Transcript
Dean Wehrli:
Hey, this is Dean Wehrli with New Home Insights Podcast. Welcome. Today we have Greg Vogel. He is the head honcho at Land Advisors Organization. It’s one of the dominant residential land brokerages in the country. So naturally we’re going to be talking about land. Where is it most in demand, in what form, how much of it, and how we can make more of it. I’m going to hold you to that last one too, by the way, Greg.
Greg Vogel:
All right.
Dean Wehrli:
How’s it going? Good afternoon.
Greg Vogel:
It’s going great. Thank you for having me.
Dean Wehrli:
Why don’t you start us off with just a brief intro of you and land advisors, and then we’ll get started.
Greg Vogel:
Thanks, Dean. Again, very much appreciate being involved here. So I moved out to Arizona to go to Arizona State University in 1982. I ended up falling into an internship program at Coldwell Banker now CBRE. I ended up having a great mentor who was owning something that no one else had in 1983 out of 65 brokers, and that was a computer, which was amazing. He taught me about databases and spreadsheets. And so at the ripe age of 19 years old, I became the pro in the office that people would stand behind me and say, “Watch, he’s going to change one number and it’s going to change everything else.” So I was actually quite a magician. I had a couple of other brokers send me some aerials requesting land research, and I began to research there, but I was wondering why they weren’t putting it into a database.
Greg Vogel:
One other observation is I had another broker in the same office hand me the same page and request I research it and I said, “Well, I already did it for Joe. Go get it from him.” He goes, “Shut up and do it.” So [crosstalk 00:02:12] two observations at 19 years old was they weren’t putting it in the computer and they weren’t working together and that’s the foundation, the roots of Land Advisors Organization. I formed my first land company at 21 years old with a couple other partners that lasted two years. At 23 years old on October, 6th of 1987, I formed this current company Land Advisors Organization. I was 23 as I mentioned in the stock market crashed on October 19th and it was welcomed to business and couldn’t have been a better thing that happened than a leveling of the playing field. We ended up representing the RTC, many banks, and institutions and we really cut our teeth.
Greg Vogel:
In 1999 we began an expansion of the company and that expansion has continued to this state. We now have 72 advisors across the country. We are in 26 markets. We have another 35 supporting the advisors. So we’re a little over a hundred in team on the brokerage side. We also have lend advisors capital, we have a group called Launch Development Finance Advisors, and we’re discussing and advising on district formation for infrastructure. And we’re continuing to grow. We plan to hire another 20 advisors over the coming 24 months and dive into additional business lines. Last year we transacted in just a hair under $3 billion in land across the US which far exceeds any of our competitors, including the largest companies in the brokerage business.
Dean Wehrli:
Yeah, I should have said that by the way. I know you guys do a lot. You have your fingers in quite a few pies and have a lot of breadth to what you do. We’re going to focus on land here, but I’m glad you brought it here, I’m glad you brought up the variety of what you guys actually do. So let’s start with looking back a little bit before we come to the present time. It’s late 2018 going into 2019, and it seem like maybe the market could be slowing a little bit. Maybe it was the end of the cycle possibly. People were really concerned about affordability and how high housing prices had become. Did the land market have these kind of figures or show these kind of worries at that time?
Greg Vogel:
Well, the land market and especially navigating the residential sector of sale of a individual pad or a parcel of land to a home builder was really a difficult business, really from we’ll call it the beginnings of the recovery in 2014 right through 2019. We would have to sell the same parcel of land a multitude of times, underwriting would fail, renegotiation cancellation, sell it again, and feasibility was generally very difficult and failing. The public builders especially, their land committees were being very stringent and they should have been, but it was very difficult to make numbers work. All of that really did change as we began to shift into the new market, which I know we’re going to about to cover. But we did have touch and go, and it wasn’t just ’18, ’19, but it was fairly dismal in terms of volume. It was just enough to maintain. Absorption was not high enough at a pace that was needing very quick replacements and turnover. So we just did not have the volume or the activity.
