Differences between the housing business and Housing writ large are lost on no one in The Builder's Daily's audience.

Those differences -- between not-enough homes in America and housing demand, between housing attainability challenges and historical trends in payment power, between undersupplied housing types and overbuilding higher-priced market rate homes – matter.

They matter particularly insofar as how the forces of federalizing and financializing of everything are currently hellbent on a head-on collision, even as both improved policy and better capital investment strategy play critical roles in solutions for both market-rate and affordable housing.

The differences shape the everyday real-world topography and moats of opportunity for some players in the housing and residential real estate markets, amidst high-barriers and deep pitfalls of risk for the rest.

Still, as a massive new influx of tens of billions of dollars – dollars that normally would seek opportunistic returns across an array of real estate and other asset classes – inundates and activates residential development in a stretch of indefinite time defined by the pandemic, what gives those differences meaning blurs.

Our contributor, Scott Cox, principal at SLC Advisors has written:

I don’t think I’ve ever seen this much capital in the housing space before. Single-family built-for-rent, traditional apartments, single-family for sale, master plan communities, you name it, there is a ton of money looking to be placed in it.

Public builders, private equity, hedge funds, debt funds, etc. Land banking is so competitive it’s becoming more common to see single-digit rates. For that to end well, you’ll need almost a perfect track record from beginning of the cycle to the end.

Not likely. Instead, an often blunt instruments of public perception and political narrative yield to the temptation to compress many separate strands of American residential real estate and construction investment's plotline into a single frieze, complete with larger-than-life heroes, villains, victims, and perpetrators, greed, and misery.

In real ways, the pandemic and its realm of repercussions – on Main Street, Wall Street, and Capitol Hill – have warped both time and spatial differences, partly because America is full of people who live in and in between and on the bubble of what commonly goes for market rate versus subsidized, supportive, lower income homes and communities.

Where the differences blur the most these days concerns the immediate and long term business future of the single-family built to rent market, embraced by households and investors alike as a housing choice of the moment.

The number of built-to-rent homes — single-family homes constructed expressly for the purpose of renting — increased 30 percent from 2019 to 2020. Today, they make up about 6 percent of all new homes being built in the United States, and that number is poised to double in the next 10 years. This is the fastest-growing sector of the American housing market, and it is increasingly master-planned and built on tracts. On the fringes of America’s second-tier cities, entire villages owned by large-scale investors are popping up, offering renters who either can’t or don’t want to spring for a down payment another path to the American dream.

We'd written last week about "Twin Risks" facing the $30 billion to $60 billion in institutional investment seeking yield from the rockstar of residential real estate, single-family-rental development, construction, and property management. In hearings last week on Capitol Hill, a lightning rod for one of the high-risk areas had its moment in a Senate Banking committee hearing run by committee chair Sherrod Brown (D-OH).

Private equity is all about the quick buck – everyone else be damned,” Brown said at a hearing Thursday. “Private equity profits depend on squeezing every last nickel from workers and renters, without any kind of real investment in their employers or their communities.”

This week’s hearing on private equity’s role in the housing market is the latest effort by Democrats like Brown and Elizabeth Warren to clamp down on alternative-investment firms, which the lawmakers say often profit at the expense of vulnerable Americans. Earlier this week, Warren reintroduced a bill that would require companies to disclosure more about their fees and performance, though the legislation faces long odds in a closely divided Congress.

Right now – with 5 million people out of work who had jobs before Covid hit last March, and with millions more whose livelihoods have been directly affected to the negative, and with millions more whose somewhat tenuous capability to meet monthly payment demands of their homes have been impacted – "Evicted: Poverty and Profit in the American City" author Matthew Desmond's iconic trope blasts away the differences between a market-rate housing boom and a housing crisis for any of those unable to participate in the boom:

The rent eats first.

The hearing, co-chaired by Sen. Pat Toomey (R-PA), drew on testimony that both assailed private equity fund investment in single-family rental portfolios and supported it as a private sector solution for affordable housing options.

There’s nothing wrong with investors putting their own money to work to meet the needs of renters,” Toomey said.

What testimony did reveal however, is the symbiotic – if not collusive – relationship between private equity giants and the Federal government sponsored entities, Fannie Mae and Freddie Mac.

One of the hearing's witnesses, Sofia Lopez, deputy campaign director On Housing, for the Action Center on Race and the Economy, testified on how private equity's big push into single-family rental portfolios dates to the middle of the 2008 financial crisis and housing meltdown:

As home prices bottomed out, buyers representing these institutional investors were dispatched to county courthouses across the country to bid on the foreclosed single family homes, often with the owners still living in them, with the goal of renting them out.

"During this time, these companies were the beneficiaries of bulk non-performing loan sales held by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development, which were intended to determine if bulk sales could 'stimulate housing markets' by 'attracting large, well-capitalized investors.'"

So, not only did private equity firms get an inside track into acquiring the "foreclosure loan tapes" from the GSEs, they availed of tax-payer subsidized loans as Fannie and Freddie securitized the debt and sold it through their respective commercial mortgage-backed securities platforms.

You've got the government – the GSEs – benefiting on both sides of the trade here, in selling off the distressed real estate in bulk and then making money on the CMBS, you've got the Democrats pointing the finger at private equity investors for buying up the homes and forcing higher rents on those who were displaced, and you've got the Republicans blaming the problem on overregulation and lack of density that drive up prices," says a strategic executive with a large regional construction and residential development firm. "This hearing may not lead to legislation, but it certainly makes capital nervous right now. Capital behaves differently when investors are nervous."

A wise man once told me, "point a finger at somebody, and you've got three fingers pointing straight back at you. So, don't be so quick to blame."

Join the conversation

Differences between the housing business and Housing writ large are lost on no one in The Builder's Daily's audience.

Those differences -- between not-enough homes in America and housing demand, between housing attainability challenges and historical trends in payment power, between undersupplied housing types and overbuilding higher-priced market rate homes – matter.

They matter particularly insofar as how the forces of federalizing and financializing of everything are currently hellbent on a head-on collision, even as both improved policy and better capital investment strategy play critical roles in solutions for both market-rate and affordable housing.

The differences shape the everyday real-world topography and moats of opportunity for some players in the housing and residential real estate markets, amidst high-barriers and deep pitfalls of risk for the rest.

Still, as a massive new influx of tens of billions of dollars – dollars that normally would seek opportunistic returns across an array of real estate and other asset classes – inundates and activates residential development in a stretch of indefinite time defined by the pandemic, what gives those differences meaning blurs.

Our contributor, Scott Cox, principal at SLC Advisors has written:

I don’t think I’ve ever seen this much capital in the housing space before. Single-family built-for-rent, traditional apartments, single-family for sale, master plan communities, you name it, there is a ton of money looking to be placed in it.

Public builders, private equity, hedge funds, debt funds, etc. Land banking is so competitive it’s becoming more common to see single-digit rates. For that to end well, you’ll need almost a perfect track record from beginning of the cycle to the end.

Not likely. Instead, an often blunt instruments of public perception and political narrative yield to the temptation to compress many separate strands of American residential real estate and construction investment's plotline into a single frieze, complete with larger-than-life heroes, villains, victims, and perpetrators, greed, and misery.

In real ways, the pandemic and its realm of repercussions – on Main Street, Wall Street, and Capitol Hill – have warped both time and spatial differences, partly because America is full of people who live in and in between and on the bubble of what commonly goes for market rate versus subsidized, supportive, lower income homes and communities.

