March 2, 2023 • 41 mins
Homebuilders have experienced major whiplash over the last few years. The pandemic originally caused them to slam the brakes on new development. Then the housing boom happened and they raced to catch up and build — but then they ran into supply-chain constraints. Then in 2022, the interest rate shock put the market into a freeze. But before that building can begin, how do developers find completely unused land and turn it into new homes? Who takes on that risk? Who buys and brokers that land? On this episode of the podcast, we speak with Chase Emmerson, the co-CEO of Emmerson Holdings, an Arizona-based boutique land investor. He explains the process of securing land, getting it permitted for development, obtaining water rights, and more. He also walks us through what he's seeing in the housing market right now.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:10):
Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, you know,
we've talked a lot about the home builders, and uh,
you know, this is the factors that go into building
at home, the supply chain, prune, the effect of rates.
We've seen this big collapse in a single family home
(00:30):
construction over the last year since rate hikes. But there's
a pretty big component of housing that we that that
I don't think we really hate yet. Yeah, that's right.
We talk a lot about building the houses, but we
don't actually talk about securing the land that those houses
are going to be built on, right, And so like
this is also like a pretty big element. And if
(00:51):
you read the transcripts of some of the big publicly
traded home builders, a lot of the questions they have
to ask are like, well, what's your strategy with land
acquisition right now? Because you can't build if you don't
have more land. But on the other hand, like that's
a big capital cost, you're bringing that onto your balance sheet, etc.
I doubt they want to just have like tons of
(01:13):
land sitting around. So the question of like thinking about
acquiring land for housing is like a pretty big dimension
of like the adequate housing story totally. And it also
taps into a lot of other big picture questions like
what are the best markets to actually build in? Do
people take into account maybe climate change considerations places that
(01:33):
are popular now, you know, you think of some of
the Sun Belt states, Artha's going to be viable markets
in the future. Yeah, all kinds of questions like that.
So I want to like talk about the land decision
because you know, again, you know, we talked about the
rate hikes. So one of the things that we've seen
with the rate hikes is that actual like physical building
and supply it seems to be pretty sensitive and we've
(01:55):
seen this to drop in the amount of new homes built.
But I don't know anything about like how sensitive land
decisions are to rate hikes and how fast that they
can respond and how fast new land could be acquired,
because that seems like a pretty big process. Well, the
other thing I would say is this is just an
interesting business, the business of securing land that you then
(02:17):
sell on to home builders for development. And I was
not aware that this was a business model that existed.
I kind of assumed that the developers themselves would go
out and buy the land and then just build it
and do everything themselves. But that is not the case.
That is apparently not the case. I didn't even think
about it that way. I just, oh, there's plenty of
land out there, you just put up a home. I
(02:38):
didn't quite figure out. No, there's all these permits and
regulatory red tape that you have to change to the
land itself. Okay, Well, we are going to be speaking
to someone on the land specific side of the question
in studio with us. We're going to be speaking with
Chase Emerson. He is the co CEO of Emerson Holdings,
a boutique land investment group and broke based in Arizona, which,
(03:01):
as we know, is one of the hottest I guess
in many ways multiple one of the hottest real estate
markets in the country about the business of land. So, Chase,
thank you so much for coming on. Odd lots great
to be here. Thank you so much. So why don't
you just a big picture what does Emerson Holdings? Why
don't you just sort of give us the top line
view of like where you sit within the housing industry
(03:24):
big picture with our funds and with investor funds, we
buy land right on the edge of existing development. We
then master plan and design a community, obtain all of
the engineering approvals and permits, and then sell to top
twenty five national home builders. So my big question, and
(03:45):
I alluded to it in the intro, but why does
this business model exist? Like why doesn't a big institutional
housing developer just buy the land themselves and then build
on it. It's a really difficult industry for institutional investors.
So much of it depends on local knowledge and relationships.
And so while many many institutions have tried buying land
(04:06):
and having land funds, for example, few have had success
at that. Looking at the home builders also, home builders
have typically started to just buy land that has all
of the final approvals in place, so randomly. This is
something I was talking about with farmers in rural Connecticut
about a week ago, which is how do you go
(04:27):
about identifying land that's for sale? And there are all
these secret ways that they were telling me about, like
looking up on local hunting registries to see who owns
the land, because you can contact people and say can
I hunt on your land? And so that's a way
of getting in touch with people. So when you say
you need local knowledge for the market. Is that the
kind of thing that you're thinking of. Yeah, exactly, when
(04:49):
someone goes to sell, oftentimes they'll look at who a
large landowner is in the area, or a broker will
have a lead on who may be interested in selling,
and want to be the first person that they call
with that opportunity. Talk to us a little bit more
about the perspective of the home builders themselves, and like,
(05:09):
I guess my question is, like what business you know?
I guess modern capitalism is all about finding like the
specific business that you're in and then outsourcing as many
sort of like peripheral businesses to third parties. And so
in their view, land acquisition land development is not the
business that they're in. Obtaining permits from the local authorities
is not the business that they're in. Talk to us
(05:30):
a little bit more about like that relationship and what
service you provide. Yeah, there's been an evolution in the
way that homebuilders buy land. Before the Great Financial Crisis,
builders would go on the periphery and purchase large tracts
of land, often without the approvals in place, and many
of them got burned. For example, we just purchased a
(05:53):
property that a home builder paid one hundred million dollars
for sent tax homes before the downturn. We purchased it
for just over ten million, just to give you a
fi for some of the mistakes that the builders had made.
But today builders are just trying to buy land that
has all Just to be clear, this was one hundred
million dollar land track purchase that was made in what
(06:15):
two thousand and seven, two thousand and six, two thousand
and six, and today, after all of this and the
housing recovery and anything, you were able to get it
for ten millions. Yes, exactly, So that really Man two
six was crazy. So you know you mentioned the permits
and regulation. Walk us through what does the process actually
look like. Say you identify you know it's currently farmland,
(06:38):
it's being used to grow alfalfa, and you buy it.
How do you go through the next steps and what
do those steps look like? How long does it take? Yeah?
So the first step is rezoning. So oftentimes there'll be
a holding category for the land. It may have one
acre zoning and so typically it's up zoning it for
more density. So the first step is rezoning. The next
step is what's called preliminary plat and that is the
(07:01):
early engineering rough engineering for roads, for infrastructure, A PLAT
is a document that gets recorded on the land showing
lots and infrastructure, and then the final step is the
final engineering, which is called final plat. And how long
is this whole process? So the reasoning process can take
twelve to eighteen months. If it's political, it can take longer.
(07:25):
The prelimary platting and final plotting process can also take
eighteen to twenty four months, So there's a long lead
time before land can be converted from agricultural land to
land that has final approvals. So it sounds like you
do some of the urban planning almost for a lot
of these developments, like you decide where the roads are
going to be and the basic look of the development. Correct. Yeah,
(07:48):
depending upon the municipality. Sometimes you're even setting exact park details, amenities.
You're definitely saying lot sizes, community design, and that it's
very early in the process. Why don't the homebuilders want
to be in that because you'd think that's something like, well,
what is the design of our community that we're building,
what's it going to look like, what kind of amenities, parks, etc. Intuitively,
(08:11):
I would think that would be the kind of thing
homebuilders would want. Like you work closely with them, do
they tell you generally the sort of trends that are
like going on in that direction. Yeah, we have close
relationships with the homebuilders and get their feedback early in
the process with preferred builder buyers, but we maintained control
of that process. Typically, sometimes the homebuilder will enter into
escrow with the land seller and then they will control
(08:33):
that process. So I want to go back, you know,
I'm still like blown away that there is a piece
of land that sold for one hundred million in two
thousand and six that's still just worth still sold for
ten millions. Talk to you know. Obviously, one of the
biggest themes of this podcast is scars from downturns and
how they affect behavior for years and years and years.
