Wednesday, March 18, 2015

No Guts No Glory



No Guts No Glory

I would like to ask a question of the homebuilding community.  We often say we are interested in innovative product, plans, cutting edge technology and new design.  However, how many of you are willing to go that extra mile to deviate from the norm, to take a chance that may put your pricing above the market.  Will the market accept it, promote it and embrace it?  More importantly, will the market be willing to pay for it?  This is the $64,000 question.  

When a gamble works, you are considered a trailblazer, someone with vision who was willing to stick to your convictions.  You are recognized as an individual who not only has their finger on the pulse of the market, but has the uncanny ability to know what consumers want before they know they want it.  Like Steve Jobs if he had built homes instead of computers.  However, if you miss, you are considered a poor risk taker, someone who missed the market and did not recognize that you cannot sell what is not asked for.  Like what almost happened to Apple when Steve Jobs first left the company.

It is a fine line, and one which has no definitive answer.  I toured a top selling community the other week that has multiple builders and is located in a price sensitive sub-market.  Most product tends to follow tried and true layouts, and pricing per foot is fairly standard across the product segments.  Then one of the builders tried something different with a new product line.  While I would not call the changes radical, they are of a nature to be significant enough to be very noticeable.  Like test driving a BMW after looking at Fords and Chevys (sorry Ford and Chevy drivers.  No harm intended.)  It obviously carries with it an increased base price relative to competitive product, but you definitely get a home that feels more valuable than the other options available.  I am not talking upgrades here.  It is all about design, utilization of space and incorporation of light.

I don’t know if it will succeed or fail.  But I sincerely hope it succeeds.  I want to believe that homeowners will recognize value when they see it and will be willing to stretch a little further to invest in something that raises the bar.  I am not implying that all good ideas can sell at a premium.  However, it is refreshing to see an entrepreneurial spirit shine through now and again.  Regardless of what market research and consumer focus groups tell us, you never really know what will work until you can dedicate yourself to an ideal and have the courage to implement it.

It is good that Steve Jobs came back to Apple.  It is also good to see builders taking calculated risks with product and design.  But it is a gamble.  You may not be the next Steve Jobs.  But do you have the conviction to try?   

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328

Friday, March 13, 2015

A Contrarian Perspective



A Contrarian Perspective

The real estate business is very much an emotional business.  You can see it, feel it and touch it.  It tends to be an extension of an individual or corporation and is out there for all the world to see.   It is a tangible investment.  Whether a commercial property, vacant land or other form of real estate, it is something that has visual substance.  And no one like to make a mistake on something that everyone can see.

Back in the late 80s and early 90s, no one would touch office or hotel properties.  They were overbuilt, vacancies were high and no one knew where the bottom was.  It drove return hurdles to ridiculous levels and drove prices down to bargain valuations.  

During the most recent real estate bust, the same was true of residential real estate.  Land could be had for pennies on the dollar and the markets were littered with destroyed companies and little liquidity.

In both cases, people were afraid to make purchases and investments as no one knew where the bottom was.  Opportunistic investors swooped in and made fortunes with contrarian investment strategies, not worrying whether their purchase was at the true bottom, but feeling comfortable that it was at least low enough to guarantee a substantial return whenever the markets would improve.

A similar phenomenon is occurring in current homebuilding lending practices.  As many smaller builders went out of business in the last downturn, institutional investment dollars have now flocked to the more established large builders.  They are perceived as more stable with a lower risk of project failure.  This has resulted in the reduction of an important source of capital for new start-ups to take shape.  Without so-called country club money, new builders have limited access to capital.  

From a contrarian perspective, this creates a huge opportunity.  Consider the following.  If a project performs poorly, who is more likely to pull out, a new or established builder?  If a deal is unconventional, who is more likely to figure out how to make it work, a new or established builder?  When trying to latch on to new trends and innovations, who is more likely to react quicker, a new or established builder?  In all three circumstances, I would argue on behalf of the new builder.  They cannot afford for any deal to fail, they are more likely to think out of the box for non-standard opportunities and they have less red tape to jump through to adjust for innovation.  In an improving real estate market, these seem to be compelling, but overlooked opportunities.  Additionally, everyone loves a fresh face.  

I understand that there is fear that the real estate markets can falter again.  After all, it is an investment and investments move both up and down.  We tend to get scarred easily and those wounds take time to heal.  Except for those contrarians who recognize opportunity.  In an improving homebuilding market.  For new homebuilders.  

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328