Where the differences blur the most these days concerns the immediate and long term business future of the single-family built to rent market, embraced by households and investors alike as a housing choice of the moment.

The number of built-to-rent homes — single-family homes constructed expressly for the purpose of renting — increased 30 percent from 2019 to 2020. Today, they make up about 6 percent of all new homes being built in the United States, and that number is poised to double in the next 10 years. This is the fastest-growing sector of the American housing market, and it is increasingly master-planned and built on tracts. On the fringes of America’s second-tier cities, entire villages owned by large-scale investors are popping up, offering renters who either can’t or don’t want to spring for a down payment another path to the American dream.

We'd written last week about "Twin Risks" facing the $30 billion to $60 billion in institutional investment seeking yield from the rockstar of residential real estate, single-family-rental development, construction, and property management. In hearings last week on Capitol Hill, a lightning rod for one of the high-risk areas had its moment in a Senate Banking committee hearing run by committee chair Sherrod Brown (D-OH).

Private equity is all about the quick buck – everyone else be damned,” Brown said at a hearing Thursday. “Private equity profits depend on squeezing every last nickel from workers and renters, without any kind of real investment in their employers or their communities.”

This week’s hearing on private equity’s role in the housing market is the latest effort by Democrats like Brown and Elizabeth Warren to clamp down on alternative-investment firms, which the lawmakers say often profit at the expense of vulnerable Americans. Earlier this week, Warren reintroduced a bill that would require companies to disclosure more about their fees and performance, though the legislation faces long odds in a closely divided Congress.

Right now – with 5 million people out of work who had jobs before Covid hit last March, and with millions more whose livelihoods have been directly affected to the negative, and with millions more whose somewhat tenuous capability to meet monthly payment demands of their homes have been impacted – "Evicted: Poverty and Profit in the American City" author Matthew Desmond's iconic trope blasts away the differences between a market-rate housing boom and a housing crisis for any of those unable to participate in the boom:

The rent eats first.

The hearing, co-chaired by Sen. Pat Toomey (R-PA), drew on testimony that both assailed private equity fund investment in single-family rental portfolios and supported it as a private sector solution for affordable housing options.

There’s nothing wrong with investors putting their own money to work to meet the needs of renters,” Toomey said.

What testimony did reveal however, is the symbiotic – if not collusive – relationship between private equity giants and the Federal government sponsored entities, Fannie Mae and Freddie Mac.

One of the hearing's witnesses, Sofia Lopez, deputy campaign director On Housing, for the Action Center on Race and the Economy, testified on how private equity's big push into single-family rental portfolios dates to the middle of the 2008 financial crisis and housing meltdown:

As home prices bottomed out, buyers representing these institutional investors were dispatched to county courthouses across the country to bid on the foreclosed single family homes, often with the owners still living in them, with the goal of renting them out.

"During this time, these companies were the beneficiaries of bulk non-performing loan sales held by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development, which were intended to determine if bulk sales could 'stimulate housing markets' by 'attracting large, well-capitalized investors.'"

So, not only did private equity firms get an inside track into acquiring the "foreclosure loan tapes" from the GSEs, they availed of tax-payer subsidized loans as Fannie and Freddie securitized the debt and sold it through their respective commercial mortgage-backed securities platforms.

You've got the government – the GSEs – benefiting on both sides of the trade here, in selling off the distressed real estate in bulk and then making money on the CMBS, you've got the Democrats pointing the finger at private equity investors for buying up the homes and forcing higher rents on those who were displaced, and you've got the Republicans blaming the problem on overregulation and lack of density that drive up prices," says a strategic executive with a large regional construction and residential development firm. "This hearing may not lead to legislation, but it certainly makes capital nervous right now. Capital behaves differently when investors are nervous."

A wise man once told me, "point a finger at somebody, and you've got three fingers pointing straight back at you. So, don't be so quick to blame."

Join the conversation

Underinvesting in a $35 trillion market – 27% of all U.S. wealth – would not make sense, now, would it?

So, are residential real estate investors, developers, builders, architects, and all of their business partners underappreciating opportunity in a current, future, and lasting unmet need?

Does that make sense, especially when building technology, home technology, materials science, the health sciences, machine learning, and community planning have so evolved as to offer a tipping point improvement at what could hardly be a better moment from a business standpoint?

On the early surge of "the silver tsunami?"

The connector here – home to health – is above debate.

Challenge and opportunity, of course, come in exploring whether this relationship goes beyond correlation to cause-and-effect.

At the kitchen table level, people express little doubt, almost no uncertainty. We asked the question in research a few years ago and the answer was unambiguous. People feel, and believe, and think that homes play an active role, not only in their health in a general sense, but in saving money on medical bills!

Home – our minds tell us – affects our health. Literature and evidence galore support this:

First, there are papers describing the health impacts of not having a stable home (the stability pathway). Second, there are papers describing the health impacts of conditions inside the home (the safety and quality pathway). A third, smaller set of papers describes the health impacts of the financial burdens resulting from high-cost housing (the affordability pathway). Lastly, a rapidly growing literature describes the health impacts of neighborhoods, including both the environmental and social characteristics of where people live (the neighborhood pathway).

This goes for all of us, at any age.

It's no surprise, then, that for those of us "of an age" home is a literal lifeline, a cause-and-effect force in what we need, want, aspire to, and believe in as a source of well-being, peace of mind, physiological soundness, and a rooted sense of comfort and flourishing.

A new study, spotlighted by Housingwire's Chris Clow, notes here that more than four out of five "seniors" want to stay put in their homes. Motivations for that preference often run far deeper than financial reasons. Clow writes:

Part of what drives the overwhelming desire for seniors to remain in their homes is the idea of safety. 83% of surveyed seniors answered that they generally feel safer when in their own homes, compared to living situations that do not involve their houses. Feeding into that idea of safety directly is the impact of the COVID-19 coronavirus pandemic, as 50% of respondent seniors said that the pandemic has contributed to their desire to remain at home.

The survey also asked about their feelings about home in a reflective sense, with 74% of seniors indicating that buying a home was “the best financial decision they have ever made,” according to the results. 62% of respondents also responded affirmatively when asked if they maintain an emotional connection to their homes.

Here, a bit randomly, are parts of this enormous housing business story that will span the 2020s and beyond.

• From Zillow: Americans 60 years and older are more active in the housing market than a decade ago. The punchline: They're competing with Millennials for homes.
• From The Atlantic: Living alone in the U.S. is harder than it should be. The punchline: Single-person households are mostly considered "odd-ducks" in real estate.
• From The Census: Living with disabilities. The punchline: The operative part of the phrase now is "living with," rather than "disabilities."  See Jeffrey Demure's "Livable Design."

• From the NAHB: The 55+ Housing Market Index, monitoring and measuring conditions among developers and builders of 55+ housing projects and communities. The punchline: Currently suspended.
• From The Center for Social and Demographic Research on Aging: A heat-map Elder Index. The punchline: Living expenses are high in metropolitan areas across the U.S.

Again, does underinvesting in this market of people who command more than one of every four dollars of wealth and who want the well-being, the peace-of-mind, the safety, the lifeline of home make sense?

If Millennials who are trying to form families have to compete with Baby Boom generation adults who are trying to find homes to enjoy and flourish in that later chapter, maybe the answer is "yes."

The market opportunity is underappreciated, underinvested.

Join the conversation

The first-day news lead ran – in three dollops -- this way:

The Howard Hughes Corporation announced Tuesday that it has bought the massive, master planned community that Jerry Colangelo has been plotting for nearly 37,000 acres in Phoenix.

