Greenbacks for Green Shoots

The housing market is seeing robust demand after the damper in mid-April, a positive sign for builders

By Margaret Whelan

As an industry, we entered 2020 expecting modest growth on the back of an extended cycle and a soft landing over the next couple of years. By mid-March the sharp and swift downturn in housing demand due to COVID-19 had left most of us scrambling for direction that was changing by the minute. Within two months, however, the dust had settled as home sales bottomed in mid-April and have recovered sequentially in most markets, due to mortgage rates that are at all-time lows and the increased emphasis on suburban living and being at home. For these reasons, we expect single family homes to continue to increase in value and rising home prices to be sticky. The emerging single family build-to-rent industry is also seeing robust demand through these uncertain conditions, further augmenting the value of new homes.

The U.S. housing market has emerged as a bright spot in the global economy, which is attracting investor interest and demand both domestically and from overseas.

As construction was deemed essential work in most states, our industry moved with speed and intensity to honor commitments made to home buyers, while ensuring safe working conditions for employees in this new normal. Given my passion for innovation, a welcome silver lining in this extraordinary time has been that more technological adoption was achieved in the last six months than in the last six years. From remote inspections to online closings, these new practices should continue going forward, enhancing productivity and returns on capital.

As we’re missing the opportunity to meet in person at the fall conferences this year, many of you have reached out to ask for an update on our thoughts on the current environment for capital raising and M&A.

The U.S. housing market has emerged as a bright spot in the global economy, which is attracting investor interest and demand both domestically and from overseas. Not only is demand for housing robust and likely to continue for the foreseeable future, but private builders and developers have seen an increase in sales velocity augment their returns, making investment opportunities more compelling. Traditional real estate private equity investors are attracted to home building given the relative stability of demand and growth when compared to other real estate sectors including multi-family, hotels and retail, where demand is depressed and returns are declining – as such they are moving quickly to identify opportunities and put capital to work in the housing arena.

At the same time, the publicly traded home builders are enjoying access to capital and liquidity that is unprecedented, with the stocks trading at close to all-time highs, and lower rates combined with the demand for new bond issuances driving debt yields tighter. This availability of growth capital, at a time when lot positions are being depleted at an accelerated pace, has spurred a lot of acquisition related conversations between national builders and private builders around the country that have robust land positions. Furthermore, investors that are attracted to the build-to-rent model are negotiating with builders and developers alike to secure a robust supply of new rental homes. The valuations being offered this year would definitely suggest this is a seller’s market.

Over the last six months we have advised on several transactions that have successfully closed, including the land sale of a private builder on the west coast to one of the largest nationals, the sale of a substantial portfolio of dedicated rental communities to a private equity firm, a land banking arrangement for a private builder in the southeast, and the formation of a $250 million discretionary equity fund in the SFR sector. Investors are focused on home builders with solid track records, sizable lot pipelines, and credible growth stories. After working with our clients behind closed doors to create a crisp investor presentation, we host a virtual roadshow via Zoom to introduce our clients to a wide range of potential partners. Only when we have narrowed down this group and received Letters of Intent do we host in person meetings and focus on executing an exclusivity agreement.

The remote nature of the current environment is allowing for more efficient decision making and faster closings, enabling our clients to quickly get back to what they love — building houses.

Margaret Whelan is founder and CEO of Whelan Advisory, a NY based boutique investment bank offering capital raising, merger and acquisition advice to homebuilder and construction company clients nationally. Please contact us to arrange a confidential conversation about your company’s capital needs www.whelanadvisoryllc.com

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