(08:55):
So if you have these homebuilders that in two thousand
and six spent egregious amounts of land that they were
underwater on for fifteen years maybe forever, talk to us
a little bit more about like how that informs still
today or up until recently, home builder decisions about land purchases. Yeah,
it really has impacted the home builder's outlook on how
(09:15):
much supply they should keep at any given time, and
I think that we're setting up for a shortage of
developable lots given their narrower outlook. For example, Meritage Homes
said that they have four and a half years of supply,
but that's based on current levels of demand, and so
if home sales increase, that supply drops from four and
(09:39):
a half years to perhaps three years. You know, you
(09:59):
mentioned in political tension, and I have to ask nimbiism
must be a big part of your business, I would expect,
like dealing with people who don't necessarily want to see
large scale residential developments next door. Absolutely. Yeah. Cities and
towns go through evolutions of being pro growth, and then
once a certain amount of residents live there, the mentality
(10:23):
can shift, and so sometimes you get city leadership that
will push for what's called executive housing or larger lots,
and that can really hurt housing affordability. Has there been
a change over time, as you mentioned Meritage, right now
they say, Okay, we have four and a half years
of spare capacity to build more homes at current demand
(10:43):
loals we don't know. Demand might go up, demand might
go down, etc. Do those trends change over time? And
do homebuilders generally have like targets? Do they try to
match each other? Do they all want to be within
some range? Is there a number that investors like to
hear that's optimal these days? Yeah, the home builders are
typically very conservative in their underwriting. They plan for two
(11:07):
to three homes per subdivision per month, and so if
you consider that builders need to plan for just two
to three months of housing, sometimes they can get be
caught flat footed. Sorry, could you explain that I didn't
quit get when you say they planning for two or
three months per subdivision? Can you? Sorry? I didn't quite
(11:30):
understand why that. Yeah, So two to three homes per
subdivision per month is typically what a builder will underwrite
a new land acquisition at, so they assume a certain
sales level. Okay, but if they only have a few
years of supply, they can often be caught without existing supply.
And then you have a land grab where builders try
to acquire new property and start competing again for land parcels,
(11:54):
and we're seeing that now in today's market. So, just
on that note, how do you yourself identify potential purchases? Like,
what are all the different factors that go into it?
I assume you're looking at the market overall, the exact
location of the plot, who you're able to sell it to,
and maybe the amount of liquidity or financing available for
(12:18):
those purchases. Yeah, first, all of our acquisitions are cash
and so, but the main thing we look for is water.
In Arizona, it's critical to have in a shured water supply.
And while eighteen percent of the land in Arizona is private,
only a small fraction of that actually has one hundred
year water supply. Talk to us more about that. So
(12:40):
if you want to get to go through all of
the permitting process, what do you have to demonstrate two
local authorities about water? So there's two different jurisdictions in Arizona.
There are areas that are known as certificate of as
shured water supply areas, and in these areas, each individual
usual developer has to demonstrate that they have one hundred
(13:03):
year or short water supply for their community. Other areas
have what's called a designated provider, and that might be
a city, it might be a private water company, and
that entity basically gives the landowner there one hundred year designation.
It's very interesting because it creates different incentives within those areas. So,
(13:24):
for example, a designated provider area, all demand counts towards
that allocation. So if it's industrial, if it's multifamily, there's
a fixed amount of water and everything counts towards that
total capacity. Within a certificate of a short water supply area,
only single family residential is counted. So it's a loophole
(13:48):
essentially where multifamily and industrial can take capacity without any
allocation for that. That's really interesting. So you mentioned how
that create sort of different incentives. Just give us a
little bit more color on what you mean. So, for example,
there's a city called Castagrande, which is just outside of Phoenix.
(14:10):
You might be familiar with Lucid Motors, one of the
large EV manufacturing companies. Casa grand is a certificate of
a short water supply area, and so it's very difficult.
Now castagrand is essentially out of water, so it's very
difficult to start a new subdivision in a place like
castagrand But you can start a multi family development and
(14:33):
oftentimes it will look just like a single family subdivision. Oh,
so you can have something called a multifamily that looks
like But if you say, but Here's what I don't get. Like,
if you say they're running out of water, are they
going to run out of water? Yeah, where's the water
coming from? It's like I get that, it's like a
regulatory loophole, but people still need to drink or more importantly,
(14:55):
and you know, I know there's a lot of semiconductor
factories being opened up, like Denis mc stronly water intensive
process to like wash the wafers in the cilicle. Yeah,
for the semiconductor industry, it is a it is a
ton of water. For example, Taiwan Semiconductors uses twenty thousand
acre feet of water per year and just to put
(15:15):
that into context, that is roughly eighty thousand new homes. Wow.
But it's a lot of water. But at the same time,
it's it's not a lot of water if you consider agriculture.
So agriculture is in Arizona, there's a lot of cotton production,
for example, and five thousand acres of cotton production is
(15:37):
equivalent to all of Taiwan semiconductors water capacity. So from
a sort of like GDP value add my guess is
maybe let's have less cotton productions right in Arizona and
more chips exactly. You know, you mentioned that water rights
(15:57):
are top of mind for you and selecting real estate
and locations. Has that changed over the years. Has it
become more difficult to source water to the extent that
you know, maybe ten or twenty years ago, this wasn't
as pressing an issue. It's become very difficult to secure water.
You have to really look at who stands in line
(16:19):
to get the water and what your legal rights are.
And that's the very first thing that we look at
when buying land. And this has been going on in
Arizona since the very beginning, right, I mean, like, I mean,
it's the desert. The entire West is like there's no
water there. So talk to us just like generally about
like where's that water coming from? Is it piped in
from elsewhere? Is underground aquifers that are depleting, etc. And
(16:42):
I mean this is like the history of the American
West is like fights over this. Yeah. So Arizona has
two main sources of water. The first is the Central
Arizona Project, which takes water from the Colorado River. The
second is we have abundant groundwater. Depending upon which part
of the Phoenix area you're in, there's more abundant water
than others, and so that with the Colorado River, we're
(17:07):
dependent upon allocation from the Colorado River basin states and
that is more at risk of being cut back, whereas
with groundwater, it's very abundant and their ancient deposits of groundwater.
I read an article recently that and I know, like
all of these states that sort of depend on Colorado
(17:28):
water or Colorado Colorado River water always like these like negotiations,
and I have to imagine that like developers in Arizona
want to see more allocated to Arizona, and developers in
Nevada wantest be more developed, you know, New Mexico, etc.
Can you talk a little bit like is there tension
between the states and how it affects you and how
it affects your thinking in terms of like who is
(17:50):
going to get these allocations? And more importantly, you know,
if I know that the Southwest is like in a
two decade drought, and this is like what if there
are cutbacks or if there are say, look, look we
really need to conserve what is that going to do
to the ability for these like rapidly growing population states
to keep growing at the pace that they are. Yeah,
we still have plenty of water for growth, but much
(18:13):
of the land in Arizona is not going to be
developable with water. So that's the first thing that we
look at. We think that areas that have groundwater versus
called river water are going to become more and more valuable.
For example, the city of Maricopa is the eighth fastest
growing city in the US right now, and that water
is entirely from groundwater, and not only it's also replenished,
(18:39):
which is a key thing. So that oh I thought
it was just going to empty one day. Yeah. So
basically there's affluent produced by subdivisions, by employment, and this
affluent is often recharged back into the aquifer or used
for irrigation. Maricopas where they have that big Rio Verde
controversy at the moment, right, Yes, rio Verde Foothills is
(19:01):
just outside of the city of Scottsdale. What is that
I don't know about this country. This is where it's
two communities basically fighting over water rights. So rio Verde
Foothills is an area just outside of the city of Scottsdale,
and residents have drilled wells, built homes and others who
were unable to hit groundwater by drilling a well, have
relied on hauled water, and so basically a truck will
(19:23):
fill up water from the City of Scottsdale, drive it
out to these homes and fill up their tank, whether
it's once every couple weeks or once a moe. It
sounds insanely costly, but the City of Scottsdale is now
turning off the tap for those residents. Yeah, so everyone
is either going to have to drill a private well
or find water from elsewhere. I mean, people are talking
(19:45):
about this as the start of the water wars or
a sort of instance of a preview of the water
wars to come. I guess a big picture existential question.
