Gold Nugget Winners Continue to Evolve

For months we’ve been reading and hearing about how builders have been downsizing both the size and specification levels of the homes they build to cater to today’s more frugal buyers. In the first stage of that transformation, it was a practical move, and often catered more to function than form.

But now that industry architects and building pros have become more comfortable with homes that are smaller yet also more affordable, urban-oriented yet energy efficient, these second-stage homes are showing the type of creativity that win awards.

At the 2010 Gold Nugget Awards this past June, however, the winners demonstrated that only the right combination of form and function will ultimately win the accolades of the most important judges – the buyers. See the list of winners here.

In the case of 1Mission in San Diego, developer CLB Partners chose to restore a somewhat faded city block more to its 1920s glory at the street level while copying architectural cues from surrounding buildings for the upper floors. Set at the junction of the very walk-able neighborhoods of Hillcrest and north Mission Hills, the mixed-use retail and residential project combines front-facing townhomes along with flats attached to large balconies.

To tie it together, architect M.W. Steele Group introduced a public paseo and courtyard that help the two restaurants better capture potential customers. Like a much smaller version of the award-winning Uptown District project nearby that was built in the early 1990s, 1Mission proves that mixed-use projects can work even in a recession, but only if created with the right combination of location and execution.

In the City of Westminster in Southern California, Bridgecreek Development also made safe connectivity to the local community a priority when developing Morian Asian Gardens, an age-restricted condominium project in the Vietnamese-dominated Little Saigon. By blending feng shui design models with a French-inspired aesthetic, architect Danielian Associates wanted to evoke a classic Vietnam environment while also providing the more practical and social aspects of two clubhouses that bring in the best of the local climate via adjacent courtyards.

For energy efficiency, it’s harder to get greener than Los Vecinos in Chula Vista south of San Diego, which was named Green Sustainable Community of the Year. Earning the coveted LEED Platinum status and built on the site of an abandoned model (of which 84% of materials were re-purposed for the new building), this affordable Wakeland Housing & Development rental project also requires residents to complete a green training course. Given the combination of its solar array which provides 90% of its electrical needs, a turf area requiring no water and most services located within a half-mile walk, it’s certainly no surprise that Los Vecinos was accepted into the Zero Energy New Home (ZENH) program of the California Energy Commission for ongoing education purposes.

And yet for sheer creativity, Nelson Development’s Arden Estates in the West Portal neighborhood of San Francisco proves that urban infill doesn’t necessarily mean high density. After carving out seven 4,000-square-foot lots from a single undeveloped 28,000-square-foot parcel, each 3,200-square-foot home promises luxury finishes with high ceilings, generous setbacks, gardens and views, and also claims one of the highest green building ratings offered by the city.

Awarded Green Point Rated Community of the Year, the considerable architectural challenge was to blend in with both the surrounding homes as well as a the site’s keynote: Arden Wood, a Normandy-style chateau built in 1930 that has since been operating as a multi-purpose Christian Science center for spiritual healing, nursing services and education.

Yet by remaining sensitive to the neighborhood’s history and not building to maximum density, it’s projects like this that remind buyers that many builders are also artisans.

Worst over for commercial real estate?

For many months we've continued to hear about the sturm und drang in the commercial real estate market. Where's that crash we keep hearing about? It is just over the horizon, or has that sector of the real estate industry learned the lessons of the housing crash and decided to manage revaluations in a different way? According to a story in the L.A. Times, not only may the worst be over for office buildings, retail stores and industrial properties, but funding is now starting to emerge from the sidelines. From the story:

After nearly three years of declines there are signs that Southern California's beaten-down commercial real estate market has struck bottom — setting up the possibility of a rebound later this year.

In a sign of the easing, heavyweight investors armed with buckets of cash are on the prowl, looking to snap up office buildings, warehouses, shopping centers and apartments at the market's low, industry observers say. The buyers are choosy, but the most desirable buildings elicit bidding wars when they come up for sale...

Although commercial building landlords in many markets are still struggling with high vacancy rates and weak rents, the erosion in some sectors has slowed, piquing the interest of buyers. In addition, reinvigorated banks have been able to postpone or avoid liquidating billions of dollars' worth of distressed real estate loans sitting on their books, helping to solidify prices.

In a similar fashion, Southern California's housing market hit bottom more than a year ago and prices have been trudging higher ever since, partly because a feared wave of fresh foreclosures hasn't materialized.

If the commercial real estate market continues to gain strength it would represent a significant shift in economic risk because many experts had feared that mass defaults by landlords on their loans could cripple banks and drive the country deeper into recession.

"It's true that thousands of commercial loans must be worked out and some of these properties will enter the market in 2010," investment banker David Rifkind said. But "federal policy has been accommodating to banks and they are not being forced to realize losses."

With rents falling and the economy trembling, commercial real estate transactions had been rare during the downturn. Owners were holding on in hopes that prices would stop falling and buyers were holding back, waiting for the low point.

