Home Builders: Today and in the Future

Please note this automated transcription may contain errors.

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Richard Green: Welcome everybody. My name is Richard Green I am director of the USC Lusk Center for Real Estate. This is Lusk Perspectives and I think almost everyone on this call knows

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Richard Green: Just a few rules. If you have a question for the panelists please type them into the Q AMP a section I will do my best to carry the questions as they come in.

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Richard Green: I've been trying very often I combine questions so that we can get to everyone. I'm not going to promise we get to everybody, but we do the best we can.

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Richard Green: And we are delighted today to have a panel on the state of the housing market, in particular, the new home building the new forum for sale has a market.

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Richard Green: And a couple of great panelists Scott Laurie, who runs the Olsen companies and Adrian Foley runs Brookfield residential so it's great having both of you gents.

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Richard Green: With us this morning I what I'd like to do is just have each of them talk for about five minutes about whatever they want to talk about. And then I'm going to be asking them each some questions.

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Richard Green: Will do that till about 1130 1135 and then we'll open up the floor questions where, again, if you have a question, please type them into the q&a box.

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Richard Green: Just also for your information, we are recording this to post or posterity. We have a web page less.usc.edu forward slash perspectives, where you can watch all of our events so

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Richard Green: Again, the Cal wins first steps on comment. So I'm going to ask Scott Laurie to just say what's on his mind.

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Scott Laurie: Well, lots of things, Richard. I'm including mass. And what I can share with you and we talked about this last week, you know, this has been an experience that none of us have been through. And some of us have a vision for where this is headed. I think there's a lot of great unknowns.

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Scott Laurie: And a lot of those great unknowns impact us as a business and it is literally right now. It's been a day by day week by week trying to see some type of trends as to where the markets going

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Scott Laurie: So from my perspective, not much has changed around the true coronavirus whether it's treatment. We certainly don't have a vaccine.

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Scott Laurie: What we have seen, though, is for the homebuilding market. People are coming back and traffic has been a sales have been up the first

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Scott Laurie: THE FOUR WEEKS OF APRIL were probably our slowest period for sales. We went negative. Overall on sales, which means we had cancellations greater than the sales. It was our slowest period since the great recession.

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Scott Laurie: May has been a very different story. And a lot of it has tracked what's gone on with the financial markets and the improvement. We've seen there.

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Scott Laurie: But the what is occurring. It's literally county by county, city by city zip code by zip code.

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Scott Laurie: So what you experienced in LA is very different than what happens in Orange County LA has been very slow.

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Scott Laurie: Orange County is on a different path to recovery. And again, we don't know how that plays out. But we will learn some lessons from that but we grand opened a community in Orange County and Costa Mesa

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Scott Laurie: Two weeks ago, and at the grand opening. We had nine sales.

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Scott Laurie: Nine sales would have been a incredible opening before there was an eight coronavirus and to be able to do that in this environment.

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Scott Laurie: Was exceeding all of our expectations. And by the way, the sales from two weeks ago over the weekend we saw strong sales and this time we saw it across the board.

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Scott Laurie: So there is a positive sentiment happening out there in light of what still goes on.

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Scott Laurie: With coronavirus so I can't tell you where it plays out. What I can tell you

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Scott Laurie: Is we've been very conservative builders shut down very fast in this cycle much different than any other cycles and builders are also not leading the country into the recession.

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Scott Laurie: And what has occurred, which is a public health crisis. It's now become a recession, nor are we in the middle of it. We're literally on the sidelines. We're still building

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Scott Laurie: I signed to start requests. This morning, based on the salesperson for performance, we've seen over the last two weeks.

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Scott Laurie: One on site development and the other to go forward on construction phases. So

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Scott Laurie: Where we had shut everything down. We're starting to open back up and what I will also tell you is the field has been highly productive. So the field never slowed down on the building side.

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Scott Laurie: And I think one data point that is very important. We have anywhere from 175 to 200 people on our job sites. We have full PD, we go above guidelines, particularly in the city of LA sets the standard for us.

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Scott Laurie: And fortunately we have not had one case in two and a half months on any of our job sites and we have eight active sites RIGHT NOW, RELATED TO coronavirus and with that I'll turn it back to you.

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Richard Green: Okay, well, Adrian

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Richard Green: If you could give us your views and I found Scott statement about basically efficiency being maintained. Because I've heard other people talk about how this has slowed down.

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Richard Green: Their construction process. I found that very interesting. And so, Adrian, if, if, as you talk about your view with the landscape. If you could at least touch on that I would be really interested to hear about it.

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Adrian Foley: Yeah, I'm happy to. So, you know, just for just for objects, maybe perspective, too. So maybe I'll speak to the

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Adrian Foley: US market because we are in other markets outside of California, the Canadian market for what it's worth, and then and then specifically California

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Adrian Foley: So I always I always like this data point, you know, we left we left sort of March 16

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Adrian Foley: And I picked I picked that just as a as a proxy date with this unbelievable sales record for the first 10 weeks I'm sure Scott was the same.

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Adrian Foley: You know we are far exceeded our sales projections. We had significant and, you know, we think of us about sales as really being the end of a conversation with the customer.

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Adrian Foley: And we had these we had this pipeline of of contracts and process reservations qualified buyers traffic. So when you look at that inventory of supply, we left sort of March 16 with this really in incredibly healthy picture for our sales. In fact,

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Adrian Foley: You know, sales for the first 1213 weeks of the year. So through the first quarter when 911 sales.

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Adrian Foley: And then, and I'll fast forward here to this morning's this morning story you know we we went. We went from an average sales pace of about 300 sales a month to 60 sales in April. So I traffic went from yeah somewhere in the

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Adrian Foley: You know 60 to 50 to 60 per traffic count per community range. So call it a know 600 or so 700 or so traffic, a week.