Greg Vogel:
Affordability was really an issue only in certain markets. I would say for most of the smile except the west part of the smile be at California and Washington and Oregon, was really affordability, a big challenge along with some of the Eastern Seaboard. But by and far, the most part affordability had not really been the challenge as much as builders just in a relatively low pulse environment.
Dean Wehrli:
Yeah, that’s interesting actually because a little bit of counterintuitive, I guess. Because in 2000, let’s say 15, 16, 17, 18, the housing market demand was pretty good. Generally speaking, the residential housing market was pretty strong, but the land market was still tough. There was a disconnect. Was that from land prices or just that gulf between the bid and ask?
Greg Vogel:
Yeah. So land prices actually had a lid on them. I think it really came down to absorption and pricing power. There was still a good inventory of resale housing builders doing one or two a month is much different than doing four to six a month. And I think that is mostly the IRR component. Now we’ve seen with acceleration and power and pricing, we’ve seen margin and IRR in a sense roar so it all does click. I think the lid on land pricing was related to escalating horizontal costs and vertical costs that were creeping up and then went into hyper overdrive related to a number of factors. But the horizontal costs really went up a bunch and we didn’t have pricing power on underlying land. And that was the lid. And quite frankly, it was the big discussion with construction cost estimates, busting for what the seller thought they had and there wasn’t room to move it up. So that was really the factor in my view.
Dean Wehrli:
Yeah. I mean, we’re still hearing about brutal costs and brutal cost inflation, but now we have something else which is incredible housing price appreciation. So things have changed, and is it fair to say just about everyone’s pretty hungry for lots right now, most builders?
Greg Vogel:
Yeah. If they’re not, they’re not in the business. So they are hungry to starving for inventory, and some of that has moved around in terms of the areas where they think we’ll talk about here shortly. There has been movement as it relates to some geography and price points, but they’re all hungry to starving.
Dean Wehrli:
Is there more appetite currently in masterplan, specifically relative to standalone communities?
Greg Vogel:
Yes. We have seen master planned communities be rewarded by the fact that they do have a platform of inventory that they can in a sense print plats and plug-in play related to infrastructure, versus some of the things we’re seeing in many of our markets, which we are beginning to run out of key infrastructure. We’re having to extend spine roads further than you might want to. We’re having to expand wastewater plants, we’re having to wait for water treatment facilities to come online. So there is a real factor that the large scale master planned communities are well-prepared. The other things that the home builders look for obviously is a market and the marketing that master plans do very well in many cases. I think the other is just the idea that if they’re a good partner to the master planned developer and performance, that they’re going to be offered additional parcels. They may cost more, but at least they can rely upon additional inventory.
Dean Wehrli:
It seems like it’s all about the suburbs here in lately in this post-COVID rebound here or during COVID rebound, I guess. Is that true in the land market? Is it all about looking at the suburbs in the outline markets?
Greg Vogel:
The answer is yes. I would tell you there was a big push toward infill even by the publics in the, we’ll call it the early stages of the recovery, ’13, ’14, ’15, there was parcels to be had at reasonable land values. But even with that, the volume couldn’t be had there, and quite frankly, the pace was not there because the price point had to be higher. They were truly competing with infill resale homes that could have a hundred grand put in them and be like new. And so those tighter sites, smaller quantities, higher cost of verticals, three story kind of not terribly desirable in many cases was really something that they didn’t get well-rewarded for. At the same time, there were lots that could be bought at or near or even below replacement costs. There was a continuing stream of relics leftover from the crash that investor had bought between 2009 and call it ’13 that they were bleeding back into the market, and that allowed for some affordability.
Greg Vogel:
At the very same time now, we have seen a full push to the suburbs and that full push to the suburbs has these relic lots all absorbed virtually across every market, yet there’s still what would be available infrastructure leftover and a fair enough price that could deliver homes within the realm of affordability to those earning the median wage. And that’s really true. I would say across virtually, every one of our markets that we’ve moved out to what was called sea lots, and now those sea lots are gone and they’re now being replaced with fresh asphalt.
