Structural Changes in Residential Development over the last 25 years
Below is a video discussion by the Founders of Highland Capital Partners regarding how changes in residential development over the last 25 years have created a need for a new way to approach developing, and raising capital- specifically for mid-priced workforce home communities.
Below is a short overview/summary:
What has changed in Residential Development that helped create this shortage of mid-pricing homes (also sometimes referred to as starter homes or workforce/essential worker homes)?
There are three trends/changes which really caused this perfect storm over the last 25 years- you have probably heard about two of the changes, but maybe not the third.
First, building costs have gone up: There has been a lot done with building design, materials, and construction techniques, and buying strategies, that are addressing this challenge. But it is hard to do, especially if you are a smaller builder……and you want to stay as environmentally sound as possible.
Second, “Entitlement” (approval) processes have become more difficult in many local communities: The NIMBY vocal groups have created a lot of friction to getting projects approved locally that do not meet "their" very narrow category/type- a look and feel that they believe is best for them. Or they believe "no growth" is best.
Education at the local and regional levels is helping (including the realization that there can be a big difference between different types/styles of lower cost communities). There is the growing realization that limiting housing types can cause bigger issues for the greater community. This is slowly taking root in many communities- but some are still lagging.
Lastly, the providers of risk capital/funding for projects (banks and developers) are more selective in residential development projects. In the past, local banks would lend local developers/builders funds to purchase and "entitle" the land (first step- design/approved/zone), improve the land with roads and utilities (second step), and then typically build the homes -or sell the lots to other local builders to build the homes (third step). This can create a long, uncertain timeline for the capital providers/banks.
Over time (with multiple large financial market swings), homebuying slowed, and the local banks/sources needed repayment- and suffered losses or/and look to the developer/builder for repayment- forcing many out of business.
These local banks now either do not exist, or are much more selective. And the developers that remain are also much more selective in what they ‘sign up’ for…..
How did the real estate development participants react to these changes/trends?
The simple answer is that the remaining local developer/builders acted rational- minimized risk, and maximized profits- at the local level.
Since local builder/developers typically cannot take advantages of all the new building cost reduction strategies (based on volume, etc..), they started focusing more on higher-end houses, with higher profit margins, to offset the additional costs and restrictions on capital.. They built in communities with typically larger homes, creating communities that are similar to the existing homes around them, to appease the neighbors (speed up the first step). This also minimized their challenges working with banks/capital providers who wanted shorter term, more profitable projects where they can get repaid quicker….
The result of fewer mid-priced homes being built, and a lot of beautiful bigger homes being built. In many markets that created challenges for many homeowners, with too much of their net worth and cashflow tied up in their home. They did not have a good, less costly, alternative to choose from.
But the Good news……How we approach it…..
Over the same time period, however, larger regional and national builder became a larger part of the industry.
They are builders first, and really focused on building cost efficiency strategies that they can bring to the market. For competitive reasons, and to keep growing, they also started focusing on smaller homes, and they started targeting regions with smaller metropolitan areas. They are good at building, and good at targeting locations/regions with unmet demand.
As they grew, however, they needed more product to build, and realized that the local “developer” role of getting projects zoned/entitled/approved was difficult for them, for a number of reasons (including holding land on their balance sheet, and the fixed overheard of a development team). They realized that local developers can work though the local process of entitlement and approvals quickly, and efficiently, and know where to target- which towns/cities are truly supportive of the right type of workforce/mid-priced housing communities.
This is the background to our strategy- play to each participants strengths to create thriving “Highland Communities”. We, with our local developer partner, take a vetted project through the entitlement process, keeping the builder involved, and then sell the project, prior to construction, to the builder. We and our investors enjoy the asset appreciation of the land, while the builder gets well designed lots/locations that have community support from the beginning. Each of our time horizons are shortened, and risks minimized.
Our strategy has been proven.....creating value for everyone involved. Click Here (or call/text me 847-508-9984)to contact us about how you may be able to join us in the mission- have some fun, make some money, and help address this housing shortage, one community at a time- John Loy