Publications

- January 1, 2021: Vol. 8, Number 1

De-urbanization trend supports homebuilding industry

by Loretta Coldfelter

Homebuilding has fared well during the pandemic, driven in part by a de-urbanization amid the COVID-19 pandemic.

“Homebuilding in general has been one of the unexpected beneficiaries of the pandemic, but it certainly varies by market,” says Richard Whiteley, co-president and COO of IHP Capital Partners. “There are several factors at play that affect each area differently. For example, the initial de-urbanization of major cities like San Francisco, where people fled a crowded and congested environment, has benefited secondary markets like Sacramento, Calif., and Reno, Nev.”

According to Whiteley, migration and several other trends that were already under way before the pandemic have accelerated in 2020. “The U.S. has been experiencing a housing shortage for several years, with a growing population and an increasing stock of aging existing homes,” says Whiteley. “The onset of COVID-19 added tremendous pressure on the demand for new homes as people re-evaluate their housing needs, driven by new work-from-home requirements and stay-at-home orders. Even more, millennials are now looking to purchase their first homes and take advantage of the historically low interest rates.”

Whiteley notes that homebuyers are seeking less expensive homes in lower density markets, and pointed to the third quarter NAHB Home Building Geography Index (HBGI). “The western U.S. and Florida markets are favored by those moving from expensive coastal cities in California and the northeast and have garnered a greater share overall,” says Whiteley. “Markets that offer outdoor-focused lifestyle in temperate climates, such as Phoenix, Austin, and Tampa, Fla., are seeing the most growth.”

As new homes sales continue to climb, homebuilders are eager to meet the increasing demand and are clamoring for opportunities to build, according to a report from John Burns Real Estate Consulting. However, notes Whiteley, “Land is limited, and homes are not constructed overnight. Finding attractive deals that pencil and can move through the entitlement process efficiently is the ultimate challenge for builders and developers.”

Homebuilders have adapted to the current environment, and those adaptations are likely to continue in a post-pandemic world.

“While consumption of many goods and traditional activities has been curtailed in 2020, people are consuming homes, which now also serve as offices, schools, gyms and more,” states Chris Bley, co-president and CIO of IHP Capital Partners. “The new work-from-home paradigm has altered the nature of work, and therefore the commute, and ultimately decisions about location and home. This has led to a sea change for homebuilders this year.” Bley noted that builders are adapting by reimagining the layout of a home to include dedicated spaces for specific activities such as an office and a place for children to learn virtually.

The suburbs and exurbs are now booming again after a slow recovery following the global financial crisis. “Homebuyers are seeking homes that offer more in terms of space and wellness,” says Bley. “The trend toward smaller square footages that was under way before the pandemic may reverse as builders move farther out into areas where land is marginally cheaper.”

According to Bley, while only a small percentage of people can work offsite in a home office, the number of people who do are making a big impact on the homebuilding industry. “The small shifts in the margins of a huge industry can have outsized effects,” notes Bley.

IHP Capital Partners is predicting strong performance for the homebuilding industry in 2021, given the ongoing shortage of new home supply and increasing demand from buyers, especially in newer high-growth markets.

“Price appreciation for new homes will be driven in conjunction with price appreciation in the resale markets,” says Whiteley. He noted that traditionally new homes have had a 10 percent to 15 percent premium on existing homes, and as the resale tide rises so will new home pricing.

One area to watch in the homebuilding industry in 2021 will be input costs. “Concrete, lumber and other materials are in high demand especially as construction activity increases,” says Whiteley. “Margin compression is a concern and an area we are watching carefully.”

Amid the strong performance for homebuilding, the build-to-rent segment is playing an increased role.

“Build-to-rent — BTR — is no longer an emerging asset class, it’s here, and it’s here to stay,” says Bley. But he noted that build-to-rent covers a wide spectrum of product from luxury short-term rentals, such as VRBO, to traditional single-family homes. “It also includes small-lot cluster homes and what is now becoming known as ‘horizontal apartments.’ This end of the BTR spectrum is quite similar to traditional multifamily in terms of its economics and functionality,” adds Bley.

A number of homebuilders are embracing the build-to-rent concept by creating their own divisions specialized in this area or partnering with the established BTR investors, says Bley.

“IHP sees BTR as a winning asset class due to high level of demand, multiple exit options and current income and return characteristics,” notes Bley. “In fact, our team is currently in development on 1,000 horizontal apartment units in Phoenix and is making plans to expand into other western U.S. markets that meet IHP’s investment criteria.”

 

Loretta Clodfelter is senior editor of Institutional Real Estate Americas.

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