Dean Wehrli:
Okay. Do you see any green shoots, so to speak in infield demand yet at all?
Greg Vogel:
Well, it’s really been replaced by the insatiable demand to the extent they are zoning for it for multifamily garden apartments, to townhomes for rent, to horizontal apartments for rent. We are seeing land prices that exceed far what a builder could pay for an infill site. And to the extent they’ve got the density there. Those sites are being absorbed for rent.
Dean Wehrli:
For multifamily, okay. In your crystal ball hair, do you see any green shoots, maybe for more urban areas when big employers start to pull people back into offices, assuming they do. But post-vaccine people started coming back to offices. Will the structural issues you just laid out still be there and put a lid on urban?
Greg Vogel:
Yeah, I think it’s still a lid on urban, not for the whole country, but you would know where you could get to some decent mixed use size of parcel and uses that are attractive. We’ve got a couple hundred acre infill site in the city of Covington in suburban Seattle right now that we’re in the market on it’s 1500 units. And that’s really unique. We did research in King County. There’s five parcels over 20 acres, that’s it. And so when we look to it, there are areas that are really, truly infill because there’s just no land left. And we’re not in the market where we’re tearing down buildings by any large scale. I think retail will be additive to some infill supply, some regional malls that will surely be transitioning larger power centers transitioning in certain cases. So that could build up. But that really does need to be at densities of more into the 20s and 30s. And we’re really talking about condos. That again creates its own issues related to the kind of product and volume and cost of development and liability.
Dean Wehrli:
So looking at your national map, generally speaking, what are the hot land markets right now nationwide?
Greg Vogel:
It would be much shorter conversation to say those that aren’t, and it’s where basically there’s not population growth. But any region that has influx of people is seeing robust landmark. Even a place like Las Vegas that has probably the most difficult situation on hand related to employment, people are pouring into Las Vegas. There’s a shortage of housing even there. So the land market in virtually all of our markets, if you want to look for a hot market map, just look at our 26 markets where we are. And virtually every one of them is on a scale of one to 10, they’re all between sevens and tens. And so I don’t see any let up here because there’s just not enough supply and land is therefore needed and people can pay more for land now because the house price appreciation disproportionately rewards land. And so while we have higher costs, there’s still a hockey stick going on related to the ability to absorb higher prices. So it’s creating a hot market.
Dean Wehrli:
California has always been one of those high growth markets. Without the supply, now it’s a much slower growth market, but also without the supply kind of its saving grace for new home builders. Is there anything that can be done about freeing up more land in California, any help at all?
Greg Vogel:
I think it’s truly not a coastal story as much as it is now inland and Sacramento. These markets have land. Some of the fees are very difficult in certain of the markets. Some of the no growth attitude is still in some of the markets, but there was a tremendous amount of land that was leftover entitlements that people could not find their way to a residual land value that would move an owner to try or want to sell. And all of the sudden, during COVID and as we’re running this post environment, it’s lit and it’s lit very strongly. And for all the right reasons, it’s accessible, it’s affordable, and you can just get more for your money. The work from home is not going away. Some will be called back may be, but they’re still going to have latitude and flexibility. So everybody now wants a home rather than necessarily living in a tighter confined area, even post any COVID or other disease-related issue or fear.
Dean Wehrli:
Yeah. And short of making man-made islands off the coast, land is what it is and freeing up those parcels that once seemed pie in the sky because of work from home is where California is going to find a supply, I think. Are builders trying to take down smaller land increments or are they starting to accept larger take-downs because the market is so hot?
Greg Vogel:
Definitely larger increments and that is both by absorption. Many of our builders are limiting sales in subdivisions because they can’t build them fast enough or price them correctly based upon costs moving. So they’re limiting sales. One builder I spoke to actually just stopped all sales for 60 days just to play breather and catch up. So we definitely have that form of acceleration and absorption which leads logically to larger parcels, but then also predictability about future supply. So it is not unusual for us today to see a builder taking 200 to 400 lots where three years ago, the discussion over 120 lots would have been, can I take half this year and half next year? And now they’re very willing to tie up more inventory. And also they are combining forces. So where there is a larger take, they are joining.