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Adrian Foley: To 10% so six five to six traffic. So again, that chronology. Now what I think we had in a lot of situations is we had buyers who are in the funnel moving through the funnel.

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Adrian Foley: Looking to buy a house. So we actually felt like for a period of time, we might see decent sales or be it at a much slower pace, but still people buying houses but that it literally you know to Scotts comment receive dropped off the edge of a cliff and in April.

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Adrian Foley: May and I'm looking at males amazing numbers here may were to X. April. Already, although we do have five days left of the month to report sales. So we're 120 sales in

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Adrian Foley: In May, like Scott, we actually projected negative numbers in April negative numbers. Sorry, mostly positive numbers in in May and and to x out in June, but we thought overall sales for the queue to be about 25% of our plan we're already

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Adrian Foley: Two times our forecasted sales. So we're, we've seen a real, a real bounce of the bounce. If you like in traffic and sales for the last three or four weeks.

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Adrian Foley: Similar to Scott. We've been fully active across, across all of our markets, with the exception of a couple Austin shut down for a period of time, Toronto for what it's worth, shut down for a period of time.

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Adrian Foley: So,

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Adrian Foley: Despite the pandemic hitting all all other parts of Brookfield business. And we actually felt like we were we were making progress.

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Adrian Foley: And I'll, I'll jump in there with just a general comment so i'm i'm a little more heavily influenced by the commentary that exists in Brookfield world today.

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Adrian Foley: As I as it relates to my own personal view and and also the company's view on sort of a forecasting looking forward

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Adrian Foley: But because of our business risk a portfolio is heavily skewed to retail office.

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Adrian Foley: The residential multifamily and residential for sale side of the business that that we're a part of

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Adrian Foley: Ends up being the sort of glimmer of optimism. If you like in an otherwise pretty gloomy conversation spectrum across our company so that tends to one inform but also skew ski my view so

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Adrian Foley: What's been incredible. So I'm going to pull out the Canadian markets because

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Adrian Foley: Because i think i think there for various reasons they're there, they're a bit of a misleading data point, Alberta, in particular, getting heavily hit by the oil crisis.

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Adrian Foley: But in the in the US markets, what's been incredible has been the resiliency of one our, our, our development teams, how we frankly you know we have eight 850

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Adrian Foley: Or so team members 785 80% of those are working remotely today. I'm not as you probably can tell, but

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Adrian Foley: 70% 5% or 80% of them have been working remotely. I think we've on average last between five to seven days in our development in our construction schedules.

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Adrian Foley: We've lost some processing time through cities and agencies moderate and we've lost some design time on the front end, but broadly we've really managed to be incredibly resilient through this process as a development company.

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Adrian Foley: Our processes virtually have converted. So we've converted our customers traffic to and I'll just touch on that briefly to a heavily virtual a virtually influence traffic count.

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Adrian Foley: We would typically yet five to 7% virtual were 30 to 40% virtual today and I mean

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Adrian Foley: Digital digital online information touring online virtual sales where salesperson takes the tool for you or we have a process called unattended access where you can gain access to the models, independently of a salesperson those of all spiked. And in the last

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Adrian Foley: In the month of April. Sorry, in the month of May, excuse me, and I've gone up 300% across our traffic counts. So we're really seeing people take the initiative online virtually and

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Adrian Foley: And

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Richard Green: Agent we lost your audio.

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Richard Green: Ah,

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Adrian Foley: There we go. Sorry. Sorry, I've been super impressed with that and

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Adrian Foley: And really have a completely different perspective now on how we see the future of of selling, which is another conversation.

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Adrian Foley: But, look, I think it's been an incredibly wild ride for the last

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Adrian Foley: 10 weeks I think we're in week 11 right now of working remotely.

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Adrian Foley: Wouldn't repeat it. It's brought about some great culture testing for our organization. It's brought about some great innovation of

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Adrian Foley: Getting people set up working remotely it's brought about great innovation about thinking about our industry more optimistically for the future that maybe we wouldn't have gotten to so that's a silver lining and I don't like that saying

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Richard Green: So how about it, you know. So the productivity side that says like both doing well. But what about sort of the regulatory side. So things like inspections getting permits actually pulled. Are you finding that that's an impediment to doing this asserts are things sort of going okay

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Scott Laurie: You know, I'll start on that.

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Scott Laurie: So I think that it depends, again, on what city you're operating in but overall the inspections have gone well

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Scott Laurie: It's very relationship driven and the difference with inspections today, particularly in city of LA is you need to have all pee pee in place.

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Scott Laurie: They are out there. They are checking, not just to make sure that everybody has mass, but it goes down to, they are making sure that there is water in the sinks.

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Scott Laurie: And that you have full hand sanitizer, and all other protective equipment available on site, including going through all checklists and the inspectors themselves are signing into the site.

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Scott Laurie: So that we can have some tracking that goes on within the site.

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Scott Laurie: But I will tell you what's also interesting is on the permit side. Again, it depends on the city, but as Adrian said we really have not been held up we've lost a few days here and there.

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Scott Laurie: On that end. But what is more interesting is the virtual entitlements that will all be doing now, because you no longer go into city council and do your presentation. It's now on zoom

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Scott Laurie: Which has some benefits to it and some challenges as well that we're facing in this new environment. And one of the things as developers.

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Scott Laurie: It's a very different way to look at opposition, because you're not in the middle of the room. And one of the other challenges with that is our ability to present our projects.

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Scott Laurie: In those virtual environments because we're still moving forward on entitlement deals. So I would say the entitlements are actually much more challenging.

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Scott Laurie: Than building today. I'm actually very surprised at how efficient, we have been, I've seen on some of our job sites more trades today than we had before. This occurred.

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Scott Laurie: Which is very positive. And as I told you before, Richard. The one challenge has been the suppliers and it's not China. It was the supplies with plants being shut down in Mexico.