The acquisition of the Douglas Ranch project, in the city’s West Valley neighborhood, adds to Howard Hughes’ roster of master planned communities. This one is projected to have 100,000 homes, 300,000 residents and 55 million square feet of commercial space.

Howard Hughes acquired the “shovel-ready” land from Colangelo’s JDM Partners and Mike Ingram’s El Dorado Holdings for $600 million. Both developers will stay on with Howard Hughes as joint venture partners on the first village of the community, Trillium, which will encompass 3,000 acres.

The news lead, however staggering in magnitude, buries at least some of the sweep of the story.

With the Buckeye, AZ, pounce, Howard Hughes adds a crown-jewel eighth community to an $8.3 billion, 100,000-acre-plus six-state portfolio that includes Las Vegas' Summerlin, Houston's The Woodlands, Bridgeland, and The Woodland Hills, Columbia, MD, Ward Village, HI, and even downtown New York City's Seaport neighborhood.

Per SEC documents filed on the deal, at build-out decades from now, more than 700,000 residents will call the current Howard Hughes operating footprint home, whose strategic business pillars – technology and innovation, sustainability, inclusivity, and community – mesh with the fabric of each place by design.

Clearly, a motivating goal for the Howard Hughes Corporation with the half-billion-dollar plus acquisition of Douglas Ranch is to stand out as a developer-of-choice, spanning business cycles, demographic life-stages, urban-and-less-urban geographies, climate regions, financial segments as pandemic-era society and the economy either incrementally or dramatically evolve the future of home and work.

Placemaking's next new real-world normal – accompanied by known and unknown challenges and opportunities such as costs, resource constraint, land scarcity, transportation and infrastructure timelines, housing affordability, and life-vs.-livelihood balances – come into sharper focus in the Douglas Ranch acquisition as a portfolio strategy.

From the press statement announcing the deal:

Douglas Ranch is projected to become home to over 300,000 residents and to emerge as a vital commercial business center as residents move into the community and growing appetites for commercial amenities create development opportunities for new diversified product types within the Howard Hughes portfolio—including single family for rent and industrial assets. It is strategically positioned in the pathway of Phoenix's significant growth in the West Valley and has direct access to I-10 through the Sun Valley Parkway. Additionally, Douglas Ranch is located off the future home of the I-11 interstate which has received Congressional approval and is projected to create $30 to $60 billion of economic impact in the region. I-11 will connect Phoenix, Las Vegas, and Southern California, and eventually establish a new trade route between Canada and Mexico by way of Idaho, Arizona and Nevada."

"Douglas Ranch will be a catalyst for growth, an economic boon for Arizona, and an ideal strategic fit within our HHC portfolio," said Jay Cross, President of The Howard Hughes Corporation. "As we shape our cities of tomorrow and deliver the new urban experiences that people and businesses are seeking today, we are designing communities with urban amenities and intelligent infrastructure integrated into expansive open settings, with convenient access to major metropolitan cities. This transaction presents an opportunity to implement impactful ESG initiatives to support the community and promote renewable practices. The Howard Hughes Corporation is defined by our steadfast commitment to the master planned communities we develop and operate, and we are thrilled to include Phoenix as a place we call home."

Achieving developer-of-choice distinction as a beacon among a fast-consolidating power-base of national and regional production homebuilding operators – across the single-family for-sale, single-family built-to-rent, and multifamily low-, mid-and high-rise vertical community types – aligns with deeper local scale and asset-light go-forward investment and operational models bigger players have adopted pre- and post-pandemic.

The Hughes Corporation has a track-record of raising a high-bar of rigor and guideline expectations among its homebuilder partners, and in return delivers a powerful placemaking gravitational attraction to the communities it invests in.

Its pro forma for investor returns – both as a land seller and a provider of lot takedown schedules, community activation, and neighborhood development horizons – reflects both confidence in its experience and operational excellence, and in its ability to adapt to and integrate a rapidly evolving addressable universe of prospective residents. Per the press statement:

The characteristics of this community are vastly similar to HHC's other MPCs across the country, with a prime location, strong demographics in a thriving job market, high barriers to entry, and limited competition," added O'Reilly. "Phoenix ranks as one of the country's most affordable metropolitan areas, and as it continues its dynamic growth as an extremely well-situated regional hub, Phoenix's West Valley is the ideal location for people and businesses looking to thrive for generations to come."

For homebuilder operators, that "high barriers to entry" note jumps out. Asset-lighter strategies mean that vertical construction efficiencies and tangible-value-to-the-homebuyer move up the pyramid of business priorities, as escalators and land appreciation rate gains that derive from real estate cycle-timing skills rank less importantly in homebuilding enterprise core skill sets.

Winners will engage with end-to-end placemaker platforms like the Hughes Corporation with vertical construction operational excellence and velocity as their strength, and higher volume as their sustainable opportunity.

I.e. – not land appreciation gains. Portals like Hughes Corp. are taking on the risk right now of front-end investments on land, and that means they're at the front of the line for risk-adjusted returns.

Join the conversation

The algorithms were always there, at work.

And since antiquity, their simplicity, elegance, and profound ability to match up important numeric levels and rates of change in the real world to our minds signaled human intellect's highest realms.

Arithmetic algorithms, such as a division algorithm, were used by ancient Babylonian mathematicians c. 2500 BC and Egyptian mathematicians c. 1550 BC.^[12]Greek mathematicians later used algorithms in 240 BC in the sieve of Eratosthenes for finding prime numbers,^[13] and the Euclidean algorithm for finding the greatest common divisor of two numbers.^[14]Arabic mathematicians such as al-Kindi in the 9th century used cryptographic algorithms for code-breaking, based on frequency analysis.

Today, microprocessor- and sensor-powered machines speed up, dig deeper, expand outward, harvest, filter, vet, compare and contrast, winnow out, and sharpen gross absolutes into helpful, defined, and differentiated quantities our minds, our marketing programs, our operational areas, etc. can work with.

In residential real estate, machine learning – paired with human experience, wisdom, and practical realism – elevates what was formerly essentially a trial-and-error business into a far more strategic array of skill-sets and endeavors.

Algorithms triangulate each of residential real estate's pillar economic value measures – demand, utility, scarcity, and transferability – and subject them to heaps and heaps of search, behavioral, preferential, demographic, income, etc. data.

Pace, price, location in all of their abundant themes and variations, external factors such as interest rate basis points, economic indicators, confidence benchmarks, macro data galore now all run through sausage-making multivariate regressions built with complex algorithms precisely to sense and detect deltas of change, trends, rates-of-rates, and the like, and that would be complex enough for any single firm or business sector.

But that's only the half of it.

Consumers – households and residents and would-be renters and owners with preferences, attitudes, behaviors, means, future earnings potential, lifestage priorities, values, ambitions, cultural mores, community attachments, personal and family networks – are a whole other ball of wax for our machine-learning enabled algorithms to get their enormous brains around.

Here's some insight I believe might impact how you approach one of the trickier dimensions of your businesses right now, especially as input cost inflation presses hard on unit gross and net margins.

This piece in the Harvard Business Review's [pay-gated] September-October 2021 issue, comes from two marketing professors, Marco Bertini and Oded Koenigsberg, could not be more timely for companies that face Hobson's Choice challenges to put customer trust at least on a par with near-term gains in profitability.

