MARKET PULSE

As part of the in-depth market and project analyses we undertake, Sullivan Group Real Estate Advisors spends countless hours in the field doing research and examining housing on the street level.  In this column we will post interesting observations we have found in the course of our work across the country.

Second Quarter 2008

APARTMENT DEVELOPMENT IN RALEIGH, NORTH CAROLINA

The Sullivan Group recently completed a market study related to the potential development of a “Class A” apartment complex in the Raleigh , North Carolina metropolitan area. As planned, the project would feature +/- 300 apartments in a series of three-story walk-up buildings. The units are planned to feature a high unit specification level and a wide range of community amenities. Additionally, there will be a +/- 200,000 square foot shopping center with within walking distance of the site. The subject site offers excellent access to regional highways and employment centers.

The objectives of this study were to test the reasonableness of the product program relative to the competitive market, establish base rents and premiums, estimate the lease-up potential of the property, and to determine the opportunity for an upscale, Class A apartment project in this particular location. Specifically, we evaluated each of the subject floor plans, identified the unit specifications and community amenities required to achieve recommended rent levels, provided insight into the anticipated renter profile and local demographic trends, and offered target rent prices and a target lease-up rate. We also assessed the supply and demand conditions in the Southwest Raleigh submarket. Given the subject’s proximity to highways and everyday amenities, as well as a high level of standard unit features and an extensive amenity package, our research indicated that there is an opportunity for market success.

MARKET OPPORTUNITY FOR COMMERICAL DEVELOPMENT IN THE SEATTLE WASHINGTON METROPOLITAN AREA

The Sullivan Group recently completed an analysis of the potential for retail development within a +/- 1,750-acre master planned community located in a southeastern suburb of Seattle, Washington . The purpose of the analysis was to determine how much additional retail space the local market could currently support and how demand for retail space might change with the introduction of the master plan. We analyzed the current retail market, proposed commercial centers, current retail spending patterns and demographics trends. Based on our analysis, we provided estimates of current and future unmet demand for commercial space as well as an assessment what retail segments were the most undersupplied.

SHARED OWNERSHIP ANALYSIS IN MAMMOTH LAKES

The Sullivan Group recently completed research on the shared ownership market in the resort community of Mammoth Lakes, California. The client asked Sullivan Group to research the success of resort-oriented product in Mammoth since the mid-2000s, and to assess the future opportunities associated with fractional ownership projects specifically. Sullivan Group conducted field research in the local market, as well as desktop research on the national trends in the shared ownership market, to determine how Mammoth compares to those markets with successful fractional or resort components.

Although it is a relatively “young” ski resort, Mammoth is increasingly being considered one of the premier ski resorts in California due to its elevation and excellent skiing conditions. It is situated about 300 to 400 miles from Los Angeles and San Diego and, as such, largely attracts Southern Californians. However, over the past 10 years, Mammoth has been continually improving its on-mountain, lodging and entertainment offerings to expand its visitor base beyond Southern California. Intrawest and Starwood Capital (among others) have invested hundreds of millions of dollars into local development with the goal of turning Mammoth into a world-class ski resort destination that draws visitors from across the United States.

Our research concluded that the opportunity for fractional ownership projects in Mammoth has been somewhat limited over the past few years as Mammoth is still in the early stages of development. Until late-2007, Mammoth lacked a four-star hotel, and it does not yet offer any substantial passenger air service. The lengthy educational process associated with fractional or shared ownership condominiums has also been somewhat of an obstacle; however, the local market is becoming increasingly aware of the particulars of this ownership type. Sullivan Group’s research indicates that with continual upgrades in accommodations and entertainment offerings, as well as expanded air service, there appears to be a growing opportunity for fractional ownership projects in Mammoth.

First Quarter 2008

LAS VEGAS PRICING AND PRODUCT ANALYSIS

The Sullivan Group recently completed a pricing and product analysis for a developer who owns finished lots in a subdivision within a master plan in Las Vegas. The developer asked Sullivan Group to determine the best market opportunity for these lots: (1) to continue with current product that is under construction and for sale in the subdivision; (2) to revise the current product; or (3) sell the remaining lots to one or more homebuilders.

Sullivan Group considered the subdivision and product relative to other subdivisions within the master plan and the overall competitive Las Vegas market. Our research determined that pricing and offered incentives at the subdivision were generally consistent with other projects in the master plan. While sales at the subdivision have recently slowed over the last year, this slower absorption may be indicative of the recent slow down in the overall Las Vegas market.