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Scott Laurie: That has been a little difficult. And we're starting to see some reopening there. In fact, our door manufacturer just reopened today coming out of Mexico.

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Adrian Foley: Yeah I echo those comments I we've seen up and down the state.

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Adrian Foley: The city's respond really quite innovatively as it relates to servicing

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Adrian Foley: Their essential server essential services, housing, you know, as an as an example in the city of Dublin, where we happen to have a large project.

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Adrian Foley: The city did all their online inspections virtually so they actually went into Blue Beam and and did plan check for all of our permits that were being processed.

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Adrian Foley: Through Blue Beam. We haven't seen that.

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Adrian Foley: As aggressively across all cities, but it's been incredibly rewarding to see cities sort of lean in.

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Adrian Foley: Scott's right though they're very diligent on that on our job sites and we like Scott have had kind of the standard plus in our on our field for our field teams. So we have single trades in each home.

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Adrian Foley: So we're actually getting some real efficiency out of that we realize the trades. He didn't like having multiple

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Adrian Foley: Other trades around them, despite the fact that we thought it was efficient, it may not have been efficient. We actually did extend the scheduled like I made the comment five to seven days. Just to give ourselves more room, frankly, that was more for

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Adrian Foley: Cleaning and and that sort of exercise the trades actually have delivered

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Adrian Foley: But back on the inspection side. So we're actually not things Richard any slowdown for inspections don't think we've missed an inspection in the last 11 weeks and this is across the US.

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Richard Green: So you said Adrian, Eric. Eric, the opening that really intrigued me as the increase in virtual traffic and how have we gotten to a point where people are buying houses without actually seeing the house first and second, how do you see this thing changing just long term of sales are done.

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Richard Green: In the residential housing market.

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Adrian Foley: Yeah, so

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Adrian Foley: So the short answer is we have had sales sight unseen and the information that we have today. So we have a we have sort of a blueprint for digital and online sales, which

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Adrian Foley: Which, you know, happy to share with anybody that wants to wants to take a peek of there, but because we want to get it frankly more accepted across our industry.

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Adrian Foley: But basically expectation is the customer does a lot more of their own online work and they do it anyway. But that they come to the to the sales office informed if they come to the sales office at all.

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Adrian Foley: But hopefully they can take a a literal tour a digital tour through the purchasing process.

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Adrian Foley: To procure the home and and ultimately go through the whole of the process, virtually without actually setting foot on site.

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Adrian Foley: Now, I don't think I'm here to say, and I'm sure Scott would agree that overnight. Our industry is going to transform into a virtual sales environment.

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Adrian Foley: And where where sales models and sales homes and communities aren't looked to be viewed by the customers, but we do think that as we turn the corner here postcode that there'll be an expectation

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Adrian Foley: That a very high bar of digital presence is felt from the customer to the point where they can, if they want to pursue an online purchasing process. So now you go to my own view Richard of of how this how this may help a customer appreciate the value of of

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Adrian Foley: Of that in their, in their purchase and we think we can offer

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Adrian Foley: I'm going to call it a technology purchase and a traditional purchase as the two choices for a customer, it may not literally be those two choices, but will highlight that if you want to go the traditional route.

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Adrian Foley: That the expectation is, you pay for that. And that includes an external broker. That includes an internal Brookfield broker.

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Adrian Foley: That includes all of the administration that comes with that exercise, but if you pursue an online purchase that that price would be different.

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Adrian Foley: And there'll be a materially different proposition to that online purchaser given you know I think our industry has struggled with.

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Adrian Foley: More so in the last three to four years with the increasing level of broker participation. I know from our standpoint. I'm sure Scott's happy to share his we spend

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Adrian Foley: We used to spend a third of our dollars broker dollars per home now. He's been more like 70% OR two x that today it's costing us you know somewhere between

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Adrian Foley: 2.75 to 3% for each one of those sales and frankly, right now we're hearing builders go as high as 4% for spec inventory sales. We're not weaning ourselves off of this broker cost which is a which the customer is paying for

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Adrian Foley: So this is what's unique about this is the customer today has been has been convinced that they're actually not paying for that broker Commission, when we know they are so the NH

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Adrian Foley: Well, I will get political here, but let's just say the association realtors done a really good job of marketing.

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Adrian Foley: Who pays for that broker condition we think we've got to educate the customer that they can pay less for their home if they want to do it.

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Adrian Foley: And do a little more work themselves. We're going to convince ourselves to be way more transparent without selling proposition. So we start to reveal a much more open book of pricing for that customer

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Richard Green: I want to follow up with that a little bit. But Scott I just your reaction.

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Scott Laurie: You know,

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Scott Laurie: I'm going to start with something that Adrian said earlier, and that was regarding the start to the year, which I think is very important and all this. So,

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Scott Laurie: Was probably one of the strongest starts. We saw in this cycle for sales and building the backlog so similar to Adrian when this hit. We had 60% of our business plan was done for 2020

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Scott Laurie: What this is done is builders are like molasses with change. They don't want to change we're never that proactive. I THINK ADRIAN, and I are ahead of most related to technology.

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Scott Laurie: And some of the advancements we've done held today. But what went on with coronavirus really pushed us forward in a very quick pace, because if you wanted to sell homes, you need to do it virtually

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Scott Laurie: What has not gone away. I was shocked at how many people wanted to come out to Costa Mesa

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Scott Laurie: We've been doing open wall walks in Torrance, I'm still surprised at how many people want to come out and it's a very different grand opening process. So we didn't do a true grand opening

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Scott Laurie: Everything was done virtually up until that point in Costa Mesa, but when we open it was one appointment every two hours. So one

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Scott Laurie: Family would come in and we tried to limit the number of people they got two hours to spend on site touring the model and then sign their contract. And then the next family.