Pricing algorithms are intended to help firms determine optimal prices on a near real-time basis. They use artificial intelligence and machine learning to weigh variables such as supply and demand, competitor pricing, and delivery time. Unfortunately, algorithms occasionally go rogue and come up with figures no one would ever pay—from $14,000 for a cabinet listed on Wayfair to almost $24 million for a textbook offered on Amazon. But such snafus are just one of the risks when companies entrust decision-making to computers.

The constant changes in price points send strong signals to customers that need to be properly managed. Yet many organizations fail to appreciate this. They know that prices affect decisions about when and what to purchase, but they overlook the fact that continual ups and downs may trigger unfavorable perceptions of their offerings and, importantly, the company itself.

Brands thus need to consider more than simple math when employing algorithmic systems. These systems can create an uncomfortable tension between earning customer loyalty and earning money.

The conclusions Bertini, who hails from at Esade–Universitat Ramon Llull, in Barcelona, and London Business School professor Koenigsberg reach track directly to common sense and golden rule principles and practices. Many insights – like these – have that "I wish I thought of that" characteristic.

The take-away is this. The profound and growing opportunity in machine learning comes not just in velocity, expanse, depth, precision, and usefulness. It's also simply this notion, the one that stretches back to antiquity, that learning itself is constant and new and uncharted. Wisdom, experience, handed-down knowledge, and even cleverness are not enough right now to fathom what will build and reinforce our customers' our team member associates' and our partners' trust and confidence that we have their backs.

Join the conversation

[Editor's Note: Here, The Builder's Daily members get to hear first-hand from the next generation of housing construction, engineering, architecture, finance, and business leadership. Our contributor, Candice Delamarre teamed up with four of her Stanford University colleagues, first, as category-class winners in the third annual Hack-A-House competition, hosted by Salt Lake City-based Ivory Innovations, a division of the University of Utah’s David Eccles School of Business, and second, to go-to-market with Kit Switch, their award-winning business concept. Kit Switch proposed an innovative approach to address the affordable housing crisis and COVID-19 economic recovery through the adaptive reuse of underutilized commercial real estate and today works on designing a kit of prefabricated wall panels to assemble housing units within pre-existing structures. From Kit Switch co-founder and principal Candice Delamarre, here's Kit Switch's origin story, and her personalized account of a next-generation housing leader's journey to making a transformative inroad into solutions in housing affordability. From Candice, in her own words ... ]

Entrepreneurship, I had thought, was about the Idea ... with a big I.

Then I got to listen to entrepreneurs. They were kind enough to share with me what happened when they obsessed over ideas. Or when, conversely, they iterated to improve their product-market fit. Thanks to them I was dissuaded of my naive view.  In fact, many venture capitalists invest in teams before ideas. This applies particularly to early-stage startups because good teams, it appears, can “pivot.” To me, this means switching nimbly from one idea to another better one along the way.

Entrepreneurship, it turns out, is all about flexibility, uncertainty, and resilience.

Even this early on in my learning curve, that challenge is evident.

In this mini-series, I will take you with me on this journey, from conceptualization to realization.

As much as the vision for Kit Switch is truly unique, our origin story was not about an idea. It is about a team. Kit Switch is a team of five women, each with deep expertise in the built environment. Our disciplines range from architecture, engineering, construction management, to sustainability and urbanism – a value chain of rigor, discipline and passion. From our different professional perspectives and personal backgrounds, our shared desire was this: To create housing sustainably.

Let me tell you a bit more about our team. Pardon a metaphor from my engineering background. Picture five different rotating-tooth-wheels. Together they make one well-oiled gear mechanism. Because we can rely on each other as individuals, and because we share structural values, teamwork always felt smooth. And in fact, in the first months, we worked very intuitively, with little structure. Today we do have roles so let me give you a feel for our cast of characters:

• Alex, the energetic, is at the job site early every morning for heavy civil construction projects and advises Kit Switch in her free time, keeping us grounded and resourceful.
• Anusha, the wise, contributes her architectural brio to sustainably design automated fulfillment centers and to advise us as a moonlighter, offering elaborate feedback and innovative design ideas.
• Armelle, the articulate, embarked on this full-time entrepreneurial journey with me, voices our vision to others and carries it inside our team, and thoughtfully reflects and analyzes our strategy.
• Sam, the conscientious, designs data-centric equitable urban systems every day, and she works as both our building vacancy analyst and prototyping advisor thanks to her experience with machinery.
• And me, the catalyst, focused on problem-solving and risk mitigation by anticipating next steps, making relevant connections, and building partnerships.

I am not saying that we tick all of the boxes for the perfect team. Nor do we pretend to account for all 9 team role types listed in the Belbin Team Inventory - although we might, and I’m now curious to find out. We sure will need to hire more people, but what we need even more than headcount is a seamless team dynamic, and solid communication. This has enabled us to remove friction and keep Kit Switch's forward momentum.

The reason is simple. It's also counter-intuitive."

We set on a mission to create housing for people who need it, where people need it, and how people need it. Housing that not only meets their physiological needs but that brings opportunities for independence and freedom, for culture and community, for dignity and respect.

It is with these values in mind that our team started exploring ideas for housing innovations and commercial-to-housing conversions, in the middle of the COVID-19 pandemic. Further, the state of California where affordable housing has long been missing, begged for new solutions.

The reason is simple. It's also counter-intuitive. In California, building affordable housing is not affordable. A huge and widening gap yawns between construction and maintenance costs, and affordable rents. Different organizations have put estimates to the number of housing units that would be need to be added by 2025. Numbers vary. However, all agree that the industry has not been able to keep pace with demand, nor to prepare for the 50 million people expected in California by 2050. In February 2018, the California Department of Housing and Community Development published its Final Statewide Housing Assessment 2025 stating a need for 180,000 new homes annually from 2015 to 2025. Unfortunately, production has barely increased since then, reaching only about 103,000 new units in 2020..

Across the country, states and metropolitan areas also face a tremendous shortage of affordable homes and communities. In March 2021, the National Low Income Housing Coalition released its annual report “The Gap: A Shortage of Affordable Rental Homes.” It reports findings that for every 100 extremely low-income renter households, only 37 affordable rental homes are available. Among the 50 largest metropolitan areas, these statistical levels drop to as low as 16 options for every 100 households in Las Vegas, NV, and up to only 50 in Providence, RI.

Now think back to Fall 2020. The pandemic felt well ingrained, the world was going through repeated lockdowns, and people were taking guesses on what life post-COVID would look like. In the Bay Area, employees from tech companies had left their campuses with no sign of coming back. Was this only temporary?

Many people thought it would be. Many asked us to make sure our concept did not rely solely on COVID-19 trends. What would you have thought at the time? What do you think today?

Join the conversation

A wall of worry gets thicker and taller. Investors clamor and throng – to the tune of reported estimates of $30 billion, $40 billion, $60 billion -- into residential real estate's every nook and cranny, seeking yield here because options of finding it elsewhere range from bleak to none.

The spectre of disequilibrium – too much capital, too little capacity, and too many barriers to expanding the capacity, at least for the near future – swells an uneasiness, especially among people who've weathered residential real estate's storms past.

Of which there are enough – although, plenty of folks, especially in the hard-charging "No-Country-For-Old-Men" investment community that came of age in the post-Great Recession run-up era, are galvanizing the pell-mell crush of capital into the space as if the sky's the limit.

Lost in the balance of priorities, a more critical lifeline to future business fitness and resilience: customer focus.

Who will buy?

It's always and forever the more important strategic and operational and design and engineering and pricing and geographic model focal point, eclipsing the ephemeral where-the-capital-will-come-from question nine times out of 10.

