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