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Scott Laurie: came in. So it's a little bit of a different environment, but the touch and feel

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Scott Laurie: And think is still very important to the buyers, AND I THINK ADRIAN says same we've sold virtually particularly to buyers from China, where they never saw the house before this is different.

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Scott Laurie: And I think it's also going to change some of our designs and what we do with the house, which I'm sure we'll talk about further but we already started going and I know Adrian did this to with touch lists.

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Scott Laurie: On a lot of the equipment and appliances and things that we're doing in the house. The connected home is going to be incredibly important and how people live in their homes, going forward, there's going to be a lot of positive change.

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Scott Laurie: In a very unfortunate circumstance that will come out of this, I believe.

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Richard Green: There we go.

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Richard Green: Adrian. I mean, you said something that was very striking to me and I want to make sure that people heard it is you're saying that when you sell a house.

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Richard Green: That involves a broker, it will be more expensive to the buyer than a house that doesn't involve a broker. Is that correct, did I hear you say that.

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Adrian Foley: You, you're putting words in my mouth or twisting my work. Well, actually, what I said was, as a traditional purchase.

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Adrian Foley: And will give people the option of pursuing a traditional purchase and if you have a broker that may be one form of a traditional purchase and other form frankly would be you processing.

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Adrian Foley: That purchase with the use of our Brookfield internal selling agent in it in their current in their current role, but it's predominantly X don't know broker focused. I, I would agree, and that that price.

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Adrian Foley: Price may be different than the price you buy if you all the offering package you wouldn't necessarily even be price, but it may be a whole series of other things that were able to do if you're if you buy

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Adrian Foley: Will call it through, through a technology purchase this is this is by the way is being done by a couple of builders in various parts of the country.

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Adrian Foley: I think we need wholesale acceptance by builders to try it out. In order for us to really break the back of what is a ridiculously overburdening broker Commission structure that's in real estate. Today it's absurd.

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Richard Green: I'll get it. I didn't put any words in your mouth, there is, you know, one of the things that people have been talking about is the disruption of the sale process for some

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Richard Green: Time and sort of the metaphor bill uses travel agents, right, is they basically got what they still around, but basically got substantially removed from the buying a plane ticket process.

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Richard Green: The media, of course, has been very disruptive the advertising model is basically seems to be going away.

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Richard Green: Straight to New York Times now gets two thirds of its revenue through subscriptions universities, of course, are being disruptive that were disrupted and we're thinking very hard about how we make sure we remain relevant given

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Richard Green: What's happening out there and people, I think, been puzzled about why the real estate sales process hasn't been disrupted more

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Richard Green: Because there are so many things customers how to do online that they didn't do before and what it sounds like. Adrian, you're talking about one of the steps that might be involved with the destruction of that market.

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Adrian Foley: Yeah, that's right. I think, you know, we all know through companies like Zillow and Redfin the transparency that exists in our, in our

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Adrian Foley: Housing portfolio today resale and new home. You know, I can look up my neighbor's home for a house that's a new home that's being delivered

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Adrian Foley: For me in the next 60 days I can look at what my neighbor paid I may not get as much clarity around how they arrived at that price, but I can see the home if it's closed escrow. I can see within

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Adrian Foley: 30 to 45 days what that home price was, why aren't we providing more as an industry to that customer

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Adrian Foley: To educate them on how we arrived at this homes price, just like we do internally Scott sits down, we sit down to review pricing, you know,

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Adrian Foley: Logic and we base it on demand we base it on prior prior sales performance and a projection of of

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Adrian Foley: Of of of our own absorption. So why aren't we giving that information to our customers. I think it will help them build advocacy around the customers.

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Adrian Foley: Around the builders relationship and prevent them needing to lean on a third party advocate in the form of a of a broker, which typically is what happens, be a bit

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Adrian Foley: Bias think they're not getting a fair deal. So there's a big opportunity here. This is a big shift that will take time to grab it to gradually move toward but we think

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Adrian Foley: To Scotts comment on the one of the benefits of coronavirus we think this will be one that we have an opportunity of jumping

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Richard Green: So let me with Scott on a shorter term issue that may also lead to long term changes, which is what what's happening and lead markets. Right now I'm. Are you seeing discounts you seeing new opportunities.

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Richard Green: How are you, integrating the characteristic Heartland market into your strategy.

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Scott Laurie: So there are similar to Adrian and I, we are not discounting our homes in this environment, which is very different than any recession. We've been through.

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Scott Laurie: Prior, and maybe we're just not at that point yet, but we haven't had to and land Sellers also have not had to discount their land.

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Scott Laurie: And builders when they shut off construction most also shut off acquisition, very quickly, which will have a long term.

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Scott Laurie: Issue, and that long term issue is going to be, if you're not buying land today, you're not building homes tomorrow.

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Scott Laurie: And so there will be a continued tightness in the market, because none of us are growing our future businesses right now.

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Scott Laurie: And there was a belief, we would see this kind of land wetland sellers have been winning willing to do at this point is every deal we had in play.

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Scott Laurie: We extend it out and it's very difficult to ask for a price reduction anyway. At this point, because we don't know exactly what we're asking for

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Scott Laurie: Right now in the cycle until this plays out further. What we want is time and the land sellers have been very accommodating

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Scott Laurie: With time, but there were a lot of deals that were stopped and walked away from they will take time to come back.

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Scott Laurie: And it will be a question of when that by side happens where I think the interesting opportunity for a company like ours and Adrian

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Scott Laurie: Who will do entitlements and play in the urban arenas is there is incredible stress and distress within cities within counties, which will create opportunity.

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Scott Laurie: On the home build side and that opportunity will be created through land sales through cities which Adrian. I bought plenty of land.