However, Sullivan Group identified several unique challenges to the subdivision and existing product that may be contributing to lower absorption rates. We suggested minor adjustments to pricing and incentive strategies for the current product in the short-term and floorplan revisions in the longer term. With minor adjustments and a possible rebound in the market in the future, the subdivision will likely be positioned for market success and overall viability in the long term.

RURAL DEVELOPMENT POTENTIAL FOUND IN CAVE VALLEY, NEVADA

The Sullivan Group was recently engaged by a land owner to provide litigation support regarding future water rights on the client’s property.   The subject is located amid 6,000 acres in rural Nevada.  A governing agent is in the process of taking the ground water in perpetuity from the client’s property on the basis that it does not offer any opportunity for future development.  It was our task to determine if there indeed is long term development potential in this rural community.  The objective included evaluating the attributes of the region and to offer an opinion as to whether or not this community offers the potential for development of any sort at some future point in time.  Our research concluded that the area clearly offers the potential for future development.  The vision for the subject property, that of a second home destination that blends the region’s natural elements (wildlife, open space, mountains) with planned amenities (such as a golf and water features), is consistent with a concept executed in numerous locations across the United States.  The Sullivan Group identified more than a dozen such resort/destination communities.  The locational attributes of the subject property (proximate to three major population concentrations and there is an existing airport approximately 45 minutes away), combined with a nationally expanding second home market (second home sales reached an all-time high in 2006 according to the National Association of Realtors and the typical vacation-home buyer purchased a property 220 miles from his/her primary residence) lend support to the opportunity.  Combine the aforementioned with a competitive market that is already being “tested” for development (a regional developer is currently selling ranches proximate to the subject site) and the development opportunity at the subject property is even stronger.

MARKET OPPORTUNITY FOR COMMERICAL DEVELOPMENT IN NORTH LAS VEGAS, NEVADA

The Sullivan Group recently completed an analysis related to the potential development of commercial uses (office and industrial) for a site in North Las Vegas, Nevada.  The 14-acre site is part of a larger 185-acre mixed-use development to include significant residential and retail uses.  The purpose of our analysis was to determine the best uses for the Subject Property and create reasonable recommendations based on site characteristics, market trends, economic growth indicators, activity in key comparable projects and general sentiment from broker/ leasing representatives in the local market.  Our core conclusions resulted in a recommended development program to include a mix of office, industrial and mini storage uses.   

SENIOR LIVING OPPORTUNITIES UNCOVERED IN PRESCOTT VALLEY, ARIZONA

The Sullivan Group examined the specific opportunities related to the development of a senior-oriented rental community on a portion of a 60-acre site in Prescott Valley, Arizona.  The overall site is conceptually designed to include a variety of commercial uses including retail, office, and market rate, non-age restricted apartments.  The senior living component was introduced as a potential concept given the relatively large size of the Subject Property that can accommodate multiple uses, as well as the convenience and “walkability” associated with having residences proximate to retail goods and services.

Senior rental options could include a diverse array of product including independent living apartments, assisted living, and nursing care facilities.  In addition to the positive attributes of Prescott as an attractive retirement destination (ranked by Money Magazine as one of the “Top Five Places to Retire” in 2006), our research revealed strong market conditions among all types of senior rental product, including solid lease rates, strong occupancy rates and a lack of newly completed competitive product.  Ultimately, our recommendations suggest that a mix of all types of senior oriented rental product could present a viable development opportunity for our client.  

NORTH LAS VEGAS SUPPLY ANALYSIS

We recently completed a supply analysis for a single family detached subdivision located in North Las Vegas.  The client was a capital source with plans to purchase the lots and hold them until much of the local area supply had been absorbed and the housing market had improved. We looked at the projects that are actively selling, the number of recently built existing homes for sale and proposed projects in the competitive market and determined most of the supply would be absorbed by late 2009. We also made new pricing recommendations and used them to approximate the per-lot price of the subdivision.

FOURTH QUARTER 2007

RIVERSIDE COUNTY SEGMENTATION ANALYSIS

We recently completed a segmentation analysis for a single family detached master plan located in Riverside County. The client was a developer/builder with plans to enter the market in early 2008. The challenge was to adjust the community’s product, pricing and absorption estimates in light of current conditions in the area. Our research suggests that over the past 18 months net base prices (adjusted for incentives) had decreased approximately 15% to 20% and absorption had decreased +/-40% at the most comparable projects for the subject property. Sales agents report that the limited number of buyers are seeking affordability and shying away from the oversized homes that were popular in the Inland Empire during the peak years of the housing boom (2004 to early 2006).