But you develop land exclusively in Arizona, is that business
model going to be viable, you know, forty years from now? Yeah,
(20:05):
I think it will be. If you look at the
water use in Arizona today, seventy two percent is used
by agriculture, and so when you convert agricultural use to
residential use, you actually create a lot of savings in
terms of net water use. So basically like and there
was I think there's like, isn't one of like the
huge ELFLFA farms, like it's owned by Saudi Arabia, which
(20:27):
is their prerogative to like by land, etc. But there
are like it does seem like building more home Like
you could probably grow a felfa somewhere else, right, Yeah,
we're we're leasing roughly ten thousand acres to the Saudi government.
Even we should have done it. We should have had
an ELFFLFA farmer in Arizona as the other get We
should have had two parts and it's like no a
(20:48):
debate what should Arizona's water be used for? Like housing
development or elf cell phone? I would have liked that. Well,
why don't we talk a little bit about what you're
seeing now? And Joe kind of alluded to it in
the intro, But we have seen a lot of the
home builders affected by higher interest rates. Is that something
that you are feeling on your own business model or
(21:09):
does it not matter so much because people are still
buying up land for future development. So stepping back to
when interest rates went up back in June and July,
pretty much all of the home builders either extended escrows
on land transactions or canceled escrows, and so they stopped
their land buying entirely. They also often stopped their land
development spending, so parcels they had purchased, they stopped finishing
(21:34):
some of those lots. We are just starting to see
builders approved feasibility on deals and move to closing. So
this is based on strong sales in January. Right, so
housing is picking up. Did you yourself lose? Did you
yourself have buyers walk away? At some point in twenty
(21:55):
twenty two, we had several buyers walk away. Most of
them asked for extension and we said no, because we
know that land is in tight supply. Is that just
a function? I mean, how are they making the decision
to walk away from these properties? Do you notice any patterns? Yeah?
I think it's a knee jerk reaction, and there's a
(22:17):
difference of opinion between the local land acquisition teams and
their corporate view of the market. The local teams recognize
the land is in short supply and that they're going
to have to start buying land again, whereas corporate is
often issuing decisions to shut down land spend altogether. Right. Yeah,
I was in a little bit of a prep. I
(22:39):
was reading the recent earnings call from Poulty Homes Group
as one does, as one does, And they said in
the fourth quarter, we walked away from twenty one thousand
auction plots and associated nine hundred million in future land
acquisition spend. And as a result of these actions, will
occurred a pretext charge of thirty one million for the
right off. So they post when they make entering these
(23:00):
deals with you, they post some sort of escrow. If
they walk away, they lose it, correct, correct, is part
of your business? I mean, like that's obviously not great
for you, but is like part of like why there's
a business margin opportunities essentially like warehousing this risk, so
to speak. So it's like, okay, like in twenty twenty two,
(23:20):
you take a hit from these homebuilders that want to
walk away, and it's like, okay, they can do that
because they put some escrow. But then they're really going
to pay up in twenty twenty three and pay a
premium in the ideas that over time you sort of
like make more by warehousing this risk. You make more
in the good years when they're like, oh, we need
more land suddenly, that's exactly right. A lot of homebuilders
were looking for big price reductions based on the drop
(23:41):
in demand and land sellers just aren't giving the price
reductions because they know that demand will return. There's not
more land to build on and the builders will have
to pay if they want to keep home building. Well,
just on that note, I mean, you mentioned the pickup
that we've seen in housing activity in the SHANU and
I think that's surprising some people who thought that after
(24:04):
interest rates went up to I think eight percent in
late last year, did they had eight app okay, seven
or eight percent higher than they happen for many, many years,
that that would at least knock the market for more
than a few months. Talk to us about how you're
viewing that portion of the housing market at the moment,
(24:26):
what accounts for the rebound and the strong activity. Yeah,
I think builders were surprised by the strong activity in January.
We've heard several of the top builders actually exceeded their
January sales from the prior year. And so builders have
dropped pricing in the range of fifteen percent for entry
level homes. But you have to consider they had thirty
(24:47):
five percent gross margins at the peak, and now that
might be in the lower the mid twenties, but it's
still a healthy margin. I mean, I know you're not
a builder, but since you talk to them, maybe you
can anch It is your impression that their supply chain
issues setting aside land, lumber, windows, garage doors. We did
(25:07):
you know there are a million stories. Have they eased?
They have? I think builders have seen roughly fifteen thousand
dollars in cost reductions for entry level new homes, and
so that's helped their margins as well. What's the catalyst
for another leg up in the housing market in your opinion?
Is it simply interest rates starting to fall back or
mortgage rates starting to fall back. I think there's a
(25:27):
structural shortage of lots in the Phoenix market and in
many other markets. John Burns Consulting came out with the
report that said Phoenix is the fourth most undersupplied housing
market and we only have twenty thousand finished lots available,
which is compared to about twenty five thousand permits for
(25:49):
new homes in a year. I want to go back
to to one short question. Did you slow down or
put a pause on the pursuit of new land for
your business? We did, and we buy through cycles. We
focus on making good buys and we did find some
opportunities where sellers were impatient and didn't want to wait
(26:11):
for the recovery. And so, for example, that one hundred
million dollars transaction that dropped to ten million was an
institutional seller that just wanted to get out. And then
can you describe a little bit further your financing. I mean,
I think you said you bought them in cash, but
do you borrow like can you describe a little bit
about like the sort of ye your financial arrangements. Yeah,
we use our internal capital, plus we have a close
(26:33):
network of investors, okay, And but by buying for cash,
we can be patient and wait for the market to return.
Is that unusual in this business to purchase through cash
only or is that sort of the norm. Since the
Great Financial Crisis, it's been very difficult to get debt
financing for land, and it also can put pressure on ownership.
So we find that buying cash gives us the most flexibility.
(26:55):
And just on that note, but this type of business
land acquisition, I know you mentioned local knowledge and expertise earlier,
but how do you compete against other land purchasers. Is
it through you know, making sure that you're very good
at acquiring all the needed permits expeditiously. Is it simply
offering you know, good value to a developer and competing
(27:18):
on price. Yeah. I think there's a few components to that.
The first is competing on buys, So through relationships with landowners,
with brokers, you try to be the person to get
the first phone call when an opportunity comes up. The
second is on your community design. You try to design
as closely as possible to what builders will want often two, three,
(27:40):
four years out. And the third is by being easy
to work with. Since we're talking about how like everything
in modern economy is like outsource and everyone specializes. Do
you yourself as a company go through the permitting process
or there are other companies whose specialty is helping the
(28:00):
land developers walk through all that process. There's a big
land development industry that that that we use. So we
have teams of attorneys who are focused on water law,
for example, attorneys focused on rezoning. We have engineers who
are special specialists in floodplain So there's these are out
so the so the homebuilders they have an outside company
(28:24):
deal with land acquisition. The land acquisition companies I have
outside parties deal with like, uh, the whole water law,
the homebuilders have land acquisition teams that are internal. Yeah,
but they also rely on water law experts and engineers
and oftentimes are the same people that we are using
on the turning land into land that can build a house.
(28:46):
Whose responsibility and who does that like paving the roads,
um actually putting in the pipe so that water rights
can be turned into drinking usable water. Where does that
happen in the process, And does that happen before or
after it's sold to the home builder. So going back,
but before the financial crisis, builders would buy land and
(29:08):
take it from raw land all the way through the improvements.
Just after the financial crisis, builders were still very risk averse,
and so they would typically just purchase finished lots, which
means all of the water, sewer and roads complete. Now
we're starting to see builders close at final approvals and
sometimes do those improvements themselves, or sometimes they'll share that
(29:31):
risk with the land seller. You know, we mentioned a
(29:52):
number of times that parts of Arizona have seen a
big boom since the pandemic. Everyone moving to the sun
Belt states. Everyone wants to enjoy you know, lower taxes,
warmer weather and all that. Yes, yes, we all want that.
Do you see that continuing, like or do you see
that some of the pandemic era migration is starting to
(30:14):
tail off. We see it continuing for a few reasons.
