Arixa Capital Advisors organized its first investment roundtable in Orange County, California, on Wednesday, January 29, 2014. The event, entitled Are Happy Days Here Again? was co-hosted by Chapman University’s The George L. Argyros School of Business and Economics, and brought together over 200 industry professionals for networking and a lively panel discussion on the state of the residential real estate market. To watch the the video of the event, click here.
The event was moderated by Jesse Sharf, the Co-Chairman of the Real Estate Department at Gibson, Dunn & Crutcher. The panelists included Emile Haddad, President and Chief Executive Officer of FivePoint Communities; Scott Laurie, President and CEO of Olson Company; John McMonigle, Principal and Founder of The McMonigle Team; Gerd-Ulf Krueger, Principal Economist of Krueger Economics; Greg Hebner, Managing Director of Community Rebuild Partners; and Jan Brzeski, Managing Director and Chief Investment Officer of Arixa Capital Advisors.
The panel was a particularly diverse cross-section of industry professionals and included a developer, a homebuilder, a real estate agent, an economist, a lender, and a fix-and-flipper. This stimulated a substantive discussion featuring multiple perspectives on the single family housing market.
Despite the recent slowdown in housing prices and sales volume as well as the looming specter of higher mortgage rates, all parties were surprisingly sanguine about the future prospects for the single-family market. In answering the headline question, Are Happy Days Here Again? Mr. Haddad characterized the state of the market as "sober" happy days, as opposed to the "drunk" happy days of 2005.
Mr. Krueger noted the sizable rebound in housing prices following the real estate crash of 2009 as evidence that happy days are indeed here again. He called the rebound a "big bang". Mr. Krueger tempered his enthusiasm saying that following any big bang there is an inevitable slowdown. He said that we are entering that slower phase, which is characterized by lower affordability.
Mr. McMonigle added that the Pacific Rim buyer, often from China, was a positive factor supporting home prices. This theme of the Pacific Rim buyer supporting home values was discussed throughout the evening. Mr. Krueger agreed with Mr. McMonigle, noting that housing affordability is not a factor for Pacific Rim buyers. Mr. McMonigle went on to say that these buyers were interested in a particular product - new construction, master planned communities. In his experience, he did not find that these buyers were interested in eclectic older homes.
Mr. Haddad, who is developing homes in Irvine, CA as a part of the Great Park Neighborhoods, supported Mr. McMonigle's point, saying that 70% of the 280 homes that he has sold since October 2013, all of which are in master planned communities, were to Pacific Rim buyers. Mr. Haddad felt that concerned regime members and business owners in China would continue to move their money out of the country in anticipation of a slowing Chinese economy, which may lead to political instability in the future.
Mr. Laurie is the CEO of Olson Company, a homebuilder, who despite a recent slowdown in home prices and sales was optimistic about the prospects for his company. He cautioned that his business was a niche business and very localized. Mr. Laurie said that his company identifies the end buyer of Olson homes before they entitle land and build. End buyers are particular to a geographic region. The types of homes that sell well in one area of coastal California will not necessarily sell well in another area. It is important to understand exactly to whom you are selling, how they will pay for the home, and the features and characteristics that they will value and pay for. For this reason, Mr. Laurie’s company is highly data driven. One factor that Olson Company carefully considers is affordability, which is a combination of income, interest rates and home prices. They use this data to determine where to build and how to price their product in order to realize the optimal price elasticity of demand. Mr. Laurie said that two areas where affordability is relatively high and where Olson is investing are the San Fernando Valley, in the northwestern portion of Los Angeles County, and the San Gabriel Valley, which is in the eastern part of Los Angeles County.
Land entitlement is one of the more challenging aspects of being a developer and homebuilder. Mr. Laurie said that entitling land was one of his company’s greatest ways of adding value. For example, in the Los Angeles Basin there is high demand for housing in an area that is already very built-up. Olson Company looks for land that has been zoned for commercial use and attempts to entitle the land for residential development. This can be a difficult and drawn out process; however, in recent years the time to entitle land in Los Angeles has fallen from 24 months to 10 months.
Mr. Brzeski of Arixa Capital Advisors, a company whose principal business is lending to people who are purchasing and renovating houses for resale, said that it is precisely these difficulties with entitling land that makes renovating existing houses so attractive. In the coastal markets in California there is a limited inventory of homes that are either new construction or have the contemporary amenities that homebuyers demand. This is what creates the present opportunity for Mr. Haddad, a developer, and Mr. Laurie, a homebuilder, but it has also raised the industry profile of the fix-and-flipper. People who do not have the expertise or the inclination to tackle the entitlement process are adding to the supply of modern homes by repositioning California’s existing aging housing stock. What started as an opportunistic business following the collapse in home values in 2009 has become a sustainable business due to the lack of inventory of modernized homes.
The business of Mr. Hebner’s company, Community Rebuild Partners, is exactly what Mr. Brzeski was referring to: buying renovating and reselling existing homes in California. Mr. Hebner added to the conversation by addressing recent market dynamics, principally the impact of institutional investors on his business model. Following the housing collapse, institutional investors began purchasing large numbers of homes in order to rent them out and gain exposure to a recovery in the housing market. This action negatively impacted the business of flipping homes. Mr. Hebner said that when large institutional buyers move into housing markets they push up home prices, which makes it more difficult for home flippers to find low-priced houses to buy, renovate, and resell. This has forced Mr. Hebner’s company to seek investment opportunities in higher priced homes that are not attractive to the institutional investors as rentals. Mr. Hebner added that in recent months he has seen a slowdown in sales, which he believes is partially a function of higher interest rates.
Arixa Capital Advisors thanks Chapman University for helping to organize this tremendously successful investment roundtable event. We would like to extend a special thanks to Chapman University’s Reginald H. Gilyard, Dean of The George L. Argyros School of Business and Economics, Fadel Lawandy, Director of the C. Larry Hoag Center for Real Estate and Finance, and their staff. Of course, thank you to all of our attendees. We hope that you found the investment roundtable both educational and enjoyable and hope to see you at one of our future events. We welcome your comments and feedback.