Our adjusted segmentation plan includes smaller home sizes (more single story plans) than what was initially proposed and subsequently lower prices (particularly in the initial phases of the master plan). In addition, absorption estimates are now more conservative; closer to the current market than prior analyses. Finally, to enhance success, the product program’s unit sizes and configurations are intended to attract a wider buyer pool (first-time, move-up and move-down) as an alternative to targeting only one or two specific markets.

HIGH-END CONDOMINIUM PROJECT IN LAS VEGAS

The Sullivan Group recently completed a market study for a developer in Las Vegas who plans to build a high-end condominium project in a desirable area of Las Vegas. Our work provided the developer with a unit-by-unit pricing analysis, buyer profile, and specific unit features, amenities, and services that should be included at this project.

In addition to researching high-end projects in Las Vegas, the Sullivan Group also provided the client with extensive information on the most luxurious projects in New York, San Francisco, Chicago, and Los Angeles. While several luxury projects in Las Vegas are achieving price points of $1,000 per square foot, prices at projects in these other cities commonly reach $2,000 per square foot or more, making Las Vegas one of the best opportunities in luxury living.

Sullivan Group found that buyers at luxury projects are high-end, seasoned buyers accustom to an exclusive community with world-class services. Sullivan Group recommended offering residents extensive community amenities and services within the project as well as the highest quality unit finishes as standard. With its amenities and exclusive nature, this project will further Las Vegas’ image as a world-class, luxury destination.

INDUSTRIAL OPPORTUNITIES EXAMINED IN NEEDLES, CALIFORNIA

The Sullivan Group recently completed an analysis for a land developer in Needles California, a location proximate to Bullhead City, Arizona and Laughlin, Nevada. Because the region is a relatively pioneering location in terms of industrial park development, few comparables exist in the immediate area. The Sullivan Group considered a number of case study examples of major industrial parks in California and Arizona that shared similar attributes to the Subject Project, particularly their distance from the Port of Los Angeles.

Our study examined the opportunities and challenges of the Subject Property’s location and assigned a competitive ranking for the site compared to other industrial sites. This analysis was based on a multitude of factors that are key for an industrial firm’s site selection, including locational and logistical attributes was well as cost of doing business factors.

MULTI-FAMILY OPPORTUNITIES UNCOVERED IN LAUGHLIN, NEVADA

The Sullivan Group recently completed an analysis for a potential apartment development in Laughlin, Nevada. The study considered a variety of relevant rental comparables, including market rate apartments, condominiums in the rental pool, and single family homes available for rent. Our findings revealed an opportunity for new multifamily product in the region based on a number of factors, including a lack of new rental product built within the last decade, scarce developable land available, and a broad renter pool that is in the key demographic profile and income range to demand new rental product.

LIFESTYLE CENTER SHOPPING AND URBAN LIVING MERGE IN NORTH PHOENIX, ARIZONA

The Sullivan Group recently completed an analysis for the residential portion of CityNorth, in Phoenix, Arizona. The mixed-use project is to include 5.5 million square feet of destination retail in a lifestyle oriented setting, including upscale department stores, fine dining, and residential (for-sale and for-rent) above specialty boutiques in a dynamic urban environment.

The Sullivan Group examined relevant for-sale and rental comparables in the market to establish a viable pricing strategy, as well as assign appropriate pricing premiums for locational and elevation attributes that the units offer. Despite the downturn that is evident in the Phoenix MSA housing market, CityNorth is expected to foster strong buyer interest and yield relatively high price points due to its unique offering of a desirable location and a dynamic “live-work-play” experience.

ASSISTING A DEVELOPER DETERMINE WHETHER TO RENT OR SELL

The Sullivan Group recently completed an Apartment Pricing and Positioning study for a builder in San Jose. The product we were evaluating was originally intended to be sold as for-sale townhomes. With the current state of the housing market, the builder is considering continuing with the project as a rental community.

Based on our research, this change in strategy is strongly advised. Apartment asking rents in San Jose are at their highest rate since 2001, demand for this type of product appears to be strong, and average occupancy rates in San Jose are currently at 97%. Additionally, the subject’s upscale townhouse product will present a unique orientation in this market.

POPULATION TRENDS

We recently researched current and forecast population trends in the United States. Specifically, we looked at all U.S. Metropolitan Areas (as defined by the United States Census Bureau) and measured the population growth forecast by Moody’s Economy.com. We focused on Metropolitan Areas with current populations of at least 500,000.