The first is this reshoring trend that you spoke to,
I think on your recent podcasts with Steve Eisman. So
we're definitely seeing reshoring in the Phoenix market. Major manufacturing
companies are coming to Phoenix. We created more than eighty
thousand jobs in the prior year, and so there's a
(30:36):
robust employment market. It's not just speculation driven. I do
think we're going to have to do like a elfelfa
Like I feel like everyone's like just chips and houses
and evs and all. That's great, But we'll get all
the water stakeholders of Arizona together, room the Saudi cattle
companies that need elfalfa to feed our college like they have,
(30:59):
you know, Like who's gonna replace that? I don't know
if it's a if it's totally obvious. So is there
are there any other sort of like interesting dynamics that
we've missed so far, like things that you're thinking about
right now? Yeah. I think the big thing is unexpected
demand increases or drops coupled with a delayed supply response
(31:22):
for these finished lots is really setting up for a
structural shortage of lots, right. So, actually, this is the
question that I wanted to delve further into, which is
we talk all the time again about scars from the
Great Financial Crisis, particularly as they relate to housing and
then all the other inputs, But then we hit this
shock like twenty twenty two is the fastest rate hike
(31:43):
cycle in like decades, probably caught a lot of people
by surprise. Is weird because it's at a time of
like low unemployment a lot of demand for housing. Talk
about the sort of like knock on effects that we'll
see just from the rate shock of twenty twenty two. So,
stepping back first to COVID, you had builders kind of
(32:03):
hit the brakes on development and then they got flat
footed when demand returned with a vengeance. And then next
we have this increase in race which has led the
builders to pause yet again. And so we're really setting
up for the builders to be in a position where
their lead time on finishing landing lots is going to
(32:26):
be so tight that they're not going to be able
to meet coming demand if and when rates return to
more normal levels. So we've had a bunch of episodes
by now about the hangovers left by these sort of
extreme cycles. Yeah, what in your view when it comes
to the real estate market, would help to smooth out
(32:48):
some of that volatility or to change developers' behavior in
the sense that maybe they feel like they don't have
to hit the brakes so hard on construction, or you know,
they don't have to wait so long to start new projects.
I think the growing importance of water in the Arizona
market particularly is leading builders to take larger positions where
(33:09):
they know that they have water. Oh interesting, and so
I think that is driving builders to get away from
this just in time mindset. And so especially the private
builders have taken the lead on this and acquiring larger
parcels with maybe four or five, six or seven years
of supply, whereas some of the public builders have been
(33:31):
focused on just two or three years. This is such
an interesting dynamic that public private that we probably like.
And I think you see something in oil too, where
it's like in the last you know, when the oil
prices boomed in twenty twenty one. In parts of twenty
twenty two, you had this sort of like quarterly obsessed.
Public companies are like, oh, you know, we're maintaining capital discipline.
(33:52):
I think a lot of the new production in oil
actually came from private companies that didn't feel those constraints.
So it's interesting to hear a similar dynamic pop up
on the builder side. Yeah, they're definitely more aggressive in
the landmarkts some of the public. Some of the public
builders just will not close on property unless all the
final approvals are in place, whereas a private builder sometimes
(34:14):
is able to close even without the zoning in place.
So that gives them an advantage because they're able to
acquire the land for a more attractive price. I ought
to say, though, when you talk about water supply for
five or seven years, that still doesn't seem that long
to me. What happens after those five or seven years, Well,
to be clear, these properties have one hundred year assured
(34:36):
water supply builders are buying, so Arizona actually has some
of the most conservative groundwater management laws in the whole country.
We have one hundred year planning window, and so these
properties have an assured supply for decades to actually, can
you clarify that point about how so you mentioned that
industrial uses they can get away with certain things. What's
(34:58):
the difference in multifamily development. I think you said multifamily
is characterized more like industrial, So what is that resulting
in terms of what gets constructed? So a big boom
in the Phoenix market has been the build for rent product,
which is so these are single family homes. These are
single family homes with small yards, and they build roughly
(35:19):
twelve units per the acre, so you have much greater
density than maybe single family at three or four units
to the acre. And the loophole is they're able to
lease these for three hundred and sixty four days a year.
And so if it's three hundred and sixty five days
a year more, you have to get one hundred year
short water supply. Oh and if you have three hundred
(35:40):
and sixty four, then what what are your album? If
you have three and sixty four, you do not have
to demonstrate. Why does loophole exist? Is that was that
created on purpose in order to encourage more housing density
or I think it stems from consumer protections and people
buying single family homes. The impetus of that law was
(36:01):
designed to protect the homeowner, whereas the owner of a
maybe one hundred and twenty two hundred unit multifamily development
is a bit more sophisticated. So three hundred and sixty
four you can renew your rent or do you do
you have to go sleep at a hotel one day?
You can renew your RuPay? Okay? So what are you
looking out for? You know, we talked a little bit
about how unusual this period of time is. We still
(36:24):
have the post pandemic hangover, but housing activity and maybe
picking up a little bit. But on the other hand,
the FED says that rates aren't going to come down
anytime soon. What are you looking out for this year? Like,
what's the big catalyst on the horizon. I'm looking for
mortgage rates to come down and for buyers to get
off the sidelines. I think part of the shock has
(36:45):
not just been affordability, It's also been psychological. I think
some buyers are fear of buying at the top and
now with rates coming down with pent up demand for
how that the builders are doing a similar thing as well.
They're kind of all looking at each other, when are
we going to get back into the market and start
buying land again? And I think home buyers are doing
(37:07):
just exactly the same thing. Do you think you know
you mentioned Okay, they like walked away from agreements to
buy land. Do you think they they do that, like
walk away from agreements to buy garage, doors and windows,
And we might actually see some constraints e merge because
of that twenty twenty two shock on the supply chain.
St that's interesting question. I know they have paused development
(37:28):
trying to wait for pricing to adjust downwards. But I
think that if all the buyers return at the same
time the home builder demand, that might cause another problem.
Maybe they've been stockpiling kitchen sinks. They might that's the
best case scenario. All right, do you have any kitchen
sinks in your in your in the basement of your
(37:48):
home tracing, I have but one kitchen sink. I do
have an extra coal stove though randomly. Oh quick question,
speaking of stoves, most of the homers that you built
an Arizona electric or gas ovens, mostly electric on the
high end gas stoves, gas stoves. That's what I mean. Okay,
this isn't a politics. I'm not going to get into
(38:09):
Only in the last month did did electric versus gas
oven or stoves become a political question? But I was
curious about that, all right, Chase Emerson, so great to
have you on the podcast. There's like, uh, totally new.
You know. The other thing that I'm glad you brought
it up on the whole build for rent market is
something we I think we talked about it the other day,
but this is yet another episode that has sprung forth,
(38:32):
like three other episodes that we need to do, including
one obviously up diving in even more on water rights
something absolutely all right, Chase, thank you so much. That's
so thank you for having me. You know, Tracy, there
(38:55):
are so many interesting things in that conversation. But I
also I am like just sort of like generally fascinated
by the degree to which like all companies want to
eliminate every single risk outside of like their one narrow expertise,
which I guess on some levels very obvious. We know
outsourcing and third party consultants is big, but like this
is like a very interesting example of it for me.
(39:17):
I guess it's the natural tendency towards specialization, right. But
it is strange that I had never considered that the
housing developers would not be buying the land themselves. I
always just assumed that was the way it worked. I'm
still blown away by that one step that there were
like tracts of land that we're selling for one hundred
million dollars fifteen years ago, or I guess there's longer
(39:40):
two thousand and six. I can't seventeen years ago whatever.
Maybe like I did not appreciate how crazy that bubble is.
That is a true bath on a financial asset. I
gotta say, not even a financial asset, actual land. Yeah,
all right, shall we leave it there. Let's leave it there.
This has been another episode of the ad Thoughts podcast.
(40:00):
I'm Tracy Alloway. You can follow me on Twitter at
Tracy Alloway, and I'm Joe Wisnthal. You can follow me
on Twitter at the Stalwart. Follow our guests Chase Emerson
on Twitter at as Land Investor, follow our producers Kermen
Rodriguez at Kermen Arman and Dash Bennett at Dashbot. And
for all Bloomberg podcasts, check them out under the handle
(40:20):
at podcasts. And for more odd Lots content, go to
Bloomberg dot com slash odd Lots, where we post transcripts
of the episodes. Tracy and I blog and we have
a newsletter that comes out every Friday. Go there Thanks
your email sign up Get It Near in box. Thanks
for listening.
Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, you know,
we've talked a lot about the home builders, and uh,
you know, this is the factors that go into building
at home, the supply chain, prune, the effect of rates.
We've seen this big collapse in a single family home
(00:30):
construction over the last year since rate hikes. But there's
a pretty big component of housing that we that that
I don't think we really hate yet. Yeah, that's right.
We talk a lot about building the houses, but we
don't actually talk about securing the land that those houses
are going to be built on, right, And so like
this is also like a pretty big element. And if
(00:51):
you read the transcripts of some of the big publicly
traded home builders, a lot of the questions they have
to ask are like, well, what's your strategy with land
acquisition right now? Because you can't build if you don't
have more land. But on the other hand, like that's
a big capital cost, you're bringing that onto your balance sheet, etc.
I doubt they want to just have like tons of
(01:13):
land sitting around. So the question of like thinking about
acquiring land for housing is like a pretty big dimension
of like the adequate housing story totally. And it also
taps into a lot of other big picture questions like
what are the best markets to actually build in? Do
people take into account maybe climate change considerations places that
(01:33):
are popular now, you know, you think of some of
the Sun Belt states, Artha's going to be viable markets
in the future. Yeah, all kinds of questions like that.
So I want to like talk about the land decision
because you know, again, you know, we talked about the
rate hikes. So one of the things that we've seen
with the rate hikes is that actual like physical building
and supply it seems to be pretty sensitive and we've
(01:55):
seen this to drop in the amount of new homes built.
But I don't know anything about like how sensitive land
decisions are to rate hikes and how fast that they
can respond and how fast new land could be acquired,
because that seems like a pretty big process. Well, the
other thing I would say is this is just an
interesting business, the business of securing land that you then
(02:17):
sell on to home builders for development. And I was
not aware that this was a business model that existed.
I kind of assumed that the developers themselves would go
out and buy the land and then just build it
and do everything themselves. But that is not the case.
That is apparently not the case. I didn't even think
about it that way. I just, oh, there's plenty of
land out there, you just put up a home. I
(02:38):
didn't quite figure out. No, there's all these permits and
regulatory red tape that you have to change to the
land itself. Okay, Well, we are going to be speaking
to someone on the land specific side of the question
in studio with us. We're going to be speaking with
Chase Emerson. He is the co CEO of Emerson Holdings,
a boutique land investment group and broke based in Arizona, which,
(03:01):
as we know, is one of the hottest I guess
in many ways multiple one of the hottest real estate
markets in the country about the business of land. So, Chase,
thank you so much for coming on. Odd lots great
to be here. Thank you so much. So why don't
you just a big picture what does Emerson Holdings? Why
don't you just sort of give us the top line
view of like where you sit within the housing industry
(03:24):
big picture with our funds and with investor funds, we
buy land right on the edge of existing development. We
then master plan and design a community, obtain all of
the engineering approvals and permits, and then sell to top
twenty five national home builders. So my big question, and
(03:45):
I alluded to it in the intro, but why does
this business model exist? Like why doesn't a big institutional
housing developer just buy the land themselves and then build
on it. It's a really difficult industry for institutional investors.
So much of it depends on local knowledge and relationships.
And so while many many institutions have tried buying land
(04:06):
and having land funds, for example, few have had success
at that. Looking at the home builders also, home builders
have typically started to just buy land that has all
of the final approvals in place, so randomly. This is
something I was talking about with farmers in rural Connecticut
about a week ago, which is how do you go
(04:27):
about identifying land that's for sale? And there are all
these secret ways that they were telling me about, like
looking up on local hunting registries to see who owns
the land, because you can contact people and say can
I hunt on your land? And so that's a way
of getting in touch with people. So when you say
you need local knowledge for the market. Is that the
kind of thing that you're thinking of. Yeah, exactly, when
(04:49):
someone goes to sell, oftentimes they'll look at who a
large landowner is in the area, or a broker will
have a lead on who may be interested in selling,
and want to be the first person that they call
with that opportunity. Talk to us a little bit more
about the perspective of the home builders themselves, and like,
(05:09):
I guess my question is, like what business you know?
I guess modern capitalism is all about finding like the
specific business that you're in and then outsourcing as many
sort of like peripheral businesses to third parties. And so
in their view, land acquisition land development is not the
business that they're in. Obtaining permits from the local authorities
is not the business that they're in. Talk to us
(05:30):
a little bit more about like that relationship and what
service you provide. Yeah, there's been an evolution in the
way that homebuilders buy land. Before the Great Financial Crisis,
builders would go on the periphery and purchase large tracts
of land, often without the approvals in place, and many
of them got burned. For example, we just purchased a
(05:53):
property that a home builder paid one hundred million dollars
for sent tax homes before the downturn. We purchased it
for just over ten million, just to give you a
fi for some of the mistakes that the builders had made.
But today builders are just trying to buy land that
has all Just to be clear, this was one hundred
million dollar land track purchase that was made in what
(06:15):
two thousand and seven, two thousand and six, two thousand
and six, and today, after all of this and the
housing recovery and anything, you were able to get it
for ten millions. Yes, exactly, So that really Man two
six was crazy. So you know you mentioned the permits
and regulation. Walk us through what does the process actually
look like. Say you identify you know it's currently farmland,
(06:38):
it's being used to grow alfalfa, and you buy it.
How do you go through the next steps and what
do those steps look like? How long does it take? Yeah?
So the first step is rezoning. So oftentimes there'll be
a holding category for the land. It may have one
acre zoning and so typically it's up zoning it for
more density. So the first step is rezoning. The next
step is what's called preliminary plat and that is the
(07:01):
early engineering rough engineering for roads, for infrastructure, A PLAT
is a document that gets recorded on the land showing
lots and infrastructure, and then the final step is the
final engineering, which is called final plat. And how long
is this whole process? So the reasoning process can take
twelve to eighteen months. If it's political, it can take longer.
(07:25):
The prelimary platting and final plotting process can also take
eighteen to twenty four months, So there's a long lead
time before land can be converted from agricultural land to
land that has final approvals. So it sounds like you
do some of the urban planning almost for a lot
of these developments, like you decide where the roads are
going to be and the basic look of the development. Correct. Yeah,
(07:48):
depending upon the municipality. Sometimes you're even setting exact park details, amenities.
You're definitely saying lot sizes, community design, and that it's
very early in the process. Why don't the homebuilders want
to be in that because you'd think that's something like, well,
what is the design of our community that we're building,
what's it going to look like, what kind of amenities, parks, etc. Intuitively,
(08:11):
I would think that would be the kind of thing
homebuilders would want. Like you work closely with them, do
they tell you generally the sort of trends that are
like going on in that direction. Yeah, we have close
relationships with the homebuilders and get their feedback early in
the process with preferred builder buyers, but we maintained control
of that process. Typically, sometimes the homebuilder will enter into
escrow with the land seller and then they will control
(08:33):
that process. So I want to go back, you know,
I'm still like blown away that there is a piece
of land that sold for one hundred million in two
thousand and six that's still just worth still sold for
ten millions. Talk to you know. Obviously, one of the
biggest themes of this podcast is scars from downturns and
how they affect behavior for years and years and years.