Greg Vogel:
So we have done multitudes of the trio or duo to basically have a lead participant and a builder that will come and take the inventory that either they don’t want or are allocated appropriately by phases. And so that concept of sharing is really an important feature to these larger takes. And they also have IC. Some of these builders, some of the deals we’re working on, they actually now have a growing profit center related to land equity that they have created by taking these larger parcels. I do think that we are in a very low risk high reward standpoint in terms of the cycle because of the lack of inventory.
Dean Wehrli:
Is there still a real preference though for finished lots like there has been, it seems for a long time?
Greg Vogel:
It really depends on how the market functions. There are certain markets that are very much finished, lot markets. A lot of Texas’ acted that way since the beginning of time. I would tell you certain other markets like Phoenix is very much a self-developed market in the master plans. You’re actually paying for residual land upfront and funding the horizontal improvements. So that surely is a theme I think is going to continue related to that. So I do see more raw land trading. I see a trading a back of a final map in markets where it’s predictable to get to the final map because the seller can.
Greg Vogel:
So we’re seeing a lot of pre plats close where they’re still six months or eight months to a final plat, but they’re willing to play that whole game because they could get the inventory and step up. So we see quite a bit of that competition breeding larger takes, raw land, and a back of in the sense of final map with low entitlement risk. I wouldn’t say anybody’s taking huge entitlement risks at this point, but they are willing to buy a back of a final map.
Dean Wehrli:
So I’m going to sort of recap real quick. More builders are taking a little bit more risk. The more risk acceptant on size of takedown, the more risk acceptant on sort of being entitlement food chain, being a little less far along on the entitlement process, and the more risk acceptant in terms of going out to outlined even tertiary markets. Is that a fair summation?
Greg Vogel:
When you called it all risk and I look at it all and say again, to qualify the risk of a larger parcel is relatively locus. If you’ve got it, everyone wants it and you could pawn part of it off pretty quickly, likely make a profit. I said, regarding entitlements in terms of risk in low risk communities or municipalities where it would be low risk. And then you could say secondary or tertiary kind of going out further is where affordability is found and they are flocking to these areas in large numbers. So again, I think you labeled it all as additional risk, and I would just for the moment I call it all relatively calculated and measured risk, but not really taking on a whole lot of gambling risk.
Dean Wehrli:
Yeah. That’s fair. That’s fair. I was using that word more in the sense of just relative to how folks were looking at it a year ago, two years ago, before. Does that worry you at all though, long-term?
Greg Vogel:
Not yet. Not yet. It’s in such increments that are all digestible. There is no supply. Right now my biggest concern is that of getting enough housing in each of these inventory-less markets. Phoenix has a 16-day supply of resale houses when you net out the pending contracts. We have an eight-day supply with houses under $350,000. So my bigger concern is how do we get enough supply to get some equilibrium to inventory? And quite frankly, there’s no behavior going on right now that is going to bail us out of this current mess we’re in. It seems very rewarding at this point in time, but certain markets are going up by 10, 12, 18% in house price appreciation. And we cannot do that for three or four years in a row. I think that’s going to be where the trouble is.
Dean Wehrli:
Yeah. It’s funny too. You make a good point about how unusual this situation is. We’re at 0.4 months supply a 0.6 months supply. And if you haven’t been doing this very long, your longer-term measure might be one and a half months supply, and you think, well, this is tight. No, five to six months supply is the norm. And so the 0.6 and 0.5 we’re talking about now, those are insanely under supply conditions.
Greg Vogel:
We have had a chronic shortage in many markets. I called it a chronic shortage, which was kind of hovering around two months for several years. And it went from chronic shortage to panic. And in a sense, we are seeing what I would call panic buying. You are overbidding, you’re having to make 10 offers before you could get one, and if you go to the builders, even for a typical what used to be 120-day build is now 180-day build. And you’ve got to wait six months for delivery. And you’re competing with others where people are limiting sales.
