Unlike some of its competitors, Naples-based Stock Development appears to have escaped the worst of the residential-construction downturn. But from now on it will let others bear the risk of owning land.
Back in 2007, most residential real estate developers on the Gulf Coast thought they'd seen the worst of the housing bust. “Wait 'til '08,” they rhymed.
But not Stock Development.
The Naples-based privately held firm, which has five residential communities spread from Charlotte to Lee and Collier counties, immediately slashed prices by 35% two years ago. “Rather than wait the market out, we took more aggressive action,” says Brian Stock, the company's chief executive officer.
Led by Stock's vice president of sales and marketing, Claudine Leger-Wetzel, the firm was among the first to boldly promote lower prices in its print advertising in early 2007. During the boom, developers never published prices in their ads because they had reached such absurdly high levels. “We came out very hard with that message,” she says.
The move paid off because business got a lot worse. Besides selling off a substantial backlog of inventory with aggressive pricing, Stock lowered its debt load and streamlined its operations.
Although Stock won't reveal financial details, those prescient moves helped it avoid some of the calamities that have befallen its competitors, including WCI Communities and The Bonita Bay Group. WCI recently emerged from bankruptcy reorganization and the lender-owned company is expected to liquidate many of its assets. The Bonita Bay Group is struggling as its land sales collapsed and resident members of its luxury golf clubs demand their money back.
While the market is still in a funk and sales are below last year's levels, Stock believes the residential real estate market has reached a bottom in the Naples-Fort Myers area. “There's a sense of relief that it's not going to get worse,” he says. The stock market has rebounded and there's talk of an economic recovery.
The company believes the residential real estate market will reach equilibrium between supply and demand in 2010 and it's planning to spend $6 million to clear land for a new development at Lely Resort in Naples with 433 home sites for the 2011 season.
But the trauma of the last few years has forced the company to rethink the way it operates. Instead of buying land for development, Stock says he'll let venture funds with a greater appetite for risk do that and partner with them to manage and develop it. While the potential profits aren't as high, Stock says that strategy will lower the company's risk. “Everyone is starting to reset their business model,” Stock says.
Brian Stock and his father, K.C. Stock, started the company in Naples in 2001 after the elder Stock sold his successful construction-supply busi ness in Green Bay, Wis.
The pair acquired distressed residential developments, buying their first parcel of land just days before the terrorist attacks of Sept. 11, 2001. Eventually, the Stocks assembled developments such as Lely Resort and Olde Cypress in Naples, Grandezza in Estero, Paseo in Fort Myers and Vivante in Punta Gorda.
Stock's strategy was to build lavish amenities such as elaborate clubhouses and lushly landscaped entries that would draw new residents looking for the Florida lifestyle. It launched other businesses under the Stock banner such as a homebuilder, an interior-decorating firm, a pool builder and a brokerage firm to resell properties.
Stock rode the residential-construction boom, reporting $608 million in sales in 2004 and $1.8 billion in 2005 (the company declines to reveal sales in recent years).
But Stock was among the earliest to recognize the severity of the downturn and it lowered prices by 35% in 2007. Although the company beat its competitors on the way down, residents of its communities complained that they had paid more than their newest neighbors.
Brian Stock soothed residents' concerns, citing the need to remain financially solvent and the necessity of reacting to the market. “We're in this for the long haul,” Stock told residents.
Stock says the company reduced its backlog of unsold homes and used the money to pay down bank debt it had used to purchase the communities. He declines to discuss how much debt remains or other financial details. “We've lost money like everyone else,” he says.
Besides paying down debt, the company cut staff, restructured pay for top executives and consolidated its various businesses to save on commercial space. It also sold parcels for commercial development, including 38 acres to Lutheran Life Communities at Lely Resort for a 400-unit senior residential complex.
Back to equilibrium
Because the financial crisis of last fall lingered into the winter selling season, Stock is projecting 261 home sales at its communities this year. That's down 26% from the 353 home sales in 2008.
However, Stock has projected 290 home sales in 2010, an 11% increase from 2009. And Brian Stock says he's seen prices starting to increase as the inventory of new homes continues to shrink in Collier County.
In particular, Stock has seen a dramatic increase in the number of Canadian buyers. Backed by a relatively stronger currency, Canadians now account for 10% of buyers, up from 1% to 2% just a few years ago.
And buyers are paying cash because financing is still tough to obtain. For example, out of 22 closings at its Vivante community in Punta Gorda, just two were financed with a mortgage.
For now, Stock is focused on selling its inventory of about 2,000 lots and commercial parcels. It will build about 20 speculative homes to generate activity in its developments. “Activity breeds activity,” Stock says.
Still, the company is looking ahead to what it believes will be an even better 2011. It is spending $6 million to clear land for a development at Lely Resort to be called “Cobblestone,” where it plans to sell 433 single-family home sites.
Partner with venture firms
Control of residential development land is highly profitable when the economy is booming, but it can sink a company in a bust.
With banks reluctant to finance any residential project in Florida, venture-capital funds have been scouting land deals using money from private and institutional investors. But most of these funds have little experience developing and managing a residential development and Stock says some have come to him to discuss partnerships.
Venture funds' challenge when they buy land in Florida for residential development is to provide a healthy return for their investors, but that's hard to do without a development team. “They don't have an exit plan,” Stock says.
For Stock, partnering with a venture fund to develop land can remove the risk of holding the land and paying the costs to carry it. It can manage the sales process for venture funds and share in the profits. Stock says his company may acquire land for construction, but according to a strict schedule that allows for purchase only when it sells a lot to a homeowner. “You can control the land, but not with capital,” he says.
Tale of Two Counties
Lee and Collier counties are neighbors, but their residential markets are dramatically different.
Surprisingly, Lee County's new-home market appears to be healthier than its wealthier cousin to the south.
According to a survey by Metrostudy, there was a seven-month supply of finished vacant homes, homes under construction and model homes in Lee County in the second quarter of this year. In Collier County, there was a 14-month supply. Both numbers are based on the rate of move-ins.
Bradley Hunter, chief economist with Metrostudy, suspects that higher home prices in Collier County means homes haven't been selling as fast than they have in Lee County. For Collier to catch up, Hunter says home prices will have to fall further. “I don't see home prices rising next year and even into the following year,” he says.
While move-ins have exceeded construction starts for 11 consecutive quarters in both counties, the supply is still a ways from what Metrostudy considers a healthy market of between 1.5 and 2.5 months of supply.
“Builders have been very successful in getting their inventories back down to almost normal levels,” says Hunter. “The problem that still exists is the foreclosures.”
Foreclosures in both counties will continue to affect housing well into next year. “That is still an issue and that is going to keep downward pressure on home prices,” Hunter says.
Even if the recession is officially over by early next year, ongoing job losses will continue to hold back housing. Hunter says that's even true in second-home markets that cater to retirees, like those in Lee and Collier counties.