Like Dorothy in the "Wizard of Oz," the nation's homebuilders aren't in Kansas anymore.
Or, as researcher-consultant Jeff Meyers said at the Pacific Coast Builders Conference in San Francisco, builders are no longer atop the housing finance food chain.
"There's plenty of money; it's out there," Meyers said at the PCBC's Capital Markets Forum. "But it's focused on multifamily, not single family. Even office, industrial and retail is getting more attention" than for-sale housing.
"Apartments are in favor right now," the consultant said. "That's what you are competing against."
Real estate debt funds have "always been tourists" when it comes to single-family housing, said Meyers, who heads a Corona Del Mar, Calif.-based firm which helps connect homebuilders with sources of capital. "They come in and out of the market, and they are not focused on housing now."
Meyers presented the results of the PCBC's annual capital markets survey during an all-day session that concluded with the popular "Meet the Money" networking sessions in which builders seeking funding sat down nearly 20 lenders and investors who were looking to put their cash to work.
The group of capital sources, including Bank of America, Capstone Advisors, City View, Grosvenor Residential Partners and Wells Fargo, wasn't as large as in previous years. But, as one firm, Partners Capital Solutions, Calabasas Hills, Calif., advertised, "We have the capital you need."
So does Presidio Residential Capital in San Diego, an 18-month-old privately owned residential lender backed by a diversified Minneapolis-based hedge fund and headed by Don Faye, a 30-year real estate veterans who, up until three years ago, worked for San Diego builder Corky McMillan.
Presidio was created to provide alternative financing solutions for builders who have found it increasingly tough to obtain financing from mainstream lenders. "There is money out there, but it is from institutional investors and it is all recourse, many times individual recourse," Faye said in an interview. "Lots of times, builders are not large enough or don't want to put up a personal guarantee."
The difference? "My program is nonrecourse," Faye said.
Faye has been part of the "Meet the Money" networking session event in the past, always coming away with "a little bit of business," and this year was no different. "We talked to four or five builders that could lead to potential business," he said. "On top of that, we picked up 30 to 40 business cards."
Supporting builder complaints that money to acquire and develop land is scarce at best, Meyers' survey found that lenders are pretty much out of the land development business, and that they favor small deals over large ones when it comes to construction funding.
Nearly half the lenders polled said they don't make land loans at all. “The only land development debt is coming from private groups,” Meyers reported, and three out of four want to partner with other lenders on any project over $20 million.
"It's still a very tenuous market unless you have an existing relationship," the consultant told a hall packed full of anxious builders who have so far survived the five-year downturn.
"Lenders are being very, very selective. And the idea of a nonrecourse debt is nonexistent. Banks are still hanging on to recourse, either personal or company."
So where's the money? Investment funds, according to Meyers, who said equity "is where the action is."
Large funds have all done deals within the last six months, he said, but not necessarily with homebuilders. But when they do, he added, they favor core markets and gateway cities with strong office markets where job growth is expected.
They also like smaller deals, but not too small, the survey found. And they want builders to ante up some dough, too.
Most equity investments are in the $5 million to $10 million range, but anything smaller than that is "country club money," Meyers said. And co-investment "is mandatory in today's market. If you are willing to do 20%, practically everybody wants to play."