(08:55):
So if you have these homebuilders that in two thousand
and six spent egregious amounts of land that they were
underwater on for fifteen years maybe forever, talk to us
a little bit more about like how that informs still
today or up until recently, home builder decisions about land purchases. Yeah,
it really has impacted the home builder's outlook on how
(09:15):
much supply they should keep at any given time, and
I think that we're setting up for a shortage of
developable lots given their narrower outlook. For example, Meritage Homes
said that they have four and a half years of supply,
but that's based on current levels of demand, and so
if home sales increase, that supply drops from four and
(09:39):
a half years to perhaps three years. You know, you
(09:59):
mentioned in political tension, and I have to ask nimbiism
must be a big part of your business, I would expect,
like dealing with people who don't necessarily want to see
large scale residential developments next door. Absolutely. Yeah. Cities and
towns go through evolutions of being pro growth, and then
once a certain amount of residents live there, the mentality
(10:23):
can shift, and so sometimes you get city leadership that
will push for what's called executive housing or larger lots,
and that can really hurt housing affordability. Has there been
a change over time, as you mentioned Meritage, right now
they say, Okay, we have four and a half years
of spare capacity to build more homes at current demand
(10:43):
loals we don't know. Demand might go up, demand might
go down, etc. Do those trends change over time? And
do homebuilders generally have like targets? Do they try to
match each other? Do they all want to be within
some range? Is there a number that investors like to
hear that's optimal these days? Yeah, the home builders are
typically very conservative in their underwriting. They plan for two
(11:07):
to three homes per subdivision per month, and so if
you consider that builders need to plan for just two
to three months of housing, sometimes they can get be
caught flat footed. Sorry, could you explain that I didn't
quit get when you say they planning for two or
three months per subdivision? Can you? Sorry? I didn't quite
(11:30):
understand why that. Yeah, So two to three homes per
subdivision per month is typically what a builder will underwrite
a new land acquisition at, so they assume a certain
sales level. Okay, but if they only have a few
years of supply, they can often be caught without existing supply.
And then you have a land grab where builders try
to acquire new property and start competing again for land parcels,
(11:54):
and we're seeing that now in today's market. So, just
on that note, how do you yourself identify potential purchases? Like,
what are all the different factors that go into it?
I assume you're looking at the market overall, the exact
location of the plot, who you're able to sell it to,
and maybe the amount of liquidity or financing available for
(12:18):
those purchases. Yeah, first, all of our acquisitions are cash
and so, but the main thing we look for is water.
In Arizona, it's critical to have in a shured water supply.
And while eighteen percent of the land in Arizona is private,
only a small fraction of that actually has one hundred
year water supply. Talk to us more about that. So
(12:40):
if you want to get to go through all of
the permitting process, what do you have to demonstrate two
local authorities about water? So there's two different jurisdictions in Arizona.
There are areas that are known as certificate of as
shured water supply areas, and in these areas, each individual
usual developer has to demonstrate that they have one hundred
(13:03):
year or short water supply for their community. Other areas
have what's called a designated provider, and that might be
a city, it might be a private water company, and
that entity basically gives the landowner there one hundred year designation.
It's very interesting because it creates different incentives within those areas. So,
(13:24):
for example, a designated provider area, all demand counts towards
that allocation. So if it's industrial, if it's multifamily, there's
a fixed amount of water and everything counts towards that
total capacity. Within a certificate of a short water supply area,
only single family residential is counted. So it's a loophole
(13:48):
essentially where multifamily and industrial can take capacity without any
allocation for that. That's really interesting. So you mentioned how
that create sort of different incentives. Just give us a
little bit more color on what you mean. So, for example,
there's a city called Castagrande, which is just outside of Phoenix.
(14:10):
You might be familiar with Lucid Motors, one of the
large EV manufacturing companies. Casa grand is a certificate of
a short water supply area, and so it's very difficult.
Now castagrand is essentially out of water, so it's very
difficult to start a new subdivision in a place like
castagrand But you can start a multi family development and
(14:33):
oftentimes it will look just like a single family subdivision. Oh,
so you can have something called a multifamily that looks
like But if you say, but Here's what I don't get. Like,
if you say they're running out of water, are they
going to run out of water? Yeah, where's the water
coming from? It's like I get that, it's like a
regulatory loophole, but people still need to drink or more importantly,
(14:55):
and you know, I know there's a lot of semiconductor
factories being opened up, like Denis mc stronly water intensive
process to like wash the wafers in the cilicle. Yeah,
for the semiconductor industry, it is a it is a
ton of water. For example, Taiwan Semiconductors uses twenty thousand
acre feet of water per year and just to put
(15:15):
that into context, that is roughly eighty thousand new homes. Wow.
But it's a lot of water. But at the same time,
it's it's not a lot of water if you consider agriculture.
So agriculture is in Arizona, there's a lot of cotton production,
for example, and five thousand acres of cotton production is
(15:37):
equivalent to all of Taiwan semiconductors water capacity. So from
a sort of like GDP value add my guess is
maybe let's have less cotton productions right in Arizona and
more chips exactly. You know, you mentioned that water rights
(15:57):
are top of mind for you and selecting real estate
and locations. Has that changed over the years. Has it
become more difficult to source water to the extent that
you know, maybe ten or twenty years ago, this wasn't
as pressing an issue. It's become very difficult to secure water.
You have to really look at who stands in line
(16:19):
to get the water and what your legal rights are.
And that's the very first thing that we look at
when buying land. And this has been going on in
Arizona since the very beginning, right, I mean, like, I mean,
it's the desert. The entire West is like there's no
water there. So talk to us just like generally about
like where's that water coming from? Is it piped in
from elsewhere? Is underground aquifers that are depleting, etc. And
(16:42):
I mean this is like the history of the American
West is like fights over this. Yeah. So Arizona has
two main sources of water. The first is the Central
Arizona Project, which takes water from the Colorado River. The
second is we have abundant groundwater. Depending upon which part
of the Phoenix area you're in, there's more abundant water
than others, and so that with the Colorado River, we're
(17:07):
dependent upon allocation from the Colorado River basin states and
that is more at risk of being cut back, whereas
with groundwater, it's very abundant and their ancient deposits of groundwater.
I read an article recently that and I know, like
all of these states that sort of depend on Colorado
(17:28):
water or Colorado Colorado River water always like these like negotiations,
and I have to imagine that like developers in Arizona
want to see more allocated to Arizona, and developers in
Nevada wantest be more developed, you know, New Mexico, etc.
Can you talk a little bit like is there tension
between the states and how it affects you and how
it affects your thinking in terms of like who is
(17:50):
going to get these allocations? And more importantly, you know,
if I know that the Southwest is like in a
two decade drought, and this is like what if there
are cutbacks or if there are say, look, look we
really need to conserve what is that going to do
to the ability for these like rapidly growing population states
to keep growing at the pace that they are. Yeah,
we still have plenty of water for growth, but much
(18:13):
of the land in Arizona is not going to be
developable with water. So that's the first thing that we
look at. We think that areas that have groundwater versus
called river water are going to become more and more valuable.
For example, the city of Maricopa is the eighth fastest
growing city in the US right now, and that water
is entirely from groundwater, and not only it's also replenished,
(18:39):
which is a key thing. So that oh I thought
it was just going to empty one day. Yeah. So
basically there's affluent produced by subdivisions, by employment, and this
affluent is often recharged back into the aquifer or used
for irrigation. Maricopas where they have that big Rio Verde
controversy at the moment, right, Yes, rio Verde Foothills is
(19:01):
just outside of the city of Scottsdale. What is that
I don't know about this country. This is where it's
two communities basically fighting over water rights. So rio Verde
Foothills is an area just outside of the city of Scottsdale,
and residents have drilled wells, built homes and others who
were unable to hit groundwater by drilling a well, have
relied on hauled water, and so basically a truck will
(19:23):
fill up water from the City of Scottsdale, drive it
out to these homes and fill up their tank, whether
it's once every couple weeks or once a moe. It
sounds insanely costly, but the City of Scottsdale is now
turning off the tap for those residents. Yeah, so everyone
is either going to have to drill a private well
or find water from elsewhere. I mean, people are talking
(19:45):
about this as the start of the water wars or
a sort of instance of a preview of the water
wars to come. I guess a big picture existential question.
But you develop land exclusively in Arizona, is that business
model going to be viable, you know, forty years from now? Yeah,
(20:05):
I think it will be. If you look at the
water use in Arizona today, seventy two percent is used
by agriculture, and so when you convert agricultural use to
residential use, you actually create a lot of savings in
terms of net water use. So basically like and there
was I think there's like, isn't one of like the
huge ELFLFA farms, like it's owned by Saudi Arabia, which
(20:27):
is their prerogative to like by land, etc. But there
are like it does seem like building more home Like
you could probably grow a felfa somewhere else, right, Yeah,
we're we're leasing roughly ten thousand acres to the Saudi government.