Key findings

• Las Vegas and Phoenix are projected to lead the way in percentage population growth.

• Seven of the top ten metropolitan areas poised to lead the nation in percentage population growth are in Florida.

• Places 11 through 20 are dominated by the six largest Texas MSAs.

• In terms of absolute population growth, Los Angeles, Miami, and Phoenix are expected to lead. (Los Angeles is also the second largest MSA in the nation after New York/N.NJ/Long Island).

ASSESSING NEW HOME PRICE IMPAIRMENTS: STRIVING TO REACH A BOTTOM

Recently we were asked by one of our clients to help assess potential new home price impairments going forward in markets around the nation.  To get to this answer, part of our research revolved around buyer incentives and price cuts in 17 metropolitan areas ranging from the Desert Southwest to the Mid-Atlantic Region.  We surveyed 240 actively selling new home communities in these markets.  In most cases, we contacted at least two projects for each of the top public builders in each market.  The projects surveyed were diverse of terms of both geographic locations within each market and price points.  The goal of the surveys was to gauge current buyer incentive levels, general incentive direction trends, level of base price reductions, and opinions about future price reductions.  While our surveys only covered a small portion of active new projects in each market, the aggregated trends for each market provide some compelling information on the health of the new home market in each metropolitan area.

Florida Markets

Our recent round of surveys covered 10 metropolitan areas in the State of Florida.  With the exception of Miami and Ft. Lauderdale, most metropolitan areas in the State of Florida have shown double-digit price reductions from peak price levels achieved in the “boom” years of 2004 to early 2006.  Our survey results show that Florida has felt the brunt of the recent slowdown in housing, with nearly 60% of projects surveyed in the 10 metropolitan areas indicating that base prices had been reduced in attempts to increase sales activity.  A few other survey findings include: 

• On average, base prices dropped 8.5% in the Florida markets we surveyed.  In addition to base price adjustments, the vast majority of projects surveyed are still offering some form of buyer incentives (monies for closing costs, options/upgrades, mortgage rate reductions, or off base prices).   

• While inventory home incentives are still high (equating to an average of 9.2% of the base price of a home), “build-to-suit” incentives are moderating (down to an average of 5.1% of the base price of a home). 

The good news coming from Florida is that nearly 70% of projects surveyed indicated that buyer incentive levels are either stable or decreasing and that over 75% of projects surveyed indicated that they did not expect further base price reductions.  While we still believe that the remainder of 2007 and 2008 will be tough for homebuilding in Florida, a market bottom in terms of pricing may be close at hand in many metropolitan areas.

Mid-Atlantic Markets

Our recent research in the Mid-Atlantic region focused on the Washington, D.C. and Baltimore metropolitan areas.  These two metropolitan areas were “heavy hitters” in the recent market boom, but have slowed considerably since peaking in the 2004 to early 2006 period.  Important survey findings include: 

• Nearly half of the projects surveyed in Washington, D.C. and less than 40% of the projects surveyed in Baltimore have lowered base prices from peak levels achieved the past two years.   

• Based upon our review of pricing data in these two markets, new home prices in Washington, D.C. are off 15.3% from peak levels, while prices in Baltimore are off 8.1% from peak levels.   

• Sizable buyer incentive levels are still present in these two markets with inventory home incentives equating to an average of 6.4% of the base price of a home in these two markets.   

• “Build-to-suit” buyer incentives currently stand at an average of 7.8% of the base price of homes in surveyed projects.

These levels of incentives speak to the weakness that is still present in these markets.  The outlook for the Washington, D.C. and Baltimore markets remains guarded as 55% of projects surveyed indicated that buyer incentives remain in an upward trend.  The positive news is that 68% of projects surveyed in Washington, D.C. and all projects surveyed in Baltimore indicated that they did not believe base prices would be lowered again.  Look for fall-out from the mortgage industry to further impact sales and pricing levels in the Mid-Atlantic region in 2008.

Colorado Markets

The Colorado markets of Denver, Boulder, and Colorado Springs are unique in that their “boom” period occurred in the late 1990’s.  Since the technology and telecom fall-out of the early 2000’s, housing market conditions in these markets have remained average at best.  With that said, it is no surprise that less than 10% of projects surveyed have lowered base prices.  In fact, base prices have increased an average of 3% at the new home projects we surveyed.  A few other key findings:  

• Moderate incentive levels were found in the Colorado markets, accounting on average for 7.9% of base prices for inventory homes and only 4.3% for “build-to-suit” homes.   