It's also the factor most homebuilding firms take most for granted. "Everybody needs a home."

That may be true, but how clearly need it be expressed, that "everybody doesn't need" the $400,000 home you may be selling.

Who will buy?

That's where business fitness kicks in, especially as the Covid pandemic roots into our collective behavior's system of values, references, and ways of living.

For instance, women – the past two-decade-or-so's wake-up call decision-maker in nine out of 10 home purchase or rental transactions – have entered an economic and societal inflection point, as disrupted household schedules, responsibilities, and finances have weighed more heavily on careers, time-spent, and household preferences.

As the crowding-in of global capital seizes the headlines, this critical reality is likely to be an underappreciated force-factor in the years ahead. A new or next-normal will work itself through transitory blips of reflex toward sustaining trends.

Who will buy?

Women have borne the brunt of job loss from the very first days of the pandemic (Stevenson 2020). That is because women, particularly minority women, are more likely to be in positions that require in-person work (Gould and Shierholz 2020). At the start of the pandemic, women held the majority of nonfarm payroll jobs, a milestone that they had reached in December 2019. Women’s labor force participation had risen both absolutely and relative to that of men in the years before the pandemic. Part of this growth was driven by mothers, whose employment reached a peak in 2019. Mothers in 2020 were older, with more work experience, and more education, potentially shaping their response to the pandemic-induced recession compared to previous recessions."

Who will buy?

Our [McKinsey] analysis shows that women’s jobs are 1.8 times more vulnerable to this crisis than men’s jobs: Women make up 39% of global employment but account for 54% of overall job losses as of May 2020. At the same time, the burden of unpaid care, which has risen in the pandemic, falls disproportionately on women.

McKinsey research suggests a veritable "lost-decade" ahead – a trade-off of $1 trillion in lost global GDP versus a potential opportunity to gain $13 trillion – if action is taken to address gender equality and rebalance some of the lost equilibrium in the wake of Covid.

Who will buy?

Many women had their work situation disrupted during the pandemic. Among those that dropped out of the workforce, a staggering 75% have not yet returned. Black and Hispanic women more frequently struggle to provide for their household and fear they will not recover financially in the next year — if ever. Generation X and younger respondents also struggle financially and feel stressed about the future."

Net, net, Freddie Mac research finds, three out of five single female heads of households conclude that homeownership has flitted from dream to non-reality.

Again, women drive nine out of 10 home purchase decisions. So, who will buy becomes the more important question. The specter for operators, strategic players in homebuilding, development, and residential investment may seem to be the glut of capital pouring willy-nilly into the space. The more profound challenge is not that supply of capital; it's the demand from residential investment's principle decision-maker.

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Call new single-family rental development an unstoppable juggernaut or a bandwagon headed straight into trouble.

Few who look knowledgeably at residential real estate and construction's current capacity and projected capability also look comfortably at all the money plowing into the space right now.

Investor enthusiasm and conviction are banking on two principle drivers right now: the math of structural, fundamentally-evidenced demand and actual current buyer and renter behavior. The question is can those two compelling, real-world forces be deceiving?

If so, which of the umpteen siroccos kicking up around housing's fringes right now amount to any genuine headwind threat for housing's hottest – albeit relatively small – asset class? We'll explore that here in a moment.

First, perspective and context:

Per a John Burns Real Estate Consulting newsletter post from senior research manager Danielle Nguyen this past Friday, all that money looks something like this:

The tally, per JBREC's Nguyen exceeds $30 billion. The reasons all this capital wants in on single-family rental development and property management now check all the boxes of sound, strategic investment – especially given the alternatives in a latter-pandemic shocked landscape. Nguyen writes:

• Worldwide bond yields are at historic lows, and investors need yield.
• Inflation is on the rise, and most investors view rental homes as an inflation hedge.
• Record high rent growth (see chart below) is supported by high occupancy rates.
• Renters have demonstrated that they are willing to pay a premium to rent in a new home neighborhood managed by a professional landlord. While the news headlines and NIMBYs are busy bashing institutional owners, many renters are clearly enjoying a better rental experience living with renter (instead of homeowner) neighbors and having no fear that their landlord might decide to sell the home sometime soon.

Here's more on why single-family-built-for-rent has been one of the fastest growing segments in housing – both before and since the pandemic.

In 2017, about 37,000 homes were built as rentals, according to the National Association of Home Builders (NAHB), as reported by CNBC. Just two years later, the number of build to rent houses soared to roughly 43,000.

The growth rate in build-to-rent housing above was impressive, but even more so because that number only includes homes built and held by builders as rentals. It doesn’t include the homes that builders sold directly to investors to be used for rental property.

When you factor in the demand for build to rent from investors, the actual number of homes being built as rentals is likely quite higher for several key reasons.

Net net, the massive tube of global investment capital is being squeezed by a shrunken set of options from one end – thanks to Covid-related latency in a large number of consumer, business, and industrial activity, into a single-, "safe haven" vertical that is growing not only from discretionary housing preference but because housing's "playing field" is tilted at an incline that produces more and more rental households for financial reasons.

The result? Estimates ranging from JBREC's $30 billion to other's $60 billion are crowding into the space – like dozens and dozens of marshmallows at the end of sticks being held over one little campfire flame. By laws of physics, then, all that capital versus a constrained capability means what? Higher, and higher, and higher prices, accompanied by many last-ditch efforts to buy or rent before the prices go even higher, or before interest rates notch upward.

From where smart money in residential investment stands right now, bumper crop demand – millennials, GenZ, and downsizing Baby Boomers – is the decade ahead's sustaining given. Paired up with that fundamental factor an overweening conviction that policy – in light of a universal need for and value derived from safe, decent, healthy shelter – will continue to work largely in accommodation of developers, at least at the taxation and cost of money level.

That second assumption is where the trouble could start, soon.

Here's early word of a hearing this week on Capitol Hill in to "How Private Equity Landlords Are Changing The Housing Market."

THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIR will meet in OPEN SESSION, HYBRID FORMAT to conduct a hearing entitled, “How Private Equity Landlords are Changing the Housing Market.” The witnesses will be: Ms. Sofia Lopez, Deputy Campaign Director on Housing, Action Center on Race and the Economy; Ms. Holly Hook, Manufactured Home Resident and MHAction Leader in Swartz Creek, MI; and Mr. Norbert Michel, Vice President and Director, Center for Monetary & Financial Alternatives, Cato Institute. Additional witnesses may be added at a later date.

According to insiders, the hearing will explore the role of private equity across all sectors of the housing market, include the SFR juggernaut.

For some, Capitol Hill's attention adds to both current impediments – and in the view of several vested stakeholders in the newly developed single-family rental property space – an even bigger threat at the local level.

For instance, many of the "smart money" players in single-family-built-for-rent development and construction – i.e. those with experience, proven wisdom, and relationships in local residential real estate – view local regulation with a wary eye.

Entitlement risk – a known, known among residential land and community development S.W.O.T. analyses forever – intensifies its vibrations around single-family-rental communities, if for no other reason that it's the "new kid on the block" among planning, zoning, and other local boards and commissions.

Being closely watched, in Henry County, GA, a town called Stockbridge has hoisted the zoning equivalent of the Jolly Roger.

Stockbridge is pulling the welcome mat from under the feet of developers of single-family subdivisions where houses are put up for rent, not for sale.

The Henry County community passed a mortarium earlier this week after Pineview — a recently approved development on the city’s north side — switched from selling new homes under construction to renting them."

