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At the Lay of the Land Florida Conference in Lakeland in late February, industry insiders, policy makers, investors and property owners gathered for two days to talk about what they’re seeing.
This year’s event was held in the shadows of high interest rates, a slowdown in economic activity and uncertainty whether there’s a recession in the country’s future. Those gathered talked conservation and deals and got economic updates.
One of the big topics was the state of the residential housing markets. It featured three panelists: Noah Breakstone, managing partner and CEO of commercial developer BTI Partners; Daniel B. Green, principal at the real estate investment firm Wheelock Street Capital; and Jim Bavouset, executive vice president of national land operations for homebuilder Lennar.
Bavouset: I'm a firm believer there's a deal for any period, any time. Sometimes it's going to be cash on the barrelhead. And if you time that right from a land seller’s perspective, good for you. In times like now, when I think there are capital constraints, there's some hesitancy. If I underwrite in today's market, I'm probably not going to pay you the value that you need for your land. As the capital markets changed, we’ve started wondering how do we structure our deals so that we continue our business and still give our lands suppliers the money and the value they deserve. And that's come through structure — getting some money on the barrelhead now and having participation in the future. As we go through this, that will probably increase. If we start to see a pullback, if we start to see a recession, we'll look to have more on the (front) and more profit participation. We don't need to make outsized returns. We just need steady return to build our homes, sell our homes, close our homes.
Breakstone: From our perspective, investing and developing land throughout Florida is our timeframe. Typically, when we acquire a point, a master-planned community is activated in three years. So, our timeframe is three to 10 years. We try to be very practical for that period. The way we plan for it is something that my dad told me years ago. That is to get the development going with zero debt. And that's how we look at it. All of our purchases are all cash. We're long-term players. But what's interesting about this time for us is, previous to September, the previous 18 months, we acquired zero in the land area. Everything was priced to perfection. It was very difficult to acquire anything. And the last quarter we acquired three major land tracts — two in Jacksonville, one in Osceola. And so, we find when there's more turbulence, there's more realistic pricing. And reality in pricing is attractive to us. So right now, we're finding ourselves to be buyers.
Green: Leverage. That's what caused the issues in the last downturn. When you put leverage on real estate, that helps your returns, obviously, on the equity side. But when you put leverage on the wrong kind of real estate, which is land — I always heard land eats 24/7 and very rarely gives back. And that was the problem we had. We over-leveraged. So in these times, we use leverage very, very lightly and only for development and short-term debt. We don't use it for acquisition.
Breakstone: We find that in terms of any active infrastructure or pod development that we would look at, instead of going in and having 5,000 units, and putting in $100 million, infrastructure work gets phased out with our contracts that we expect over time. It's much more controlled, much more risk averse.
Bavouset: If there's anything that I've learned just watching what the development community has done since the downturn is exactly what Dan noted. Part of what caused the downturn was overlapping with debt, whether it was funds, whether it was banks, what have you. That just doesn't exist this time around. There are very few banks that loan for acquisition and development. It's largely equity. Short-term financing. Whether there's a recession coming in Florida or elsewhere, it certainly is not going to be led by a collapse in property or housing. Housing is going to be affected by demand, but it's not going to be a collapse.
Green: In the master-plan space, we invest with local partners who are operating partners who do the development. What I've seen over this last cycle is residents and homeowners don't necessarily want the big amenities. In the last cycle, you would see master-planned communities with 10,000-square-foot amenities, with three pools and all the accoutrements. The thing that I think came to light was that it cost a lot of money annually to keep up and they and the homeowners all pay for that. What we're also seeing is more of an appreciation for the natural surroundings. We just mentioned a project up in Pasco (County) called Starkey Ranch. We tried to stay true to what the land was giving us as far as Florida-type vegetation and we built very light amenities. As far as vertical construction, we used the land and nature and gardening and open spaces.
Bavouset: From a home perspective, as you can imagine, as we all were part of COVID, everybody wants dedicated home office space. Spaces that you can get away from the family and be productive. And that goes for all members of the families. You want space for the kids to be so they're not bothering you all the time. Mom and dad both want their spaces, whether it's offices, but places to be. So, we're seeing some shift in what we're designing and building.
Bavouset: There was a time during the downturn when we were acquiring developed home sites for $5,000. That was a distressed situation. Then you had to go to the municipality in Naples and pay them $60,000 for impact fees. I understand there are county services, civil services we all need, but that's just one level of it. If you need affordable housing, your counties can’t charge these types of fees, these type of costs, and then bring a home to the market. That goes alongside with our lead time to permit a community, build a community, build homes has tripled. And that costs money. With every bit of time that goes by, it's more expensive to deliver that home.
Breakstone: The approval process clearly is a very timely and cumbersome process. You can take a piece of ag land and easily be three to four years before you have all your rules in place. Or longer. And there's just a cost to run your business to deal with that. I think that clearly needs to be looked at. I think Florida has done a great job trying to give some authority back to the counties and cities and the federal government. It is still a very cumbersome process. Any core project that you look at can take 18 to 24 months. From my perspective, it's hard to justify that time.
Green: What I do see is in this cycle is some jurisdictions don't like some of the finishes on some houses. So, I'm seeing some of those architectural features get governed, which is going to cost. Every time you make a regulation, it costs money.
Green: It's really difficult for somebody who is an expert in agriculture to try to do something like we do on a daily basis. It is really tough. And the landowners that I've dealt with over the years, because they try to stay so much in the middle, to not go one way or the other as far as entitlements and approvals, it's very hard to get anything done. If you're a landowner in the agribusiness, you really need somebody that has that experience and can make those decisions, because you’ve got to go one way or the other in many of these entitlements.
Bavouset: If I put myself in the shoes of a large landowner, it is money well spent to find, and I obviously have no dog in this fight, a good consultant to help. When you come to the market and you've talked to environmental consultants and you have put some thought to what you can create by doing those things in the normal course of your agricultural use, planning five, 10, 20 years in advance for what you want to do. It is a little money now. But I would suggest that when I see the property package, if those things have been thought through, and the wetlands are well defined, and the constraints are already defined, it makes it much easier for us to evaluate and take risk out. The less risk, the more we're willing to pay.
Breakstone: It's always a tough situation when you bring in the master developer through the process. But let me tell you, I'm not in the cattle business and I don't know how to make cattle or farmland decisions. We've been doing this for 35 years. We talk to 20 builders on a daily basis on multiple sites. We have a great day-to-day understanding of what the homebuilders are looking for, how to lay it out and think about that process. We find that the earlier that we're involved it just makes for a more efficient plan and, I think, that brings more value to the (land) in the long run than having some of the underlying work done and then redoing it. There's no perfect answer, but we try to be a complement to that process to bring that value.
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