But a philosophical change has become apparent among investors, Rifkind said.

"There is so much money sitting on the sidelines that when distressed assets or even small pools of loans come to market, there is a flood" of interest, said Rifkind, managing partner of George Smith Partners.

"That became palpable to us in the first quarter," he said. "Money can't stay on the sidelines for long periods of time. It has to retool and be put to use."...

Click here for the entire story.

San Diego Market Monitor for 1Q 2010 now online

Each quarter, I update the Market Monitors for San Diego County and the combined Los Angeles/Ventura County region for Hanley Wood Market Intelligence. Last week, I finished up the San Diego version, which you can purchase online here. I just finished up the LA/Ventura version today, which should be online later this week.

I also thought it'd be helpful to offer an excerpt from the Executive Summary for the San Diego report that's included at the beginning of the report:

Following last quarter’s 38% rebound as buyers began to take advantage of special tax credits, new home sales rose again by 21% during the first quarter of 2010 to 673 units versus the same quarter of 2009. And, even as prices began to slowly rebound, the combination of low interest rates and tax credits helped to boost average absorption rates by 69% to 1.7 sales per month per project. Looking ahead to the rest of 2010, however, the new home market is expected to soften slightly as the tax credits expire, discounted foreclosures remain as formidable competition and Option ARM mortgages continue to re-set.

In the existing home market, the rate of annualized sales rose by 9.4% during the first quarter of 2010 to 35,628 units. At this level, existing home sales are now just 1.5% less than the long-term average noted since the beginning of 1988, due in large part to a median price of $315,000 that is now 39% below the peak of $520,000.

At the same time, after last quarter’s 12% decline, median new home prices rose by 5.9% over the last year to $549,465. Although prices rose by 18% to $466,990 in the attached sector, they fell by just over 5% for detached homes to $597,900, with each submarket in both sectors performing much differently from each other during the quarter.

Somewhat surprisingly, in terms of relative strength, per-project absorption levels during the first quarter were actually highest in the East submarket (2.3 sales per month) and the Inland North (2.0), whereas the lowest rates were noted in the South Bay (1.0) and the Coastal North (1.7)...

Although higher affordability levels compared to new homes should continue to disproportionately assist the market for existing homes, given the weak economic outlook for 2010 and the expiring tax credits, the recovery for the new home sector will likely be slow and very gradual. In the short term, jobs in the existing and emerging technology sectors and hospitality industries are expected to rebound the fastest due to existing infrastructure and prior investments...

Looking to the end of 2010, the median detached new home price is still expected to reach $618,000 – or down by about 5% over the preceding year -- owing to a mix of smaller and more affordable homes, with the value ratio falling slightly to $206 per square foot. Sales are also still projected to fall by about 4% to 2,100 homes, or about 25% less than 2008 levels and 86% less than the peak in 2004...

Riverside Press-Enterprise covers trend of smaller homes

The Riverside Press-Enterprise's Leslie Berkman recently covered the ongoing trend of builders creating smaller homes in today's environment, and spoke with MetroIntelligence Principal Patrick Duffy on the impact on the state and federal tax credits in this year's housing rebound.

Patrick Duffy, Principal with MetroIntelligence Real Estate Advisors, a Los Angeles-based real estate consultant, said, "It is too early to tell if we are in a recovery until we are working with market-based fundamentals of supply and demand without federal benefits."

You can read that entire article here.

June column for Builder & Developer now online

My column for the June 2010 issue of Builder & Developer magazine is now online. In this issue, entitled "A Spring Thaw for Project Finance,"I interview Jonathan Lee, a Vice President with George Smith Partners (GSP), a real estate investment bank and a MetroIntelligence client on the various financing programs available today buying land, developing projects or refinancing existing ones.

In addition, MetroIntelligence is now able to work with builders and developers in need of project finance/re-finance, conduct preliminary due diligence and then bring appropriate deals to GSP. An excerpt from that column:

As the building industry continues to slowly recover from its most prolonged downturn since The Great Depression, the good news is that it appears a minor thaw may be finally beginning in the credit and equity markets. The bad news is that the rules of the game have changed so profoundly that not all players will be able to adjust accordingly...

According to GSP Vice President Jonathan Lee, who focuses largely on the residential sector, although the thaw in lending has unofficially begun, it won’t really matter until banks have re-set the land on their books to current values. In the interim, Lee is seeing lenders reaching out to established builders as either fee builders or as JV partners to protect their investments by maintaining entitlements and building out what’s already been started.

And yet the Catch-22 here is builders don’t want to JV unless land values are re-set to current value, but lenders aren’t strong enough yet to do so. As for buying new land, assuming a private builder can out-bid a public company, the terms for leverage are going to be strict, with hard-money interest rates and 50% loan-to-value (LTV) ratios...

