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Reframing the Dream
By Gary H. London
President, The London Group Realty Advisors
There was a very large conference held in San Francisco a few weeks ago. Its attendees filled the hotels, swarmed the Moscone Convention Center, lined up to eat in the restaurants, and frequented the downtown shopping district's boutique retailers. San Francisco was packed with attendees of the WWDC 10, dubbed "The Center of the App Universe", from around the world who gathered to exchange ideas on making up software for your IPhone and IPad.
It dwarfed the other convention which I attended: the Pacific Coast Builders Conference, dubbed "PCBC10: Reframe the Dream."
The fact that Moscone could hold both conventions simultaneously had less to do with the enormity of their convention facility than with the comparative sizes of each event. The WWDC took up most of the center. The PCBC held out in a portion of one exhibit hall.
Moreover, rather than the exhibit hall filled with the latest appliances, building technologies, new software and other vendors showcasing in expensive booths, this year's gathering was extremely downsized. The few vendors displaying their wares were mostly occupying smaller, cheaper booths.
Traffic was down. And the quality of the players was lower also. The rather sparse setting seemed to be mostly frequented by smaller or custom builders, not the larger, development company executives. Blue jeans were the attire of choice, not Italian suits.
The World Has Changed
Not a lot of business was conducted.
It was a far cry from PCBC's past when the young and the entrepreneurial were the builders, developers and their servicing industries. They were the ones who footed the large dinner bills at the hottest San Francisco dining spots, stayed in the fancy hotels and networked in the Galleria or the Ferry building. This year the builders could not be found anywhere.
It was the geeks eating at the nice places. The world has changed, indeed.
PCBC was once the event of the year, the central repository of thought, products, and mostly, DEALS. It was the personification of the industry. It was where builders met money. Ventures got cemented. Projects got started. Celebrations were held.
I'm guessing that a lot of that was going on in the WWDC10 world. It's just that the deals were more about ventures to develop software, not homes. It was about what new activity one could gracefully download into your IPhone 4G (introduced at that conference).
The building industry has been in freefall for years. It will recover, but it is not likely to be part of the early stage recovery that seems to be taking place slowly across the globe. That, incidentally, was essentially the message that came out in the event's meetings: the industry was told by the various economists, lenders and industry soothsayers that were gathered that the market had now hit bottom, and that things were looking up.
That's the good news. Last year's PCBC was just as small, but the message was considerably more morose. The time for recovery had not begun. So grin and bear it.
Green Doesn't Mean Money
If there was a theme at PCBC10 it was to be "green." The exhibitors were demonstrating how they will save on energy and resources. However laudable, going green is not going to jump start the market. Everyone will have to be green. Consumers will not pay a premium for being green. That is just what consumers will minimally expect in their next home. In this regard, green was a sideshow.
The real show was when and where the market will return.
In 2010 it is time to start looking for deals. At least that was the sense I got talking to the builders I ran into. They have deals, they need money.
While money is searching for deals, much of the available capital--and believe it or not, there is a lot of it out there--is still searching for the "killer deal," not unlike the search for the killer App on the other side of the convention center.
Capital is looking for bargain deals in which they can invest a fraction of what they might have invested in the same deal in, say, 2003, but they are seeking much higher returns. They are willing to engage in the risk that there is money to be made in the buildup to the next up-cycle in real estate development, but they want a very high return for that risk.
Where North Meets South
There are at least two ironies that I observed in attending this year's PCBC.
One irony is that PCBC remains a conclave where North meets South. During the show, the two California markets, separated by the Tehachapi mountain ridge (read: the Magic Mountain amusement park) talk about their respective markets and exchange strategies.
Yet, there is not a lot of difference between the coastal Bay Area real estate markets and the coastal Southern California markets of Los Angeles, Orange and San Diego Counties. The bigger differences are between the east and the west portions of the state, roughly divided along the I-5 corridor until on gets to LA, then along the I-15 corridor. They are two worlds apart.
Most of the distressed deals are the acres upon acres of prairie or agricultural land that was to be replaced by building projects to accommodate the housing needs of the people who fed the economic engines of the coastal employment markets. The markets from Riverside and San Bernardino, up the inland corridors to San Joaquin, Fresno and the Bakersfield corridors remaining disaster zones: too many foreclosures, vacant homes, entitled but undeveloped or partially developed lots. And deep discounts on all that is still available. The gambit is that the market will come back and re-ignite housing demand in those areas.
The coastal markets are slow to draw out of the down cycle, but they will return quicker because demand will lead supply in those housing markets. They, too, are not active yet.
The Big Short
The other irony was that the star speaker attraction was Michael Lewis, the author who laid bare the greed that is Wall Street in his 1989 best seller "Liar's Poker." He has come back 20 later with another massive best seller, "The Big Short: Inside the Doomsday Machine," in which he chronicles, through mini-biographies of its main villains and heroes, the circumstances which led to putting our financial system on the brink of total collapse.
It all started, as we are so painfully aware now, by the irresponsibility of lending to "sub-prime" borrowers, and how that craziness went on so long, involved so much money, with so little accountability by all who were active in making it possible. He chronicles the few who guessed that the system was rigged, that it had to collapse, and how they become wealthy betting (e.g. investing in other notes) that the collateral (sub-prime notes) would cave in because its borrowers couldn't and wouldn't afford to keep their payments up once the teaser rate period was over (they didn't) and that the financial vehicles which propped that system up would run its course. It did.
So here he was speaking -spinning his yarns-about this failed system and these people who both fueled it and failed it, to a gathering of building industry people.
The question in the room had to be, how did this all come to be? Couldn't we have just built our homes at a reasonable pace, relied that qualified buyers would find us, and that through it all we would make acceptable profits for ourselves, our investors and our lenders?
Maybe next time that will come to be.
Gary London is president of the London Group Realty Advisors (http://londongroup.com/), a San Diego-based consultancy.
Gary London is president of the London Group Realty Advisors, a San Diego-based consultancy.
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