1993 residential builders survey.

Is an upturn finally in sight for the Southern California residential real estate market? In an annual survey conducted by active participants in the real estate industry -- Lam, Robinson & Company, certified public accountants, and the Los Angeles Business Journal -- builders and developers in the residential housing industry were asked to help answer this and other related questions.

Today's builders are challenged to meet the fast-changing demands of home-buyers, lenders, and numerous environmental, governmental, and other regulatory agencies. Trends high-lighted in the results below will show how builders are flexing to meet these demands and survive in the worst depression experienced in California in 60 years.

Increase/Decrease

The builders responding to our survey expect to increase the number of residential non-apartment units they build in 1993 over those they produced in 1992 by about 41%. This is almost double the increase projected a year ago for 1992 over 1991.

Projected growth is across the board of product lines, with builders projecting growth in single family detached homes, townhouses and condos. These builders project building seven single family detached homes for every one townhome or condo in 1993, up from six to one in 1992. Though most of the growth in single family detached homes is projected to be in the less than $300,000 selling price category, the largest percentage increase is in the $300,000 to $600,000 range, with builders who built only lower priced models in 1992 coming into the higher priced field.

Who is Providing Growth?

Response from 65% of the builders indicated increased production in 1993 over 1992, the same percentage that projected an increase in last year's survey. About 25% of the builders projected less production, and 10% expected no change from 1992.

To get an idea of how accurate our responding builders were in their projections, we looked at last year's projections for 1992 and compared them to the actual 1992 production that these same builders reported in this year's survey. For all builders who responded to both surveys, we found that in 1992, builders were reasonably accurate in their projections, actually reaching 90% of their projected output. The accuracy varied noticeably by the size of the builder, with smaller builders as a group reaching 60% of their projection, medium sized builders reaching 87%, and large builders reaching 95% of their projected production. Converted to growth rate, this means that last year's developers projecting a 21% increase in housing starts actually achieved about a 9% average increase.

Statistics on residential building permits issued in Southern California as reported by the Real Estate Research Council of Southern California indicates there was a quarter by quarter rise in activity in the first and second quarters of 1992, but still down from the prior year. There was a fall-off in the third and fourth quarters in 1992. The total number of single-family residential building permits was reported as down 5% from the number issued in 1991 to the lowest level of permits issued in the past 10 years (but still higher than 1981 and 1982).

The state of California as a whole fared better with a 3% increase in single family building permits issued in 1992 over 1991 as reported by the Construction Industry Research Board.

According to Dr. Michael Carney, executive director of the Real Estate Research Council of Southern California, "Construction of new homes in Southern California in 1993 will not increase from levels in 1992."

Where Are They Building?

Southern California builders continue to go out of state to reach more fertile markets. The neighboring states of Arizona and Nevada are receiving the most attention in 1993 with our respondents indicating 13% of their total production in 1993 will be in Arizona and 11% of their production will be in Nevada. Overall, these builders are still expecting to build 72% of their product in California -- about 16% in Northern California and 55% of their output in Southern California.

In looking at the more immediate Los Angeles area, builders were asked to identify within a map boundary where their primary building effort for 1993 is focused. (See Map.) The highest concentration seemed to be in the Victorville area, followed closely by southern Orange County. Next in order of magnitude were the South Bay and Palmdale/Lancaster areas.

Response By Size of Builder

Responses to this year's survey were sorted according to the size of the builder to see if there were significant differences in the 1993 production start expectations of the different groups. Those builders who are building less than 100 units are classified as smaller builders. Medium sized builders are those building between 100 and 500 units, and large builders are those expecting to build more than 500 units in 1993. This year there was not much differentiation in the expectations by group. The smaller builders project a 48% increase, medium sized builders a 44% increase, and large builders a 43% increase. Overall, this increase is reduced to 41% because a small group of builders who produced housing in 1992 responded that they did not expect to build any housing in 1993, and so are not included in any of the three groups.

Some builders seem to be growing in double digit percentages while others are struggling to survive. Jim Oesterling, vice-president of finance for Shea Homes commented that, "This is a case of financial 'haves' and 'have-nots.' Due to the decline of pricing, volumes being sold, and the continued decline in the number of competitors, people who have the ability are grabbing a growing share of a shrinking pie.

