal estate of things, podcast subscribe and Tuning weekly for newconcept for the industry best. Well, we continue to unhate nuances of thisdynamic market. Follow US across social media for additional insets andanalysis on the topics covered in each episode and remember to late review andshare the show o t.

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