Builder hanging on by thread

By Buck Wargo

Friday, Dec. 11, 2009 | 3 a.m.

The recession continues to take a toll on Las Vegas’ private homebuilders, who are simply trying to hang in there until the economy turns around.

This year, Astoria Homes announced it was stopping construction on new homes after lenders foreclosed on three of its neighborhoods. Things haven’t improved for the company, which is down to five employees, says Astoria President Tom McCormick, who has always been open about his difficulties. Astoria had 34 employees this year and 170 at the height of the housing boom in 2005-06.

With no current income, times are tough for builders such as Astoria, which built more than 1,000 homes a year in 2004 and 2005.

“We are just staying in hibernation,” McCormick says. “We just want to survive before we can get involved again.”

McCormick says it’s anybody’s guess on how long his company can last.

“It is hard for anyone to make it in housing right now,” McCormick says. “I take it one day at a time, and when the market returns, I want to be here for it. The longer we hold out, the more chances we give ourselves.”

Many private builders have been unable to compete against foreclosures because they haven’t been able to build homes cheaply enough to compete. Much of that is the result of the inflated price that builders paid for land during the market’s boom.

“There are not a lot of finished lots out there today, and it is hard to make it pencil because prices (of foreclosure homes) are so low,” McCormick says.

Astoria defaulted on a loan with Bank of the West for 81 finished lots in the Lone Mountain area in the northwest valley and is working with the bank to sell the property, but none of the offers has come close to paying down the note, he says.

Astoria had obtained 30 acres, 15 each from Focus Property Group and the Bureau of Land Management at an average price of $240,000 an acre that was too costly to build affordable homes.

McCormick says he is open to ideas on how the builder can reenter the housing market. It could be a situation in which lenders who own land want a homebuilding partner.

“We are open to all ideas,” McCormick says. “When the market starts to improve, we think there will be opportunities out there. There are a lot of people who are trying to buy distressed assets, and they still believe in Las Vegas and see opportunities. It will be like the old days when builders partner with capital and go out and buy some land and build homes and make the split. That way works fine.”

Public builders haven’t had as difficult a time keeping afloat because of their access to money, and, unlike Astoria, their business isn’t 100 percent based in Las Vegas, McCormick says.

“That means we have suffered 100 percent of what has happened here,” McCormick says. “The big publics are spread in 20 to 30 markets and a vast majority of those aren’t as bad as Las Vegas is.”

McCormick says demand from buyers is picking up because many are frustrated at getting shut out by the foreclosure process, which gives builders some hope going forward, McCormick says.

“Things are looking very dire,” McCormick says. “We have talked that as much as we have been crushed by this thing, we are thinking of what we want to be doing when the time comes (for the turnaround). This is my lifelong dream. I love to build homes in Las Vegas, and some day we hope to draw back people.”

Grubb & Ellis preview

The brokerage firm predicts that as lenders take back more apartment buildings in 2010, there will be tremendous buying opportunities for investors.

For the past two years, apartment transactions have slowed to a halt, says Dave Dworkin, a research analyst with Grubb & Ellis. The reason is average rental rates per unit have declined 20 percent to 30 percent.

Vacancies are averaging 10 percent for high-end apartments to more than 20 percent for the oldest and most inexpensive apartments. That has prevented more owners from paying their debt service, he says.

By bringing in less revenue, the properties are worth less than their underlying debt, especially those properties purchased since 2006. That is prompting more and more apartments to have receivers appointed or be foreclosed upon, Dworkin says.

As lenders take back properties, that will create more opportunities. But the main challenge in 2010 will be obtaining financing, Dworkin said.

In 2009’s third quarter, most underwriters requested three months of stable occupancy of at least 90 percent, he said.

Land preview for 2010

Banks are the new land sellers, and 2010 will be the year of the opportunity for buyers to strike deals with banks for attractive pricing.

In 2009 most of the completed land transactions were either foreclosures or unique deals and few standard deals closed, Dworkin says. Land prices are skewed because of the foreclosures and that will make it difficult to assess land values, Dworkin says.

By 2011, Curt Allsop, a senior adviser with the land group for Grubb & Ellis, says that commercial land, whose values have already declined sharply, will start to increase in value after a growing number of foreclosures hits the commercial building market in 2010. Such a scenario has played out in the residential land market where values dropped sharply after home prices fell and foreclosures increased. Prices of finished lots ready for home construction have started to increase recently because of the demand by builders and investors given there is a limited supply, Allsop says.

“Commercial land today is where residential land was two years ago,” Allsop says. “You can buy commercial centers for less than the construction cost, and the land has no value. You can argue commercial land is worthless.”

Prices of commercial centers will continue to plummet in 2010 when properties are taken back by banks through foreclosure, Allsop says. When those properties are sold and leased at rates lower than in place today, that will dry up the supply and drive up demand by developers for the limited supply of commercially-zoned land, he says.

“Once those adjustments are made, land will start to have value again and people will start developing,” Allsop says.

Brian Wargo covers real estate and law for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at [email protected].