Builders and developers impacted by the Henry County zoning-out of single-family-rental communities do not see the Georgia county nor the municipality as a big exception, but rather as the rule.

We struggle all the time with municipalities," says an executive-level strategist for a homebuilding company with operations that focus on build-to-rent opportunities. "They don’t want rental properties, and they generally want renters. The local officials come up with all sorts of barriers to get approved, to the point where they hope it won’t be economically viable to develop. We have not seen one municipality be favorable to these communities.  It’s not well-thought of , and there is a sell-job we have to do to make up for the stigma created before professional organizations were managing, maintaining, and sustaining the value in the communities."

David Howard, National Rental Home Council executive director, does not see municipal opposition as an existential threat, but rather as an education and training challenge for builders and developers, to correct prior misconceptions and persuade local officials of the multiple values and benefits to include affordable single-family rental housing as part of the broader community's portfolio of housing options.

Resilient and sustainable communities offer an appropriate mix of housing and a broader mix of owners and renters," Howard says. "Owner-occupied single-family, single-family rental, and vertical for-rent communities, our research shows, create the most sustainable balance, economically, socially, in terms of public safety, crime, education, and services. Our job in many cases is to educate local officials, and as more capital comes into the marketplace, we have our work cut out for ourselves."

The education process can take time. Sometimes the money awaiting the conclusion of that process is patient. Sometimes less so. That's where entitlement risk – whether it's from flak at the Federal level or on the ground in municipalities – makes or breaks the deal.

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As the debate rages about the demand for housing and how many homes we need, we should also be at least as concerned with the intersection of that answer with capital supply and demand.

I don’t think I’ve ever seen this much capital in the housing space before. Single-family built-for-rent, traditional apartments, single-family for sale, master plan communities, you name it, there is a ton of money looking to be placed in it.

Public builders, private equity, hedge funds, debt funds, etc. Land banking is so competitive it’s becoming more common to see single-digit rates. For that to end well, you’ll need almost a perfect track record from beginning of the cycle to the end.

As recently as 2019, at least some types of capital were leaving the space, or at least getting more conservative, especially as it relates to project duration and exposure to entitlement risk. Lately, however, it seems bigger is better. Builders going longer, PE going longer, land bankers going longer. Master-planned multi-cycle projects receiving so many bidders there are multiple rounds and “best and final.”

Another element of an increasing acceptance of duration is more entitlement risk is being taken on. Builders these days typically buy projects with a portion of the approvals necessary to develop. Or, they put up non-refundable deposits to be used by others for processing. However, these projects are often still a long way from “shovel-ready.” While there is clearly a stop-loss if they haven’t closed on the land, it’s also a little disingenuous to say “we don’t take entitlement risk”.

Much of the capital world has decided the pandemic completely reset the clock on the housing cycle.

Maybe.

And maybe if it is a new cycle, we shortened it with the unprecedented price increases. None of us can know. We are all speculating.

Public builders are lowering gross margin hurdles on new deals and build-for-rent is putting significant rent growth in proformas. Markets that historically happily absorbed 2-3 homes per project per month are now assuming +4, because that’s “conservative” relative to the +6 in the last 12 months. So, we seem to be assuming pricing can and will stay high (I think probably true) but that absorption can also stay higher than normal (I doubt it).

On the positive side of the ledger, rates are low, savings are great and Millennials are buying. But from an overall demographic perspective, immigration is low, birth rates are low and population growth is anemic. And the number of prime working age people is going nowhere, which is unprecedented.

I get it. Homes have been flying off the shelves and inventory needs to be replaced. Builders and developers are a hamster on a wheel. It’s hard to argue there is not a shortage (but don’t confuse your personal shortage with a market shortage) when things sell that fast. But price equilibrates. So, to assume things stay great is to assume we will equilibrate at an even higher level.

If the low-end estimates for demand are correct, it’s a lot less demand than is assumed in the business plans of most of the industry. I think it’s a bit more, as the lowest numbers have been calculated on a national basis which is “net,” while the “gross” would be a higher. You can’t move existing houses from places with out-migration to places with in-migration. But I’m in agreement it’s nowhere close to the bullish projections. And the intersection of way more money than good opportunities usually does not end well.

That does not mean there are no good markets or good deals to do. And when I discuss this with builders and developers what I almost always hear is “it’s way too competitive out there, but I’ve found a couple things that make sense.”  Maybe, of course that’s what others are saying too. And it’s pretty hard to be successful when those around you are not.

I have no crystal ball (it shattered in March of 2020). And every market is different. But it’s well to remember just because you believe you are being prudent, that does not mean others are, and it will be critical to keep an eye the future pipeline in your area. If you are in a position that being right about pricing but wrong about absorption is disappointing but not tragic, it will probably be fine. If you need to be right about absorption, you should be nervous.

Excess money has a way of making things happen you did not expect.

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Location, location, location.

The same words as ever. What changes, from normal, to new normal, to the next new normal, and so forth, is what real estate's mantra means in the context of three critical force factors: what people value, timing, and money.

This matters now for The Builder's Daily audience because certain amounts of risk tend to mean greater investment rewards, but too much risk is often only recognized in hindsight.

Red flags fly when we see or hear the words, "this time is different." Still, we're of the belief that nothing new under the sun and uncharted waters can and do co-exist.

For instance, the lead of today's story was buried at the bottom of yesterday's.

The limbo of the future of work and the future of home may define who's long on land right now and who's not.

Let's unpack this this way.

Long on land tracks as one of the residential real estate and construction business' cardinal rules of engagement. The term applies to those who face or experienced ruination because of money misplaced or mistimed or miscalculated – errors of location, timing, or amount – to secure home sites, residential community development's table stakes.

Mismatches are real estate's devil in the details. They make for winners and losers in a game where for fleeting stretches it appears that everybody's a winner. Mismatches in residential real estate mostly occur in three dimensions: place, timing, and financial valuation. Remove the urgency to be correct in any of the three dimensions and anybody can be a winner 100% of the time. That's not how it works.

Now, back to the lead.

The limbo of the future of work and the future of home

Mismatches in invested capital in residential real estate – again – will come as some players misplace, mistime, and miscalculate the dollar value of property.

The economic, financial, and operational models aimed at predicting, and measuring returns to solve for those mismatches are – we must remember – constructs. Those constructs may be in play.

Consider:

• Amazon to allow employees to work remotely indefinitely
• Still, companies "can't agree on remote working"
• In workers' minds, "Remote Work Persisting and Trending Permanent."

Here's what that looks like:

As regards the calculus of residential investment, development, and construction's most mercurial, if not most expensive raw, direct input cost – land – 2021 is a step-change threshold of occasion for mismatches.

As we noted yesterday, models for housing demand boil down to population growth, job and income growth, household formation growth, and family formation growth.

Since Covid, assumptions, trends, and predictions for all four of those leading indicators have checked up, sent mixed signals, and promised shifts ahead.

Essential assumptions like, "everybody needs shelter," and "everybody needs a job" are working through a pandemic era reframing. The Great Resignation is part of it. Writes Nobel Prize winning economist Paul Krugman:

It seems quite possible that the pandemic, by upending many Americans’ lives, also caused some of them to reconsider their life choices. Not everyone can afford to quit a hated job, but a significant number of workers seem ready to accept the risk of trying something different — retiring earlier despite the monetary cost, looking for a less unpleasant job in a different industry, and so on.

And while this new choosiness by workers who feel empowered is making consumers’ and business owners’ lives more difficult, let’s be clear: Overall, it’s a good thing. American workers are insisting on a better deal, and it’s in the nation’s interest that they get it.

