Today’s Dilemma: Interested Parties, Wary Capital But Very Few Acceptable Deals

The economic news has not been wonderful lately, with investment bank meltdowns, the distressed sales of brokerage houses and discussions on a “bailout” monopolizing the focus of reporting. Many of our clients are looking for deals but the “bid-ask” separation is still too much to make them happen (the bid-ask has improved, from the 40 to 50% difference of earlier this year to perhaps 10 to 20% now). Here are some observations as to what many deal shoppers are facing right now:

• The acquisition focus is on the best locations with some distress. These locations are likely to have fewer future price reductions and market instability (generally fewer foreclosures as well), and underwriting can be more aggressive and closer to what a seller needs. Further, a few builders tell us they are actually running out of lots in some close-in locations.
• Groups with horizons beyond five years are still paying attention to the secondary markets where the housing environment today is weak. If deal terms are available that allow a reasonable hold, buyers are assessing these longer term opportunities.
• Most groups are looking for terms that will help mitigate the risk of further market deterioration.  Most projections include elevated profit margins (often with a profit sharing above a lower profit margin), multiple takedowns, and floating land prices.  Homebuilders still prefer deals between 40 and 80 units, but will pursue larger or smaller opportunities depending on the deal, location and terms.
• In California, the key is to find any deals that make sense.  Deals in the challenged markets (such as Bakersfield, Stockton and the Coachella Valley) have limited appeal since in most cases even finished lots have little or no value right now and it is difficult to sell houses (or get them financed).
• Most builders we know are willing to do "fee management" deals in most locations.  This includes working through existing projects, completing subdivisions for banks or entitling new projects for a fee.
• Apartment deals are generally making more sense than condos right now.  A client of ours notes that some projects that were large apartment designs have simply been renamed and marketed as "condos" and the product doesn't quite work.  We have seen some very interesting apartment deals in California, Las Vegas, New Mexico, and even in North Carolina.
• Believe it or not, some builders can still finance the debt and equity on new deals. We have seen this occur for a new for-sale residential project in Northern California, apartments in Las Vegas and a mixed use site in North Carolina. The keys have been a great location and very solid borrower.

Sullivan Group Real Estate Advisors conducts feasibility studies, strategic plans, repositioning and product, pricing and absorption analysis for homebuilders, developers and lenders all over the United States. In addition, we assess commercial properties and provide fiscal impact studies. In the last 12 months, we have completed 350 studies in 50 metro areas. Please contact Tim Sullivan at 858-523-1443 x152 or at t.sullivan@sgrea.com.