Dean Wehrli:
Yeah. It is amazing times. Has it been tough to get the subcontractors out to maybe those more outline areas or are they already adapting?
Greg Vogel:
For the most part, the answer is there’s not a problem where there’s enough of them. And what I mean by that, if you’re the loan builder, even if you’re doing decent velocity, you’re going to be in a tougher spot. But we’ve seen each of these emerging markets as they have caught and the volume they’re doing. When you’re doing 10 a month or something like that, you’re going to have a much easier time with the trades. And when you have six of you doing 10 a month, then it becomes a viable situation and that’s really what’s happening. It doesn’t have to be 10 a month, it could be four to six. But the point is that each of these outlying areas, maybe it was a little bit tough at first, but most of the larger publics are also putting a lot of specs on the ground. And I used to call them specs, as soon as the sticks go in the air they’re sold. But the hope is they could get into some forms of line building, and that really attracts the trades.
Dean Wehrli:
Yeah. It’ll be interesting to see if we see some of these outlet locations that just sort of had a block of potential development, because what you just said, it wasn’t feasible. It wasn’t logistically feasible to go out there. Now with work from home and folks going out to more affordable areas, it’s like once you kind of start started rolling and get a couple of neighbors out there and they can just explode.
Greg Vogel:
Yeah. That’s what’s happening across America.
Dean Wehrli:
Yeah. Is there more land banking going on? Or do you see more land banking on the near-term horizon?
Greg Vogel:
There’s not, and I do believe it will come around. We’ve got a few builders that have their strategies and partners to do that. I would tell you by and far, for the most part, because of the cost of capital, the amount of cash that the builders are sitting on, the deployment of their own capital rather than needing to use a 12ish percent, lot bank is not terribly tasteful. So land banking I do think is going to come back as opposed to lot banking for a little bit longer term, longer supply too. If you’re buying a thousand units, you might want to own 300 of them and then have a land bank for the other 700 as we get to larger transactions. And also creative strategies. We’ve probably done more across the country related to participation types of transactions.
Greg Vogel:
So it is a form of banking land that has a patient owner that doesn’t count their money at a 20% discount rate. They count it more like a family office, a legacy, ownership, a corporate owner, large owner who wants hold dollars. And if we can look to structure things in a minimum kind of requirement, but that they pay as they go, it’s a very creative structure. That is a unique form of land banking. We’re doing several of those types of transactions right now.
Dean Wehrli:
Little bit related to that. Are you seeing more profit participation by developers?
Greg Vogel:
Yes. And I would say that it never really went away. We’ll call it in the large scale master plan communities. It’s just that they weren’t collecting it because it wasn’t there to collect because of the high costs and the low margins. So they weren’t really hitting the bids so to speak related to participation kicking in. We’re not only seeing participation kick in, we are also seeing a lot premiums increase fairly dramatically. And depending on the structure, there is participation with the owners, especially somebody who built golf or has unique land that has views or backs up to unique forms of open space. So I do see premiums on the increase, which is a form of participation also.
Dean Wehrli:
Do you see any kind of mechanisms being written into contracts because of the expectation of high housing appreciation?
Greg Vogel:
Yeah. And again, that’s mostly in a master plan community. We haven’t seen that. Maybe in certain areas of California that would occur in higher price point areas. You might see it because of the price point and you’re going to want to get paid for something that’s slower velocity, but higher price, but didn’t want the drag on the hold. So there’s forms of participation at a higher price point with slower velocity. I would say it’s mostly still inside of master planned communities where sellers of those lots are looking for paybacks, but also participation in what they’ve created, but also having not priced the lots too early in the sales cycle that they are able to claw back in this hyper appreciation market we’re in.
Dean Wehrli:
So we have all this demand. We have diminishing supply. What has this done to lot values and specifically sort of lot home value ratios?