If you happen not to like Krugman, here's another take, this one from Roger W. Ferguson, Jr., former president and CEO of TIAA, with one that speaks directly to the issue of financial bets on the path of residential growth's future.

While many employees are moving on to better opportunities or better wages, others are simply dropping out of the workforce entirely or retiring early. In fact, based on some projections, 2 million more workers than expected have retired in the pandemic. Some individuals are reluctant to return to work due to fears of exposure to COVID-19 or difficulty in finding affordable childcare.

The thing about the future of work and the future of home is that it's not what, nor where, nor how much, nor when, nor how the present and the past of work and home have defined themselves. We can't know the future of work or the future of home from wisdom, brilliance, nor experience passed along to us.

We need to learn it. That's why they're both called the future. And that's where we land on this assertion:

The limbo of the future of work and the future of home may define who's long on land right now and who's not.

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Gloves are off in new residential construction's great demand debate.

The stakes in the game could hardly be more intense. The context here is tens of billions of dollars of investment capital hellbent on yield, and little opportunity so alluring – globally speaking -- as residential real estate and its enormous mismatch between a tsunami of younger-adult households in the making and the inadequate number, quality, location, and attainability of homes and communities to shelter them.

Demand – structural, fundamental, demographically-driven, and sustaining – stood as the "given" developers, builders, investors, and their myriad partners could count on whatever transitory headwinds might kick up in a moody economic backdrop.

Which door do you pick?

• Door No. 1: The National Association of Realtors, based on research by the Rosen Group, estimates a current "underbuilt" level-set at 5.5 million homes.
• Door No. 2: Freddie Mac research calculated a deficit of 3.8 million homes in 2020.
• Door No. 3: National Association of Homebuilders analysis, tracking housing vacant units and vacancy rates, tops out at about 1 million as a working proxy for undersupply.
• Door No. 4: Forget all of that. At current production levels, developers and builders are currently oversupplying the market, with financial consequences to come sooner or later.

In what world of upended markets and parallel realities could we go from being underbuilt by 5.5 million to a current single- and multifamily starts pace that not only exceeds pent-up demand but soon will clock in as a glut by 200,000 or 300,000 or more new homes beyond what the national market can absorb?

A good person to ask, for a sound, clearly evidence-based, assumption-by-assumption construct of past, current, and future housing demand versus past, current, and planned supply is John Burns, ceo of eponymous housing analytics and advisory firm John Burns Real Estate Consulting.

Here's a hint at his take on the math. Tweets Burns:

We are under building for today's demand surge, but building more than our long-term need of 1.4 million homes/year that we forecast in our book Big Shifts Ahead 5 years ago."

Earlier, contrary to wider-held assertions that soaring house prices served as evidence of massive national undersupply in the context of population growth, atypically low vacancy rates, and economic headway, Burns offered this reality check:

Our adult population isn’t growing as fast as it used to,” said Mr. Burns, chief executive of John Burns Real Estate Consulting LLC. Compared with decades before 2000, “we don’t need to build as much,” he said.

What builders do with that – not just insofar as their efforts to lean into the surge right now, and deliver up as much and as often as they can to keep pace, but in the calculus of their time-released investments in land for later – is critical.

Underlying the red-flag, still contrarian view the Burns team at JBREC embraces are the raw material inputs of any business-to-consumer market outlook.

Household demographics.

Fact is, household demographics crossed an inflection point that coincided with the Great Recession. Here's the way Pew Research analysts Richard Fry, Jeffrey S. Passel, and D'Vera Cohn describe the tipping point:

Growth in the number of U.S. households during the 2010s slowed to its lowest pace in history, according to a Pew Research Center analysis of newly released 2020 census data.

The 2020 census counted 126.8 million occupied households, representing 9% growth over the 116.7 million households counted in the 2010 census. That single-digit growth was more anemic than the prior record low percentage growth of households (11%) during the previous decade, as shown in the 2010 census.

Three Vital Statistics For Housing

What this means for the U.S. economy may not be fully appreciated. Households, we know, fuel a full one-third of Gross Domestic Product economic activity. They're the engines of the nation's outlook, directly impacting residential real estate investment, development, and construction, and indirectly exerting multiplier-effect force on countless related local, regional, and national business fortunes.

Pew research analysts flag three underlying trends currently resculpting the landscape of household formation, equally material for stakeholders in homebuilding and development.

• The rate of population growth – a core ingredient of household formation – slowed during the same period to 7%, the lowest rate since the 1930s.
• Multigenerational households increase – a spike from 12% multigenerational households in 1980, to 20% in 2016 – mutes household formation rates.
• Further, faster population growth among race and ethnicity groups less likely to form households:

Asian and Hispanic adults – the fastest growing racial or ethnic groups in the U.S. – are less likely than White and Black adults to live in separate households. In 2020, there were 42.2 households for every 100 Hispanic adults and 41.9 households for every 100 Asian adults.

Finally, of real importance in where housing demand is headed, a tipping point, the rate at which adults live in their own household fell.

Overall, the household formation rate declined slightly from 51.5 households per 100 adults in 2010 to 50.9 households per 100 adults in 2020.

Geographic, occupational, and financial reasons also play into why household formation rates reflect a diminishing return.

The nature of housing demand itself – an equation that in reality blends wherewithal in a livelihood sense with lifestage with housing preference – may be entering a transitional, transformational era.

The limbo of the future of work and the future of home may define who's long on land right now and who's not.

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It's there – unwritten or mentioned, buried or blaring -- as the lead of every story you or I read.

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”  – Charles Dickens, A Tale of Two Cities

Could plain English work any harder than that? Or more elegantly?

It's here, all right, too. As Q4 earnings season kicks into gear amidst a jittery Wall Street, hundreds of millions, maybe billions of dollars that mix invested financial capital together with the currency of job site and workplace sweat equity are in play for 20 or so homebuilding empires that today account for two of every five newly-constructed American homes.

The Street wants a deck and a dashboard that ensure predictive and predictable outcome ratios.

On the job sites and the workplaces of late 2021 real estate, construction, distribution, marketing, and sales, people show up, face the day, and do the work without the faintest glimpse at nor feeling of what's predictive or predictable.

Tens of thousands of team members are at it today. Their jobs, on some level, are to solve myriad problems related to these two data points:

• Not-started houses for sale jumped to 105,000 (up from 60,000 in August 2019);
• Under-construction houses for sale jumped to 237,000 (up from 185,000 in August 2019).

All in, that's 107,000 homes that should be near the finish line in their start-to-completion construction cycle, or heading into it. While so many eyes fixate on Wall Street, on growing inflation pressures, on the supply chain's exponential dysfunction, on the threat of higher mortgage interest rates, on missed guidance and on obscured visibility into the market's future, too few focus on the tens of thousands of boots on the ground in homebuilding.

Too often, they're taken for granted.  Or worse, seen as not producing up to expectations.

So, maybe they don't Slack. They don't Zoom. Maybe they TikTok on their own time.

They didn't get the memo that told them not to show up and step up.

They haven't given themselves a pass, despite headlines everywhere that could let them off the hook. For them, it's about getting through a day, each day, come what may. It's about doing a job that belies those headlines telling them that they shouldn't come up with the workaround for the workaround for the workaround to progress their project.

These tens of thousands of people can hear.