Even we should have done it. We should have had
an ELFFLFA farmer in Arizona as the other get We
should have had two parts and it's like no a
(20:48):
debate what should Arizona's water be used for? Like housing
development or elf cell phone? I would have liked that. Well,
why don't we talk a little bit about what you're
seeing now? And Joe kind of alluded to it in
the intro, But we have seen a lot of the
home builders affected by higher interest rates. Is that something
that you are feeling on your own business model or
(21:09):
does it not matter so much because people are still
buying up land for future development. So stepping back to
when interest rates went up back in June and July,
pretty much all of the home builders either extended escrows
on land transactions or canceled escrows, and so they stopped
their land buying entirely. They also often stopped their land
development spending, so parcels they had purchased, they stopped finishing
(21:34):
some of those lots. We are just starting to see
builders approved feasibility on deals and move to closing. So
this is based on strong sales in January. Right, so
housing is picking up. Did you yourself lose? Did you
yourself have buyers walk away? At some point in twenty
(21:55):
twenty two, we had several buyers walk away. Most of
them asked for extension and we said no, because we
know that land is in tight supply. Is that just
a function? I mean, how are they making the decision
to walk away from these properties? Do you notice any patterns? Yeah?
I think it's a knee jerk reaction, and there's a
(22:17):
difference of opinion between the local land acquisition teams and
their corporate view of the market. The local teams recognize
the land is in short supply and that they're going
to have to start buying land again, whereas corporate is
often issuing decisions to shut down land spend altogether. Right. Yeah,
I was in a little bit of a prep. I
(22:39):
was reading the recent earnings call from Poulty Homes Group
as one does, as one does, And they said in
the fourth quarter, we walked away from twenty one thousand
auction plots and associated nine hundred million in future land
acquisition spend. And as a result of these actions, will
occurred a pretext charge of thirty one million for the
right off. So they post when they make entering these
(23:00):
deals with you, they post some sort of escrow. If
they walk away, they lose it, correct, correct, is part
of your business? I mean, like that's obviously not great
for you, but is like part of like why there's
a business margin opportunities essentially like warehousing this risk, so
to speak. So it's like, okay, like in twenty twenty two,
(23:20):
you take a hit from these homebuilders that want to
walk away, and it's like, okay, they can do that
because they put some escrow. But then they're really going
to pay up in twenty twenty three and pay a
premium in the ideas that over time you sort of
like make more by warehousing this risk. You make more
in the good years when they're like, oh, we need
more land suddenly, that's exactly right. A lot of homebuilders
were looking for big price reductions based on the drop
(23:41):
in demand and land sellers just aren't giving the price
reductions because they know that demand will return. There's not
more land to build on and the builders will have
to pay if they want to keep home building. Well,
just on that note, I mean, you mentioned the pickup
that we've seen in housing activity in the SHANU and
I think that's surprising some people who thought that after
(24:04):
interest rates went up to I think eight percent in
late last year, did they had eight app okay, seven
or eight percent higher than they happen for many, many years,
that that would at least knock the market for more
than a few months. Talk to us about how you're
viewing that portion of the housing market at the moment,
(24:26):
what accounts for the rebound and the strong activity. Yeah,
I think builders were surprised by the strong activity in January.
We've heard several of the top builders actually exceeded their
January sales from the prior year. And so builders have
dropped pricing in the range of fifteen percent for entry
level homes. But you have to consider they had thirty
(24:47):
five percent gross margins at the peak, and now that
might be in the lower the mid twenties, but it's
still a healthy margin. I mean, I know you're not
a builder, but since you talk to them, maybe you
can anch It is your impression that their supply chain
issues setting aside land, lumber, windows, garage doors. We did
(25:07):
you know there are a million stories. Have they eased?
They have? I think builders have seen roughly fifteen thousand
dollars in cost reductions for entry level new homes, and
so that's helped their margins as well. What's the catalyst
for another leg up in the housing market in your opinion?
Is it simply interest rates starting to fall back or
mortgage rates starting to fall back. I think there's a
(25:27):
structural shortage of lots in the Phoenix market and in
many other markets. John Burns Consulting came out with the
report that said Phoenix is the fourth most undersupplied housing
market and we only have twenty thousand finished lots available,
which is compared to about twenty five thousand permits for
(25:49):
new homes in a year. I want to go back
to to one short question. Did you slow down or
put a pause on the pursuit of new land for
your business? We did, and we buy through cycles. We
focus on making good buys and we did find some
opportunities where sellers were impatient and didn't want to wait
(26:11):
for the recovery. And so, for example, that one hundred
million dollars transaction that dropped to ten million was an
institutional seller that just wanted to get out. And then
can you describe a little bit further your financing. I mean,
I think you said you bought them in cash, but
do you borrow like can you describe a little bit
about like the sort of ye your financial arrangements. Yeah,
we use our internal capital, plus we have a close
(26:33):
network of investors, okay, And but by buying for cash,
we can be patient and wait for the market to return.
Is that unusual in this business to purchase through cash
only or is that sort of the norm. Since the
Great Financial Crisis, it's been very difficult to get debt
financing for land, and it also can put pressure on ownership.
So we find that buying cash gives us the most flexibility.
(26:55):
And just on that note, but this type of business
land acquisition, I know you mentioned local knowledge and expertise earlier,
but how do you compete against other land purchasers. Is
it through you know, making sure that you're very good
at acquiring all the needed permits expeditiously. Is it simply
offering you know, good value to a developer and competing
(27:18):
on price. Yeah. I think there's a few components to that.
The first is competing on buys, So through relationships with landowners,
with brokers, you try to be the person to get
the first phone call when an opportunity comes up. The
second is on your community design. You try to design
as closely as possible to what builders will want often two, three,
(27:40):
four years out. And the third is by being easy
to work with. Since we're talking about how like everything
in modern economy is like outsource and everyone specializes. Do
you yourself as a company go through the permitting process
or there are other companies whose specialty is helping the
(28:00):
land developers walk through all that process. There's a big
land development industry that that that we use. So we
have teams of attorneys who are focused on water law,
for example, attorneys focused on rezoning. We have engineers who
are special specialists in floodplain So there's these are out
so the so the homebuilders they have an outside company
(28:24):
deal with land acquisition. The land acquisition companies I have
outside parties deal with like, uh, the whole water law,
the homebuilders have land acquisition teams that are internal. Yeah,
but they also rely on water law experts and engineers
and oftentimes are the same people that we are using
on the turning land into land that can build a house.
(28:46):
Whose responsibility and who does that like paving the roads,
um actually putting in the pipe so that water rights
can be turned into drinking usable water. Where does that
happen in the process, And does that happen before or
after it's sold to the home builder. So going back,
but before the financial crisis, builders would buy land and
(29:08):
take it from raw land all the way through the improvements.
Just after the financial crisis, builders were still very risk averse,
and so they would typically just purchase finished lots, which
means all of the water, sewer and roads complete. Now
we're starting to see builders close at final approvals and
sometimes do those improvements themselves, or sometimes they'll share that
(29:31):
risk with the land seller. You know, we mentioned a
(29:52):
number of times that parts of Arizona have seen a
big boom since the pandemic. Everyone moving to the sun
Belt states. Everyone wants to enjoy you know, lower taxes,
warmer weather and all that. Yes, yes, we all want that.
Do you see that continuing, like or do you see
that some of the pandemic era migration is starting to
(30:14):
tail off. We see it continuing for a few reasons.