Greg Vogel:
Sure. So I would say first and foremost, with house price appreciation, you can pay more for a lot than you did yesterday. So that is a factor that is going on and there’s no perfect pricing, but it’s clearly the attempt to get there. The ratio of house price to lot has absolutely increased. And even on the affordable side, the attainable affordable side, we’ve seen those ratios creep up. And so I would say on the average, that’s gone up by 20 to 40% in terms of that ratio. So if it was 20, it’s now probably 24, if it was 24, maybe now 28 ish. It’s gone up, but keep in mind that that’s the lot ratio. The underlying land is truly the thing that gets the hockey stick. The asphalt costs about the same, the verticals cost about the same. When I say about the same with this inflation, which has been an irritant, but when you move house price up $100,000 on a $400,000 home, much of that can fall to raw land. And we’re seeing that occur where we’ve seen 2x, 3x of the price just from three years ago.
Dean Wehrli:
Wow. And those increases in lot ratios. So that’s literally been just six, seven months or so over that kind of span?
Greg Vogel:
Yes. Yes. Especially in this current environment, we’ve seen those ratios click up.
Dean Wehrli:
That’s pretty amazing. Let’s end with your crystal ball, and I’m going to leave it as open as I’ve ever left it for a guest on the podcast. Is there anything that you see down the road here that’s going to maybe shake things up in land, or maybe it’s going to be some new trend or factor, our new device, our new deal structure? Anything at all that you think that you see coming down the road.
Greg Vogel:
I do think that the build for rent industry is here to stay. So we don’t need a crystal ball for that, but I do believe that it’s going to rise from low single digit percentage of the overall land economy to something that is very formidable, something in the 20ish percent of the overall resi land environment. It’s going to create more and more competition for home builders on the for sale side that they had not seen before. We are near par and in certain cases, the build for rent can pay just more than a builder would on a for-sale basis, based upon hold time and cap rates assuming that those cap rates remain in the vicinity of where they are. So build for rent will make up a larger share of the market and will be a formidable competitor to the home builders.
Greg Vogel:
Of course, many builders are getting rewarded by doing fee building, joint ventures, and that type of thing. So build for rent are here to stay. I would see much more structured finance coming in related to land. More things like Horton has done with four-star and Lennar is doing. I think there should be much more partnering going on with institutional investors related to their position in the market related to a growing need for capital. There is also a looming issue, which I addressed a little bit earlier, which relates to big infrastructure. And the resolution around big infrastructure, in many of these cities, we cannot rely upon them solely to provide for us. We need to do consortium’s. We need to get districts formed. And that is very complicated work it’s long-term work. And that’s going to be one of the tricks to hopefully getting enough supply on the ground where we have enough end result utilities, where that sewer plant and water plant is interchanges parkways. That big infrastructure funding and financing, I do hope we have some help from the federal government or to the states to then help the cities and counties.
Greg Vogel:
But right now we’re starting to eat away at some of that really big infrastructure. So crystal ball would be that there’s going to be a need for a form of finance. And there’s going to be an activity where there is a profit related to this big infrastructure.
Dean Wehrli:
I just saw a story today. I think it was today or very recently that there is potentially some help on the horizon from the federal government, at least plans to really go big on infrastructure. So we need it.
Greg Vogel:
I sure hope they get there. And it can’t just be bridges and tunnels, we really needed to get down to we’ll call it the city level of some of these issues that haven’t been addressed since 2006.
Dean Wehrli:
I asked for one crystal ball idea, I think you gave me four. I’ll have to come back and count.
Greg Vogel:
I could go on for another half hour but…
Dean Wehrli:
You’ve been an overachiever since your teens. So now you had to do that here too. That’s awesome. Well, Greg, thank you so much for coming on. This has been fantastic. I appreciate it.
Greg Vogel:
Well, Dean, thank you. And I also just want to throw out a great appreciation to you guys for all you do for so many of our clients across the country. You guys do a wonderful job, so thank you.
Dean Wehrli:
Thank you. Appreciate it. Awesome. This has been the New Home Insights Podcast with Dean Wehrli and Greg Vogel was our guest. Thanks for listening.