They're hearing a lot these days about an obsessive focus on the planes, the trains, the container ships, the automobiles (or, rather) trucks that analysts, experts, pundits, and a good number of C-level executives amplify as emblematic of a locus of uncertainty around two of the most critical resource flows in production homebuilding: time and money.

Gridlock at ports, warehouse paralysis, transportation bottlenecks and chokeholds, notwithstanding, these 10s of thousands of people – from superintendents, to local purchasing managers, to installers, to community directors, to builders of all stripes, to truckers, to loading dock workers, etc. – have shape-shifted themselves into the production community's jack-and-jill-of-all-trades problem solvers.

They're underappreciated, right now. Part of that underappreciation comes clear in context. Their contributions in utility value creation today occur in the context of false comparisons – to budget, to projections, to prior year metrics and what forecasters heaped on them to set performance expectations, bonuses, acknowledgement and recognition of achievement.

Here are two nuggets to take stock of right now, that leaders in the business community know, but can always use reminders of, especially when the gestalt places disproportionate importance on what's going on on Wall Street and Capitol Hill.

One is this, from The Conference Board:

As the pandemic drags on, the mental health of your workers may be deteriorating as new survey results would suggest. 57 percent of workers surveyed say their mental health has degraded since the start of the pandemic. The driving factor behind this decline: their workload. In fact, work pressures are so great that half of respondents say work demands are taking a bigger toll on their mental health than COVID-19."

The other nugget comes from the Bureau of Labor Statistics JOLTs data released yesterday.

Quits hit a new series high going back to December 2000, as 4.3 million workers left their jobs.

The supply chain is getting marquee billing right now as the community's No. 1 pain point. The enormous risk right now, for leaders, is to let the tens of thousands of people whose boots are on the ground right now, solving the morning or the afternoon's problem-of-the-day, feel they're forgotten, or worse, underperforming goals – especially performance objectives set in a rose-colored glasses budget planning cycle a year ago.

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Land, people, money.

People, money, land.

Money, land, people.

Scramble it any way you want, you wind up in the same place. Namely, success in a homebuilding, residential real estate investment, and community development endeavor – new, old, always and forever – means getting this triangulation of pillar forces to sync up and outperform.

Timeless formula though it may be, these particular times feel different. Hypercharged with zooming demand, tricky operational dynamics, what with the supply chain's firehose of problem-of-the-day challenges, froth lathering up at the margins, and an array of big and little issues as long as your arm – intensify the need to get those three pillar resources into just-so alignment.

Or else.

Just ask Scott Davis. He's got a heady challenge ahead of him: Getting a Northern and Southern California stalwart – Trumark Homes – up and running, from zero to a run-rate of more than $100 million by this time next year in the Front Range corridor of Colorado, and perhaps 10 times that in the next decade or so.

The MSAs along the Front Range represent nothing but upside for us," says Davis, who led D.R. Horton's Colorado intiatives as division president for 11-and-a-half years until his departure in October, 2018. "We'll begin by starting 10 homes a month, and we'll be at a run-rate of 100 closings a year in January, and go from 100, to 500, to 1,000. Our goals are to put together a team, and with the backing, patience, and focus of Trumark leadership and Daiwa House, navigate that balance here in Colorado between what the customer wants in excitement and what the customer can afford. That's what's aligning here in my mind."

Market expansions – de nova start-ups or via acquisition – are part of the longer, several-decade story of homebuilding business consolidation, which has concentrated 90% of new-home development and construction among a couple of thousand firms that build and sell more than 20 new homes a year.

Further, expansions remain an essential part of the wheelhouse of enterprises bent on growth, ebbing and flowing across housing's parabolas of up- and down cycles.

It's noteworthy, all the same, that manifest destiny-like expansion into the 2021-to-2030 patchwork quilt of metros – many of which may have been regarded as economically- or logistically-challenged – shifted decisively as the pandemic breathed viability and attraction into a new map of lives and livelihoods.

Multiregional and national homebuilding enterprises that had been focused for the past half-dozen years on the upside business returns of deeper, more-concentrated, more localized market scale have begun pinning new mobility magnets into their operating footprint – ones with smaller, but fast-growing populations drawn to physical, cultural, or economic resources in a work-life balanced future.

Denver, CO, ranked eighth among 2020's "inflow" migration destinations, per a Bloomberg zip code analysis of LinkedIn users.

We'll be a receiver state," says Davis, with his forecast hat on, looking at the years ahead. "We've got people coming in from both coasts, who have the jobs – attracted to the outdoors, the personal health, the quality of life – and some who come here for the lifestyle, who don't have a job yet but plan to get one when they settle in. That in-migration, on top of an already known undersupply of new home construction that dates back pre-pandemic, will exert a strong pull on demand-supply relationships."

Trumark Homes' recent thrust over the Continental Divide into Colorado's Front-Range corridor, stretching from Fort Collins to the north, down through Denver, Boulder, Colorado Springs, south as far as Pueblo, stands as a case in point. Trumark's flag-in-the-ground effort, Trumark Homes at Pelican Shores, in the Fort Collins area north of Denver, says Davis, will feature 11 contemporary floorplans, both ranch style and two-story plans, ranging in size from 2,199 to 3,746 square feet, through a deal that purchased from Juma Homes.

As Trumark readies designs for communities to come, it has turned to a series of new floorplans and elevations – including 11 new plans in the works -- from award-winning architect Michael Woodley's Woodley Architectural Group.

The backdrop for the Trumark Colorado start-up is a fiercely competitive, highly muscular competitive arena, featuring nationally active public homebuilders, as well as some local and regional powerhouses, like Thrive, Clayton Homes-owned Oakwood Homes, and others.

The opportunity in the Colorado market, particularly for a builder like Trumark, which has been doing distinctive architecture and contemporary designed communities in Northern and Southern California, is that buyers want that exciting 'wow' and 'cool' factor in the floorplans and elevations," says Kenneth Perlman, a managing principal at John Burns Real Estate Consulting. "Working with Woodley, Trumark's ability to address the Colorado-area challenge of balancing great product with attainability is enhanced. Both have pedigree in dealing with density, which is how they can go at attainability, and both have a strength and flair with style, indoor-outdoor livability, and indoor flow.

What's more, a ton of people are migrating from NoCal and SoCal to Colorado, and they're going to recognize the Trumark name, which is a competitive plus," says Perlman.

To build a business from scratch into what promises in a foreseeable timeframe to sprint headlong into a $1 billion core market arena, the challenge for Trumark's Colorado go-to leader Scott Davis started at a gut trust level this past late winter, when Whelan Advisory principal Margaret Whelan made the match between Davis and Trumark's two co-founding principals Gregg Nelson and Michael Maples.

The three of us had all been in the business three decades, and when that first introductory call happened, we spent more time laughing [amusement, joy, pride, learning] than anything else," says Davis. "When I saw the alignment Greg and Mike had with their Daiwa House partners on the investment commitment to fast growth, strong design, and great quality, and on the communications, patience, and integrity of the people, that's where the fit became clear cut."

Whelan, who'd originally introduced Nelson and Maples to Daiwa House execs, leading to the 2019 acquisition of Trumark, adds:

Beyond access to capital, chemistry and fit are of utmost importance to me when I’m making an introduction on behalf of a client," she says. "Having worked with the Trumark team for the last few years, I knew that Scott’s expertise and character would be the right way for Trumark to put up a flag and expand outside of California for the first time."

Daiwa House has had a full agenda in the North American market since it bought Stanley Martin Homes in 2017. With the launch of Trumark Homes Colorado, the accelerate agenda shows no sign of slowing down.

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