The Recapitalization of Home Building and Commercial Real Estate is Underway

Implications: The subject article is a presentation of the reality in today’s home building business. It speaks of overextended capital plans and the reality of maintaining positive cash flow. The state of the industry today parallels if not exceeds the difficulties of the early 90’s, early 80’s and mid-seventies. Comparisons with the 30’s are offered as even deeper ground, but there are few if any around to speak with experience about that era from the standpoint of having been a mature adult who lived through the period.

Analysis:

At least a dozen private equity funds are marketing opportunity funds to acquire the acreage and lots left behind from defaults. So far there have been a few large transactions in the West such as the Ellman Company acreage buys in Fountain Hills adjacent to Scottsdale and two other Phoenix metro perimeter locations. Lennar has recapitalized Valencia/Newhall Land in northern Los Angeles County and a major tract in Phoenix by joint venture – the latter also with Ellman. SunCal and D.E Shaw have taken down a 55,000 acre buy on the perimeter of Albuquerque. But generally the residential land market is dormant as the buying community waits for better buys throughout 2008 and 2009. A recent article in the Orange County, California Register noted this current lack of current land interest and the general wait and see attitude was confirmed in that market and throughout Southern California.

The office market is going to see more vacancy as one in three jobs in the Phoenix market and a substantial number in the other major western urban areas are real estate related. Vacancy rates are creeping up even though absorption has been relatively strong, but the underpinnings of the market will be taken away as rent defaults occur and there are not enough sub-lease takers. To illustrate the problem, a recent estimate noted that there are about twice as many mortgage brokers in the Phoenix metro area as are required. The other service providers to the industry are probably similarly over-staffed.

The oil interests continue to pile up capital, particularly in the Middle East. The buying binge is on as we part with some of our service companies and manufacturers and Las Vegas and NASDAQ even if we wouldn’t let Dubai buy our ports some time back. Look for more of the same in the near future as we recapitalize the cheap debt we have been enjoying with more expensive equity. This capital will represent the current best available buyer as debt terms continue to be more restrictive. In fact, the entire next decade may find that the best portion of available long term capital may come from this source

We continue to make gains on the international side as we continue our offshore activity. Asian powers such as Japan and China may age slowing their progress even as we accelerate. Our new investors from the Middle East may prove to be our best and youngest allies even as we continue the turmoil of terrorism with a minority of Islam and others. The Middle East nations are moving to establish broadly based economies as oil income appears to be reliable for a more limited future.

New housing and commercial property realities will revamp the cast of characters just as the auto industry is now experiencing and we will have new financial giants. Power will pass to the new order in the course of time as it always has. Markets will be disturbed and we will have new consumer and business trends. As always, the results will be fascinating.