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Scott Laurie: Through cities and we just approved a deal through a particular city last week that they were eager to get done. And that's our first deal that we move forward on

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Scott Laurie: During this period, and we have two more behind it that are also city deals cities need cash. They are not going to get it from sales tax revenue.

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Scott Laurie: There is incredible level of collateral damage that has been done that none of us truly realize until we come out of the bunker on this.

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Scott Laurie: And I think cities will be much more accommodating where they did not want residential before they will be more willing to accept.

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Scott Laurie: Residential and there will be some changes, but there will be a definite need

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Scott Laurie: Going forward, and the affordable issues, by the way, did not leave with coronavirus or worse today than they were before. So there's a lot for Adrian, I believe, to do on the land side to grow our business, but we're going to need to be patient, it's going to take time.

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Richard Green: Do you have any thing to add on this point.

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Adrian Foley: No, I think so. So we think of ourselves as a lot provider, as well as a land buyer. So I think so. Just for optics. Again, we, we would typically close between three and 4000 lots of year with third party builders and at the time of

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Adrian Foley: Sort of covert hitting we were somewhere around 600 to 700 lots were in in backlog, we were calling backlog.

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Adrian Foley: So, meaning there in the purchase in the process of being delivered and we basically had as you would imagine a lot of builders reach out and say hey will rather

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Adrian Foley: hold off until we get better better visibility on on how things play out in the second quarter. So we just said to all of our builders.

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Adrian Foley: In the main, and if any of them on this call and we didn't say this, I apologize, but I'm generalizing we said, hey, we will just

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Adrian Foley: Will forbear just like the, the government has on on you need to take down those lots will push them out 60 days 90 days, and we'll see how this plays out the expectation was

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Adrian Foley: That we didn't know. But that we would have at least a quarter of zero fairly low sales.

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Adrian Foley: This doesn't deal with Scotts brought a picture, which is how does the future look this is just a near term. So we basically pushed everybody out and we said

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Adrian Foley: We'll see how this year goes. Conversely, for us, we put a freeze on all new land development, we said we're not starting any new phases or waiting until this plays out. We have to think

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Adrian Foley: A combination of things. Now you have to factor in backlog sales Scott mentioned is 60% backlog sales spec inventory

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Adrian Foley: So we actually think when you factor in backlog sales and erosion of backlog sales and spec inventory that didn't have a buyer. By the end of Q2. We thought we think

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Adrian Foley: Our industry has an abundance of supply for the demand that's flowed through in Q2. It will have the math and play out that way.

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Adrian Foley: But, but even with an optimistic forecast Q3 and Q4 won't absorb anywhere near the level of adoption that it needs for us to start new lots

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Adrian Foley: So he said paws are not starting a new lots. So that was the land side of the business really we pushed it out to 2021 and then you get into a discussion as to how we see 2021 on the on the acquisition side Scott's absolutely right.

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Adrian Foley: You know, it's kind of like the first the first opportunities in the market, or what's on what's in the stock market. We see the first opportunities in the market today as being public agencies desperately needing to

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Adrian Foley: balance their budgets state California is 56 billion, I think it is right now it's going to need to dig in and figure out how to how to make PPP work and not PPP that

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Adrian Foley: Is is is funding, more, more public private partnerships work going forward so that they can get housing bill lots of Atlanta developed and

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Adrian Foley: And at a, at a you know a return for for a developer to come in. So we see that as being an opportunity if you want me to squint and look forward at

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Adrian Foley: Going forward we see a lot more distress in the land model land market in the near term in the next I'll say 12 to 36 months just given how we see the market playing out for the next 40

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Richard Green: So I want to follow up on something you both have it. I just want to syrup Goodman is on the phone and he has his hand raised. And I give it to Rob, are you gonna want to ask a question.

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Richard Green: And I give you permission to talk

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Richard Green: Okay, we're not I'm not hearing, Rob, but I'll come back to that.

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Richard Green: Do you see this leading to just a whole reconfiguration of how states and local governments raise money and I think it particular Scotts point about sales tax.

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Richard Green: I suspect that sales tax is going to be depressed now forever. And we're seeing shopping centers close and large numbers, this was happening before Copa came along.

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Richard Green: I could call it accelerated this you have, again, California, in particular, seeing the problem with having a volatile income tax base it realized very heavily on capital gains taxes for its revenue stream and of course

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Richard Green: You know, while while long term high income people are hiring people their year to year, but you don't catch them on their long term income you text them from year to year, which is that income is very volatile and we're seeing that show up.

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Richard Green: Right now, so could you imagine a world in which say

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Richard Green: State Governments rely less on sales and income taxes and more on property taxes going forward. And that influencing industry.

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Scott Laurie: I can go first on that. If you'd like Richard

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Richard Green: Her

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Scott Laurie: I think yes, someone's going to be paying for all this.

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Scott Laurie: And it's potentially going to be the property owners and as has been discussed on previous calls people are raising their hand to have their taxes raised

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Scott Laurie: But something's going to have to happen here because of the distress, which doesn't go away and a two months shut down. I tend to agree with you. This is going to play out much longer.

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Scott Laurie: And I do think there's going to be opportunity on that.

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Scott Laurie: And I know you've talked about the split role and other things which are very contentious topics here but states are going to have to figure out, Adrian talked about. I mean, where the state of California.

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Scott Laurie: Has a massive multi billion dollar deficit. That's not going to change and you hit on capital gains sure there's been an incredible stock market recovery. I can't tell you need there. Can anybody else where that plays out for the

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Scott Laurie: Rest of the year. But I think there's going to be some fundamental issues, the state is broken in very many ways. And one of the easiest ways to see it is how this recovery is starting to play out.

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Scott Laurie: There's not a lot of continuity process state. And I think a lot of cities will be left behind in this

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Scott Laurie: And I'm really not sure how they're going to fully recover and I can promise you, my building 100 townhomes is not going to be the answer to fixing some of these fundamental issues that cities will have as with state counties.

