As the nation's residential land developers and home builders face declining new-home sales across the country, one real estate finance expert offers some advice on surviving the pending downturn in business.
"Builders need to conduct a top-to-bottom review of their businesses, identify strengths and weaknesses, reevaluate their risk tolerance and determine how they can improve their operations," said Stan Ross, chairman of the board of the USC Lusk Center for Real Estate www.usc.edu/lusk.
This includes looking at how to manage land more efficiently, reduce costs, access capital, share risks, and improve business operations.
"Builders can start with a comprehensive land analysis, reviewing all land owned, in the process of being acquired, under option, or otherwise in the pipeline," Ross explained.
"Then they can develop strategies such as 'just in time' delivery to shorten the period between the acquisition of raw land, tentative maps or finished lots, and the construction and sale of completed homes." He added that builders can hedge the market by selling land today with options to repurchase it at a later date.
Ross, who has counseled many of the nation's leading developers and home builders in his previous role as vice chairman of Ernst & Young, is telling builders to consider forming special purpose joint ventures with private equity groups and hedge funds that buy large tracts of raw land. "They can take the land through the entitlement process and pay for front-end infrastructure costs," he explained.
"Capital is readily available, and private equity investors are looking for investment opportunities," Ross noted. "By entering into joint ventures with investors, savvy developers can obtain capital at lower costs to acquire land, optimize the timing of lot acquisitions and shift some of the risk of funding necessary for roads, sewers, utility lines and other infrastructure needed for development," Ross said.
Ross also advised builders to conduct a thorough review of all systems and internal processes to find opportunities to save money. "Builders need to identify as many development and construction cost reduction opportunities as possible, such as using new construction systems that incorporate less costly prefabricated components, or hedging against possible increases in materials costs by contracting with suppliers for future deliveries at predetermined prices."
Ross added that builders, facing a housing slowdown, should reevaluate the targeting of their marketing and public relations initiatives, develop new sales techniques including buyer and broker incentive programs, analyze consumer profiles and implement new pricing strategies. "In a cooling sales environment, builders should consider the benefits of partnering with local retail brokerage firms and paying commissions to help market unsold inventory through the vast network of buyers who work with residential real estate agents," he observed.
"Finally, developers and builders need to focus on developing management talent not only to address the current slowdown but also to position their companies for long-term growth," Ross said. "With more baby boomers reaching retirement and withdrawing from the work force in future years, U.S. industries including homebuilding could face more competition for managerial talent," noted Ross, who authored "The Inside Track to Careers in Real Estate," a book that was recently published by the Urban Land Institute.