Click here for entire column.

The Unacceptable Face of Capitalism

Yesterday, I received an email from Mick Pattinson, a longtime builder and founder of the Building Industry Coalition for Economic Recovery. Mick was one of the first home building executives I met when I started working in the building industry, and as President of Barratt American, he was also a prominent voice for the industry through local, state and national BIA groups.

While the email itself was a reminder of a special seminar this week at the Pacific Coast Builders Conference (PCBC) entitled Surviving Lender Action, as well as a summary of a recent lawsuit against lenders who had pulled promised funding immediately prior to the real estate crash, it was his commentary entitled "The Unacceptable Face of Capitalism" that I found compelling. I asked and received permission to reprint that commentary here on this blog:

THE UNACCEPTABLE FACE OF CAPITALISM, by Mick Pattinson

What happened to Wall Street?

Before Congress and the eyes of the world the executives of financial giant Goldman Sachs admitted that they bet against America. They created financial instruments that they compared with manure so that they and their clients could place big bets on mortgages and housing. For the winners there were fortunes to be made, even if our financial system was taken to the point of destruction and our children handed a debt burden of unimaginable proportions.

In his latest best seller "The Big Short" author Michael Lewis tells the stories of others who made the same bet against subprime and the financial institutions who pedaled them. Savvy investors who from their insider's vantage point could predict the end game. They forecast the mass of foreclosures across the country, the broken dreams and busted businesses. They saw the evaporation of life savings and the arrival of massive unemployment. They knew we faced a financial Armageddon and they placed their bets in the Wall Street casino. Big bets that paid off when the misery index was at its maximum and our financial institutions were forced to beg for a bail out to save our financial system.

This is the unacceptable face of capitalism. Power brokers who were supposed to generate the capital to drive the American economy are instead creating financial instruments of mass destruction. Worthless mortgages given triple A ratings because the big financial houses paid the agencies to do it. As simple as that. A rigged game if ever there was one.

With all of our regulatory agencies asleep at the switch or outsmarted by the slick operators of Wall Street, the law abiding citizens of the country were left defenseless. None more than America's homebuilders. Big Builder magazine recently predicted that 80% to 90% of the nation's private home builders will close their doors before the recovery arrives. A recovery that still appears to be a long way off.

One of the great mysteries for builders has been the failure of banks to conduct "workouts" during this recession. Unlike previous downturns when lender and borrower would come together to solve problems and mitigate the damage this time lenders have just rushed for the exit door. This time co-operation and patience has been replaced with arrogance and litigation.

Today's hearings and media revelations are filling in the blanks and giving us the "rest of the story". The events leading up to the great bank bailout of 2008 are very revealing to America's home builders. Why did profitable and solvent builders suddenly lose their funding? Why were projects suddenly being appraised and re-appraised until the lender got the number he was looking for? Why were performing loans torpedoed for no apparent reason? Why were builders the victims of "contrived defaults"?

We can now see the scale of the catastrophe created on Wall Street and what it meant for our industry. A trillion dollars lost on the subprime fiasco and the total undermining of housing markets all over the country. Do we need bank reform? Of course we do, but streamlined and efficient regulatory oversight is more important.

It doesn't end there. While the citizens of America have suffered mightily the culprits have not. Most of those responsible for this national nightmare are still in the positions they held, while others have left with big pay offs. This too is the unacceptable face of capitalism.

We can only hope that the hearings now underway in Washington D.C. as well as the work of investigative journalists and authors will generate the charges that justice demands. This November the politicians will feel the countries anger at the polls but that will not be enough. Those who put their personal greed ahead of the national interest need to pay a price as well.

As for the rest of that email, here it is:

PCBC

As a reminder, our Surviving Lender Action Seminar is scheduled for the Pacific Coast Builder's Conference this Wed, June 9th from 9:00-11:00am in Moscone Center Mezzanine room 228, San Francisco. There is no fee to see this seminar. Again, this seminar is designed to help builders and other privately held industry related businesses survive the current liquidity crisis. Discussion will include damage assessment through the reappraisal process, exhaustion of cash, discontinuation of funding, and subsequent loan default. The emphasis of the program will be a detailed discussion of prejudgment remedies and lender liability, and life after chapter 11 & chapter 7. Speakers include workout specialists, attorneys and accountants who are very current and experienced with these topics and have helped guide dozens of companies through difficult situations.

Lawsuits

A bankrupt arm of Sacramento's New Faze Development filed a $10 million lawsuit Monday against banks in Dixon and Stockton alleging that they cut off promised funds to a key housing project just as the real estate crash began.

Read more: http://www.sacbee.com/2010/04/13/2674007/builder-sues-two-banks-for-10.html#ixzz0l5tHSyra

More importantly, we would like to hear of any successes of lawsuits filed against any lenders who forced a default in spite of promises made to the borrower.

Please share with us if you hear of any so we can spread the word.