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Richard Green: Well, so this is so we have a question from David Nielsen and the audience that relates to what you just said, which is just you see people leaving urban areas, less populated states.

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Richard Green: Just because people are going to be more comfortable having more space around them. And we're just the start. Does it start with younger buyers. Start with retirees or doesn't it started all the first time that I had just got

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Scott Laurie: Well, I was gonna say that. You know, it's interesting. I think we lost 250,000 people out of the state. We couldn't house them anyway.

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Scott Laurie: We have a major housing shortage is this going to change the way people look at housing. Yeah, we're seeing some examples of that. Is it a long term trend.

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Scott Laurie: I don't think we know. Will people leave the state of California. They were already starting to leave because it becomes so expensive.

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Scott Laurie: To live here, but I do you think there will still be very strong demand within the state. But you know, it's interesting. Go look at The Ohio and Sandy and as Santa Barbara markets right now they are having an incredible resurgence on sales.

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Scott Laurie: Some of those are second home. Some of those are people moving. I think there are a lot of unknowns on how long this goes on for if school does not reopen next year, which I tend to think it will. But again, I don't know.

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Scott Laurie: If we're virtual schooling and we're in our homes, it changes the perspective of people. And by the way, our sales have been strong and maybe Adrian has seen this as well.

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Scott Laurie: Over the last few weeks because people are ready to move

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Scott Laurie: And there was a comment on one of these conferences where someone had mentioned about some people will move up some people will move down some people will move in some people will move out.

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Scott Laurie: I think we're all going to be surprised by the level of movement that comes out of this, but I'll end up with this common again we are so supply constrained

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Scott Laurie: In this state right now in Adrian's not building enough. I'm not building enough and we certainly are building them at the right price points. So I think this is a question that we were asking before this started. And it's becoming more and more relevant today.

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Richard Green: Yeah.

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Adrian Foley: Yeah, so I would start with the, what's your view on on people working in working remotely or working in an office environment.

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Adrian Foley: Which roles which which parts of each of our organizations collectively can be done remotely with zero impact to their

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Adrian Foley: To the culture to the efficiency of the of the organization, I would argue, whatever you think that percentage is has a high probability of viewing suburban living more tactical rather than living

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Adrian Foley: I personally and Brookfield Elvis has made a big bet in in in frankly both, but probably a lot more urban than then then suburban

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Adrian Foley: Across our real estate portfolio. My personal view is people will still want to return to an office and work.

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Adrian Foley: in a team environment and generate the energy that they get from working around people rather than working remotely certain functions, as I mentioned, I think can do it just fine. And there'll be a percentage 10 15%

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Adrian Foley: Now, as a result, I feel I personally believe urban markets will remain strong will Montana be more popular for those that can work remotely potentially I sat on a call. Interesting. Call the other day. We're building a development in Hawaii and and the guys

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Adrian Foley: commented that

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Adrian Foley: They were looking for for people working remotely from California to want to spend six months in a way and look to rent product and property in Hawaii for that six month period so

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Adrian Foley: It may be that phenomenon, you know, gathers speed. My personal view is that that will be a very slow process. And they'll still be as most of our demand for downtown San Francisco downtown Los Angeles downtown San Diego downtown New York is there ever. Is there ever was.

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Richard Green: So again, I'm going to try. Rob Goodman was had his hand up over the phone, Rob. Are you there you

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Rob Goodman: Are Hi, Richard. Can you hear me.

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Richard Green: Yes, yes.

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Rob Goodman: Great i what i don't i'm i'm a little bit confused about that nobody's talking about at least my expectation is when the numbers come out this Thursday. We're going to hit 40 million unemployed.

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Rob Goodman: And there's been massive amounts of liquidity put into the system by the Fed over the last few months, that's not going to continue forever.

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Rob Goodman: So what do we think is going to happen when the, when all of the money supplies slows down.

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Rob Goodman: And you've got 40 million unemployed people and I know as the economy starts to reopen that some of those people are going to be rehired but a lot of people are predicting by the end of the year will be down to 10 million

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Rob Goodman: I just flat out don't believe that. I don't think it's going to be even close to 10 million. How does that impact on

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Rob Goodman: The forecast for housing.

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Scott Laurie: I love that question because it's one that I asked every day.

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Scott Laurie: And I think it goes back to, I could not agree more with Rob. I think it's somewhat ignored. It's how we're looking at our future business because the question is with 38 million people.

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Scott Laurie: And we go back to this as a permanent or is a temporary and I keep telling people wait till the PPP money's gone and then let's see who's really laying off because I think we will see further layoffs PPP gave us a window.

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Scott Laurie: And gave us some time, give us an extra two months. Not that much has changed in a positive manner for many businesses. I just don't see, I agree with Rob

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Scott Laurie: There was a conference where someone was saying will end up at 10% at the end of the year, which I think was marks in handy.

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Scott Laurie: And that would be incredibly positive to me. But when we still see these claims at 2.8 million. Those are huge numbers and my biggest concern is the melt up

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Scott Laurie: And the melt up I keep talking about is, we're seeing these lower level jobs that go away. Next up is going to be middle management and above, and I'm already starting to hear it. And we have lost some people in the backlog due to this.

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Scott Laurie: The bleeding has not stopped. But again, I think the big question is going to be this permanent layoffs versus temporary and the outcome of the PPP on this, but there is no clarity, no one has the crystal ball on this, but I don't see it coming to an end, anytime soon.

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Adrian Foley: Yeah, I would add to that that and Rob I think you've heard me comment on this, say, I think we're in a bit of an Indian summer for the last

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Adrian Foley: Four weeks here, and we've seen a resurgence. I don't think anything we're going to get for the next call it the next five or six months is going to me. It's going to be a material trend that you can build a 2021 business plan off. I really struggle with that because I think, to your point.