• Trends in the Colorado markets remain relatively positive with 76% of projects indicating that buyer incentives are either stable or decreasing and 90% of projects indicating that base price reductions do not appear to be in the works at this point in time. 

We remain cautiously optimistic that markets in Colorado will be able to avoid the more severe downturns found in other markets around the nation.  However, employment and population growth levels are not expected to return to the “boom” era levels of the late 1990’s, which will likely limit the growth potential of these markets.  Couple this with a national economy that is moving closer to recession (including slowing in the technology sector) and the Colorado markets are not “out of the woods” yet in terms of avoiding tougher housing market conditions.

Desert Southwest Markets

The Desert Southwest markets of Phoenix and Las Vegas represent the epitome of how former “boom” markets are struggling to find a solid footing as demand for housing has evaporated.  After exponential increases in prices and sales levels in 2004 and 2005 (fueled by investor buyers), a lack of demand has led to a cycle of increasing incentive levels and reduced base prices, resulting in record high cancellation rates and inventory levels.  A few key conclusions follow:   

• Of the projects we surveyed, 63% in Phoenix and 67% in Las Vegas indicated that base prices have been lowered.   

• Prices are lower by an average of 8.0% in Phoenix and 6.2% in Las Vegas.  Our review of pricing data in these two markets shows that this estimate appears accurate for Las Vegas, but may be understated for Phoenix (prices are potentially off as much as 19.6% from peak levels). 

• Moving inventory homes is the current focus of builders in these two markets, with inventory home incentives currently at 11.0% of base prices in Las Vegas and 14.3% of base prices in Phoenix. 

“Build-to-suit” buyer incentives are also relatively high at an average of 6.6% of base prices in Las Vegas and 6.1% of base prices in Phoenix.  While the downturn in these two markets has been significant, our surveys uncovered some positive results with over 53% of projects in Las Vegas and 100% of projects in Phoenix indicating that incentives are either stable or decreasing.  This optimism carries over to expectations of future price reductions, with 87% of projects surveyed in Las Vegas and all projects surveyed in Phoenix indicating that prices would not likely be lowered again over the near-term.  Many projects in Phoenix indicated that the aggressive price cuts and incentives are finally starting to get buyers back into the market.  While some positive signs are emerging in Phoenix and Las Vegas, several challenges will remain in place for the remainder of 2007 and through 2008. 

Conclusions

Our research shows that while incentive and price levels appear to be stabilizing in many of the markets we surveyed, the remainder of 2007 and 2008 will be tough for the homebuilding industry.  While it appears that incentive levels and price reductions will likely diminish in 2008, this change in the market might come more as a result of builders not being financially able to go lower on pricing than as a result of improving local housing market conditions.  We believe the key to recovery will be the reset of land values that will allow new product to enter the market at “market appropriate” prices.

STOPPING STARTS

Public builders in the Austin MSA are taking a proactive approach to curtailing start levels.  Seeing sales activity slow in markets around the nation, many public builders in the Austin MSA are proactively pulling back on housing start levels.  This pullback is in spite of strong current market conditions. 

This proactive approach should help keep a “supply overhang” at bay and prevent a repeat of the rampant overbuilding that occurred prior to the downturn in housing in the late 1980s and early 1990s.  Trends such as these continue to make the Austin MSA one of the most attractive new home markets in the nation. 

GOOD NEWS SALES' TALE

We are hearing some good news in Imperial County, finally.  Some builders have led the charge in fighting a down market by bringing new product to market that more closely matches incomes in the area.  McMillin Homes recently released a new product line at three of their existing communities. This product is near or below $200,000, and all have been met with healthy sales over the past month.

FANTASTIC ‘FIX’

As a unique incentive, a national builder has recently pre-secured a large sum of financing for their internal mortgage company and is now offering fixed rates between 4.9% and 5.5% on 30-year mortgages for homes purchased in their communities.  Based upon current mortgage rates (6.33%) and a $300,000 mortgage, this incentive will save buyers between $10,000 and $15,000 over a five-year period. 

Assuming a buyer uses a 10% down payment, it will cost builders between $15,000 and $22,000 for a home priced at $330,000 (well within the realm of current incentive levels).  This type of incentive not only provides a more unique attraction than monies toward closing costs or options/upgrades, but it also opens up projects to more buyers when credit is becoming increasingly difficult to obtain.  This is because potential buyers will only need to qualify for a loan at the reduced rate.