The first is this reshoring trend that you spoke to,
I think on your recent podcasts with Steve Eisman. So
we're definitely seeing reshoring in the Phoenix market. Major manufacturing
companies are coming to Phoenix. We created more than eighty
thousand jobs in the prior year, and so there's a
(30:36):
robust employment market. It's not just speculation driven. I do
think we're going to have to do like a elfelfa
Like I feel like everyone's like just chips and houses
and evs and all. That's great, But we'll get all
the water stakeholders of Arizona together, room the Saudi cattle
companies that need elfalfa to feed our college like they have,
(30:59):
you know, Like who's gonna replace that? I don't know
if it's a if it's totally obvious. So is there
are there any other sort of like interesting dynamics that
we've missed so far, like things that you're thinking about
right now? Yeah. I think the big thing is unexpected
demand increases or drops coupled with a delayed supply response
(31:22):
for these finished lots is really setting up for a
structural shortage of lots, right. So, actually, this is the
question that I wanted to delve further into, which is
we talk all the time again about scars from the
Great Financial Crisis, particularly as they relate to housing and
then all the other inputs, But then we hit this
shock like twenty twenty two is the fastest rate hike
(31:43):
cycle in like decades, probably caught a lot of people
by surprise. Is weird because it's at a time of
like low unemployment a lot of demand for housing. Talk
about the sort of like knock on effects that we'll
see just from the rate shock of twenty twenty two. So,
stepping back first to COVID, you had builders kind of
(32:03):
hit the brakes on development and then they got flat
footed when demand returned with a vengeance. And then next
we have this increase in race which has led the
builders to pause yet again. And so we're really setting
up for the builders to be in a position where
their lead time on finishing landing lots is going to
(32:26):
be so tight that they're not going to be able
to meet coming demand if and when rates return to
more normal levels. So we've had a bunch of episodes
by now about the hangovers left by these sort of
extreme cycles. Yeah, what in your view when it comes
to the real estate market, would help to smooth out
(32:48):
some of that volatility or to change developers' behavior in
the sense that maybe they feel like they don't have
to hit the brakes so hard on construction, or you know,
they don't have to wait so long to start new projects.
I think the growing importance of water in the Arizona
market particularly is leading builders to take larger positions where
(33:09):
they know that they have water. Oh interesting, and so
I think that is driving builders to get away from
this just in time mindset. And so especially the private
builders have taken the lead on this and acquiring larger
parcels with maybe four or five, six or seven years
of supply, whereas some of the public builders have been
(33:31):
focused on just two or three years. This is such
an interesting dynamic that public private that we probably like.
And I think you see something in oil too, where
it's like in the last you know, when the oil
prices boomed in twenty twenty one. In parts of twenty
twenty two, you had this sort of like quarterly obsessed.
Public companies are like, oh, you know, we're maintaining capital discipline.
(33:52):
I think a lot of the new production in oil
actually came from private companies that didn't feel those constraints.
So it's interesting to hear a similar dynamic pop up
on the builder side. Yeah, they're definitely more aggressive in
the landmarkts some of the public. Some of the public
builders just will not close on property unless all the
final approvals are in place, whereas a private builder sometimes
(34:14):
is able to close even without the zoning in place.
So that gives them an advantage because they're able to
acquire the land for a more attractive price. I ought
to say, though, when you talk about water supply for
five or seven years, that still doesn't seem that long
to me. What happens after those five or seven years, Well,
to be clear, these properties have one hundred year assured
(34:36):
water supply builders are buying, so Arizona actually has some
of the most conservative groundwater management laws in the whole country.
We have one hundred year planning window, and so these
properties have an assured supply for decades to actually, can
you clarify that point about how so you mentioned that
industrial uses they can get away with certain things. What's
(34:58):
the difference in multifamily development. I think you said multifamily
is characterized more like industrial, So what is that resulting
in terms of what gets constructed? So a big boom
in the Phoenix market has been the build for rent product,
which is so these are single family homes. These are
single family homes with small yards, and they build roughly
(35:19):
twelve units per the acre, so you have much greater
density than maybe single family at three or four units
to the acre. And the loophole is they're able to
lease these for three hundred and sixty four days a year.
And so if it's three hundred and sixty five days
a year more, you have to get one hundred year
short water supply. Oh and if you have three hundred
(35:40):
and sixty four, then what what are your album? If
you have three and sixty four, you do not have
to demonstrate. Why does loophole exist? Is that was that
created on purpose in order to encourage more housing density
or I think it stems from consumer protections and people
buying single family homes. The impetus of that law was
(36:01):
designed to protect the homeowner, whereas the owner of a
maybe one hundred and twenty two hundred unit multifamily development
is a bit more sophisticated. So three hundred and sixty
four you can renew your rent or do you do
you have to go sleep at a hotel one day?
You can renew your RuPay? Okay? So what are you
looking out for? You know, we talked a little bit
about how unusual this period of time is. We still
(36:24):
have the post pandemic hangover, but housing activity and maybe
picking up a little bit. But on the other hand,
the FED says that rates aren't going to come down
anytime soon. What are you looking out for this year? Like,
what's the big catalyst on the horizon. I'm looking for
mortgage rates to come down and for buyers to get
off the sidelines. I think part of the shock has
(36:45):
not just been affordability, It's also been psychological. I think
some buyers are fear of buying at the top and
now with rates coming down with pent up demand for
how that the builders are doing a similar thing as well.
They're kind of all looking at each other, when are
we going to get back into the market and start
buying land again? And I think home buyers are doing
(37:07):
just exactly the same thing. Do you think you know
you mentioned Okay, they like walked away from agreements to
buy land. Do you think they they do that, like
walk away from agreements to buy garage, doors and windows,
And we might actually see some constraints e merge because
of that twenty twenty two shock on the supply chain.
St that's interesting question. I know they have paused development
(37:28):
trying to wait for pricing to adjust downwards. But I
think that if all the buyers return at the same
time the home builder demand, that might cause another problem.
Maybe they've been stockpiling kitchen sinks. They might that's the
best case scenario. All right, do you have any kitchen
sinks in your in your in the basement of your
(37:48):
home tracing, I have but one kitchen sink. I do
have an extra coal stove though randomly. Oh quick question,
speaking of stoves, most of the homers that you built
an Arizona electric or gas ovens, mostly electric on the
high end gas stoves, gas stoves. That's what I mean. Okay,
this isn't a politics. I'm not going to get into
(38:09):
Only in the last month did did electric versus gas
oven or stoves become a political question? But I was
curious about that, all right, Chase Emerson, so great to
have you on the podcast. There's like, uh, totally new.
You know. The other thing that I'm glad you brought
it up on the whole build for rent market is
something we I think we talked about it the other day,
but this is yet another episode that has sprung forth,
(38:32):
like three other episodes that we need to do, including
one obviously up diving in even more on water rights
something absolutely all right, Chase, thank you so much. That's
so thank you for having me. You know, Tracy, there
(38:55):
are so many interesting things in that conversation. But I
also I am like just sort of like generally fascinated
by the degree to which like all companies want to
eliminate every single risk outside of like their one narrow expertise,
which I guess on some levels very obvious. We know
outsourcing and third party consultants is big, but like this
is like a very interesting example of it for me.
(39:17):
I guess it's the natural tendency towards specialization, right. But
it is strange that I had never considered that the
housing developers would not be buying the land themselves. I
always just assumed that was the way it worked. I'm
still blown away by that one step that there were
like tracts of land that we're selling for one hundred
million dollars fifteen years ago, or I guess there's longer
(39:40):
two thousand and six. I can't seventeen years ago whatever.
Maybe like I did not appreciate how crazy that bubble is.
That is a true bath on a financial asset. I
gotta say, not even a financial asset, actual land. Yeah,
all right, shall we leave it there. Let's leave it there.
This has been another episode of the ad Thoughts podcast.
(40:00):
I'm Tracy Alloway. You can follow me on Twitter at
Tracy Alloway, and I'm Joe Wisnthal. You can follow me
on Twitter at the Stalwart. Follow our guests Chase Emerson
on Twitter at as Land Investor, follow our producers Kermen
Rodriguez at Kermen Arman and Dash Bennett at Dashbot. And
for all Bloomberg podcasts, check them out under the handle
(40:20):
at podcasts. And for more odd Lots content, go to
Bloomberg dot com slash odd Lots, where we post transcripts
of the episodes. Tracy and I blog and we have
a newsletter that comes out every Friday. Go there Thanks
your email sign up Get It Near in box. Thanks
for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Therapy Gecko
An unlicensed lizard psychologist travels the universe talking to strangers about absolutely nothing. TO CALL THE GECKO: follow me on https://www.twitch.tv/lyleforever to get a notification for when I am taking calls. I am usually live Mondays, Wednesdays, and Fridays but lately a lot of other times too. I am a gecko.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.