"Developers who do not have to rely on banks for financing are taking the leading positions. However, the ray of hope is that Wall Street is stepping in, providing opportunities that bank regulators will not allow, and public and private debt is being raised for residential developers," he added.

Improved Lots

A new area covered in our survey this year was the purchase and sale by builders of improved lots. Purchase of improved lots has become a significant factor in the residential building industry, accounting for about 52% of the expected starts in 1993 by our responding builders. The large builders have been buying improved lots for some time and the projected increase for the large builders from 1992 is only 5%. However, the projected increase in purchased lots from middle-sized and small developers is in the magnitude of 200% over the number they purchased in 1992.

The major source of these improved lots are real estate investment groups, financial institutions and other developers selling blocks of their own inventory trying now to recoup as much cash as they can. Our survey showed about 21% of improved lots were purchased from banks who had foreclosed on other developers and about 2% were purchased from the RTC.

STANDING INVENTORY TIME IN DAYS
(Table 1)
DEVELOPERS                SLOWEST MOVING   FASTEST MOVING
BY SIZE                      PROJECT          PROJECT
1-100 Units     Average        136               66
                 Range        3/400             0/192
101-500 Units   Average        111               37
                 Range       11/730           -30/365
500+Units       Average         83                7
                 Range       21/200             2/20
(1) Standing Inventory Time is the time from completion of
construction to close of escrow expressed in days.

Bernard Sandalow, a spokesman for Kaufman and Broad Home Corporation, says, "Kaufman and Broad, like most large builders, has been actively acquiring improved lots because prices on the lots are very attractive and because they allow us to complete the production cycle much more rapidly than if we were developing raw, unentitled ground. The bulk of these lots have been acquired, in our case, primarily from financial institutions and from other builders and developers."

Standing Inventory Time

We asked builders what the average standing inventory time was for their fastest-moving project. This is the time from completion of construction to close of escrow. The longer the inventory time means the builder is paying interest on his investment in inventory and has overhead costs that would end with a sale. He also has risk and is not able to realize his profit nor generate funds for additional building. Therefore, builders try to minimize their standing inventory time.

There was a significant difference in the average standing inventory time of the fastest moving projects versus the slowest moving projects. This information is summarized in Table 1. The standing inventory time ranged from zero to 730 days in our survey. As can be seen in the Table, there are significant differences between the fastest-moving projects and the slowest-moving projects and the results in this regard seem to vary significantly with the size of the builder.

We asked the developers what made the difference in their fast-moving versus their slow-moving projects. The primary reason was price, second was the condition of the local economy, and third was location. Product acceptance was also widely mentioned.

Buyers Most Interested In

Given the current demands of today's home-buyers, the survey asked developers what interested their buyers most. Developers reported their buyers' first priority was price, followed by location, and finally concessions. This ranking was consistent among the small, medium, and large developers.

What Changes Would Help Your Industry Most?

Developers agreed that an improved economy would help their industry most. The second choice for industry improvements was easier access to capital, and the third selection was for the reduction of permits and fees.

Primary Source of Financing

Despite media claims to the contrary, an astonishing 66% of survey participants named banks as their primary source for construction financing. Other developers listed their primary source of financing as either internal funding (15%) or through partners (8%).

In the case of larger developers, Mr. Oesterling, of Shea Homes, said, "Bank financing is still available but has changed from product-specific construction lending to non-product-specific revolving lines of credit."

In the case of smaller and medium developers, Wayne Colmer, president of Colmer Development states, "Banks have traditionally been the longstanding source for financing -- there really are no other players who can fill that gap. The banks lending now are the smaller community banks and savings and loans. The big banks generally are not providing construction loans because their real estate portfolios are too large."

On the subject of what it takes to get bank financing, Colmer says, "Larger amounts of equity are required beyond what was normal in prior years. Loan to values are lower, and seem to go lower every month. Also, the amount available to borrow is limited to not more than $3 million. Banks require that the land be free and clear, and many banks additionally require the land to be fully improved."

Southern California residential real estate remains a mixed market. Builders and developers are finding new ways of coping in this ever changing marketplace.

Of the 395 questionnaires we sent out, 100 developers responded. We were able to use 85 in compiling our survey. We wish to thank all the companies that responded.

Robin L. Borough is survey manager at Lam, Robinson & Company, CPAs. If you have any questions about the survey, or would like a bound copy of these survey results, please contact Ms. Borough at Lam, Robinson & Company, [phone].