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Adrian Foley: There's there's heavy subsidy going on in the broader you know obviously not with clients. They're coming in and buying houses that over this heavy subsidy going on across, across the economy.

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Adrian Foley: And redeploying people at the pace that they were on it made unemployed is is is going to be a an incredibly difficult challenge.

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Adrian Foley: Our view is that we think, as a result, people will not go. We will have high unemployment at the end of this year and someone the order of 12 to 14% hence, hence roughly 20 million of our

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Adrian Foley: Employed sorry unemployed will go back to work and 20 million will remain unemployed.

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Adrian Foley: That has got to put

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Adrian Foley: a damper on 2021 demand and we're currently and if you walk around book for Brookfield with a with a negative perspective on that. I don't think you're kicked out the door.

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Adrian Foley: Because it could be, it could be even harder than that. But we view 2021 is being significantly down from 2020 even with these this sort of attracted seven to eight month slower absorption. So you're absolutely right, I think we're in for

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Adrian Foley: A slog here. So we got to be really proven with what we buy

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Adrian Foley: And how we sell and and controlling our costs going forward or in a market is not overbuilt to Scotts point

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Adrian Foley: So we may find ourselves in a fortunate position that we because the resale market is not over supplying and candidly Fannie, Freddie positions on on foreclosures and how they're going to process.

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Adrian Foley: forbearance payments and push them to the back end of sales is all going to help the the foreclosure process, which really hurt us, you know, eight or nine or 10

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Adrian Foley: So we think that despite all of those conditions. We're seeing a bit of an Indian summer here and we'll, we'll level set more towards the fourth quarter and start seeing things play out more normally as to how 2021 plays out.

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Richard Green: I think it's it. I don't think we can overstate how important the forbearance policy of Fannie and Freddie, and FHA yes and particularly now that they've said

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Richard Green: You're not gonna have to pay it all back as soon as forbearance is over. It will be tacked on to the end of your loan and when you refinance or sell or pay off the mortgage. Again, that's when you have to pay it back.

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Richard Green: So we're seeing, you know, the Case Shiller index came out today and it's up naturally 4.4%

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Richard Green: At is. But if you live number of sales. They're down about 60% but the number of houses on the market is also down 60% to where nobody's being forced to sell right now. And I think this was a very wise important

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Richard Green: Policy, but it can't go if this lasts for a long time, there's a there's a limit to how much you can use forbearance. It's a tool.

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Richard Green: To prevent bad things from happening, but it is, I think, a very, you know, you want to find some I agree with you, by the way everyone I hate the phrase silver lining

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Richard Green: But at least we showed that we learned something from last time around, and, and I think this is a very useful. And it's a very low cost, in my view, thing thing to do.

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Richard Green: We have a question from Aaron Hershey What position are you taking on cancellations to the job loss. Are you canceling buyers who have lost their job or

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Richard Green: experienced significant income loss or you keep them under contract, hoping to find work again it will be able to qualify when the time comes to close a refunding deposits if cancer to job loss. So let's go with you first Adrian on this one.

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Adrian Foley: Yeah we so if if you walk in and you lost your job to Kobe. You have a choice. You can either get a full refund on your deposit

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Adrian Foley: Will hold your option money just making sure we get recovery of your option dollars, but you get a full refund on your on your deposit or

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Adrian Foley: will extend you 60 days in the hopes that you find employment and will hold your house. So, you know, we've had a few people gave us a little bit

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Adrian Foley: Kelly. I can rate them when we talk about Camry Scott, but a camera. It's been quite healthy

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Adrian Foley: And partly because I think we had a good you know backlog coming in people that were in long ass grows four months five month escrow is weren't canceling but we've had, we have had a small percentage, you know, five to 6%

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Adrian Foley: Of a typical 16 to 18% Camry, so five 6% of that can rate be troubadour to Kobe. But that's how that's been our public position, we made it very well known. If you

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Adrian Foley: And Frank, if you walk in the door today and you buy a house and we we are giving you the acknowledgement that look, we're going to work with you through this purchase process if you lose your job. This is how it will be

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Scott Laurie: So Aaron come down and sign a contract for our house and you can see the policy yourself. We have the same policy as Adrian

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Scott Laurie: And I think that it's going to be critical. And I love how often Adrian has mentioned customer we are both customer centric companies and take great pride in that we will all be remembered how we dealt with our customer through this for a long time.

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Scott Laurie: And so we are handling it the same way. And I think what you just hit on Adrian, the cancellation rate has remained incredibly low and that's also why you're not seeing big discounting Richard

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Scott Laurie: We all have big backlogs and there is a lot of money in those backlogs and we were protecting our backlog and we are racing to the clothes.

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Scott Laurie: So that is the effectiveness of being in the central industries, we're still able to build

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Scott Laurie: We cannot build fast enough, because for Adrian and I, some of these homes or four months out, I cannot tell you what's going to happen during that window.

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Scott Laurie: So anywhere. I have an opportunity to expedite I'm expediting but here's the other flip side.

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Scott Laurie: If you're going to cancel, we've been pretty aggressive on canceling the buyers that want to cancel because I want to replace those sales.

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Scott Laurie: And I don't want to end up which happened to a lot of builders in the last cycle where all the sudden they're two months into this and they realize they have 100 cancellations in a two week period.

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Scott Laurie: So we have managed it, which I know Adrian does as well very tightly. In fact, we have trackers on every homeowner in backlog and we code them simply red, yellow, green, so we know where they stand, and we updated every single week.

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Scott Laurie: And if you're hanging out and read. We're going to work to move you out of that backlog very quickly today, but it's all about the certainty of clothes and it's all about the customer and our reputations.

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Richard Green: So, um, here's a very nuts and bolts question that I find really interesting from Paris Silva.

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Richard Green: What technology or platform has been the most useful and delivery of their products. Additionally, what piece of your supply chain you feel is going to be most disrupted after this crisis.

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Adrian Foley: So I think by I was the question related to what sales software.

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Richard Green: I that's how I took that yes, meaning. Yeah.

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So,

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Adrian Foley: I won't get technical, but

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Adrian Foley: But things like Matt report.

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Adrian Foley: Would be examples of really high quality sort of walking tours virtually online. We have a product called I see what you see, which is exactly what it sounds like it's a it's a recorded

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Adrian Foley: exchange between two people. So if, if I reach out to Scott and I see Scott, could you talk me through your models, please.

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Adrian Foley: He'll take me through the common area. Take me through the model home. We can have dialogue like this.

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Adrian Foley: With earbuds in just have a regular conversation like we're walking shoulder to shoulder. It's recorded it's sent to me. I can review it play back. What's your my TV at home with my wife.

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Adrian Foley: And kids and we can talk about that future home. So it's that sort of a, I think that that was that question. And then the second question, because I've gone on so long I forgotten what it was, what was that

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Richard Green: What do you think will be permanently disrupted in supply chain as a result.

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Adrian Foley: Oh supply chain. So, so today we have a weekly report that comes out on the supply chain side. And again, I'm happy to share that with anyone who's interested, it's

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Adrian Foley: It is ring central distribution, but it is USC last so happy to share and and it's across our mixtures business and our land and housing business.

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Adrian Foley: And as Scott said really we've seen very little from China, Asia, we've seen more from Europe from Germany, Italy and actually less money than you would expect for a country that was shut down. They were actually still manufacturing

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Adrian Foley: And Scott's comment on Mexico was very relevant. So, but we are seeing lighting shortages in the near term. So anything that's made light fixture wise in China, we are seeing some some of that.

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Adrian Foley: Stress. We're also seeing, which is really interesting out this manufacturers deploy heavily into the US so

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Adrian Foley: I wouldn't be surprised if we have to impact one. There's a lot more onshore manufacturing to which is going to be interesting for cost control to there's a lot more storage needed to store that on onshore inventory insight in the US.

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Scott Laurie: You know, Adrian on the supply side I think

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Scott Laurie: For our businesses, we're looking more towards not just North America, but us. So I've told our purchasing teams.

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Scott Laurie: You got to find the product in the US and we are over ordering for future phases. So we don't run into some of these issues, but you don't realize no one thought that we wouldn't be able to get doors for our homes because the plants in Mexico, guess what.

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Scott Laurie: I have homes and don't have doors now my closing them know. Am I getting my doors in a week from now. Yeah, but I didn't expect have a five day delay or a week because of doors. So we're learning lessons on the supply

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Scott Laurie: Chains, there's more that's made in North America than any of us thought, particularly when we're looking at things on drywall lumber, of course, the big components.

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Scott Laurie: So what

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Richard Green: Would it cost if it's if it's in North America.

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Scott Laurie: What was that Richard

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Richard Green: What is that did it cost.

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Scott Laurie: You know what, there has not been a great impact that the cost side is yet to play out. So commodities have come down considerably by the time it reaches Adrian and I

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Scott Laurie: Were years down the road.

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Scott Laurie: And you're dealing with massive suppliers here you know lumber markets played this smart, they shut down Mills, they're holding up the prices right now. I would have expected lumber to be much lower.

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Scott Laurie: At this point in time that hasn't occurred. Are we seeing it on the trade side sure you know where the cost is coming down right from the margin line from the trades. It's certainly not coming down because I'm buying less expensive paint.

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Scott Laurie: Lumber was down 16% at one point, it's headed back up. But it's coming out of the trade on the margin and it's not coming out of the labor wage side at this point in time.

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Scott Laurie: And I would just mirror Adrian's comments on technology and we just set up that same exact

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Scott Laurie: Program that you have with the face to face with the homeowners or the prospective buyers Adrian our teams really excited about that. But

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Scott Laurie: Definitely going more virtual on sales and the one thing I would add to that is the buyer is in much more control today of their purchase.

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Scott Laurie: Than they were even three months ago. So we're having to follow their rules and what makes them most comfortable today. It's not on our clock anymore. And that's been a big change.

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Richard Green: So we have reached the top of the hour. So Scott Lori Adrian fully thank you so much for a lively and informative. Our, our next

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Richard Green: Less perspectives event is tomorrow at 11pm will be going back to the commercial side of the business. There you go. And Scott, by the way, they tell us the distinction between your masks. You were talking about that before we went on the air.

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I'm

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Scott Laurie: Going back to the field, Richard. So, you know, it takes all my superpowers, but

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Richard Green: But you said one was from one geography one message.

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Scott Laurie: To this is an LA pp on a job site.

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Scott Laurie: In I won't mention the county, but some counties believe that mass are only for Halloween. So they only understand that this is a mask which I personally tried to stay away from. But what we're all trying to do is just remain safe and healthy and a smile here and there is okay by me.

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Richard Green: And so it's a my final message is

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Richard Green: I married to a woman who is a physician who takes care of eight year old people. So if you walk by me, please, please wear a mask.

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Scott Laurie: This one.

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Richard Green: That one.

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Richard Green: Yes. Tomorrow 11am commercial tenant management follow up paddle with Lisa ready Rachel wine, Dave.

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Richard Green: Dave Dodger and Stanley iseman it should be a great panel. I will look forward to seeing many of you there. Otherwise, the rest of you. Thank you very much for joining us today. This will be again online very soon. If you go to lusk.usc.edu slash perspectives agent and Scott. Thanks again.

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Richard Green: Have a good day.

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Adrian Foley: Thanks, guys. Good to see you might

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Adrian Foley: See, Richard. Thanks a lot.

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Good go