New Developer Takes on Infill Projects
October 16th, 2009 categories: Our Market
In what will undoubtedly become a milestone of local developer chutzpa, a progeny of the venerable urban developer Olson has started a business to build homes.
Really. Despite the fact that virtually no one else is.
While the target of the newly formed City Ventures is remnants of unfinished subdivisions, the developer has targeted more urban projects. “Our business plan is to focus on infill developments in the coastal counties of California,” said San Diego point man Tony Pauker, who expressed a strong belief in the state’s prospects for economic growth and long-term potential.
To start up a building company right now, necessarily means to initially focus on projects like the two City Ventures is starting at Scripps Ranch: 19 lots that was the last half of Viscaya, formerly a Warmington Homes project. The other project is in Stonebridge Estates.
The business model for these projects is simple. The developer intends to complete unfinished projects, but at a lower price. “We see a near-term opportunity to acquire well located finished lots at appealing pricing and be able to offer homes at very attractive pricing that will allow us to deliver 50 homes next year,” said Pauker, who expects to offer finished homes in the $700,000 to $800,000 range on sites that would have sold in the low millions four years ago.
City Ventures is planning the same strategy on a 34-lot deal in North County. That land purchase will close this month, and it will immediately start construction of homes to be offered in the $600,000 price range.
But this seems like just a warm-up act for this opportunistic company, which was co-founded by Mark Buckland of Olson and Craig Adkins, a well respected Orange County land broker. The initial capitalization comes from Imperial Capital in Los Angeles.
Business Plan
While Buckland and Adkins are the firm’s principals, they have hired five former Olson executives. Their business plan is to focus on infill developments up and down the California coast, including San Diego, Orange, Los Angeles, Ventura and Santa Barbara. City Ventures already has sites tied up in each locale, even though it has only been in business since June. It’s also searching along the Northern California Peninsula, including San Francisco’s East Bay.
It has committed to a 12-lot entitlement deal in Encinitas, a 6-acre site in Yorba Linda, a 48-unit site in Santa Barbara and a site in Santa Ana that is designated for “affordable housing” as part of a larger mixed-use project.
That is important, because in short order, City Ventures has placed itself at the cutting edge of what is undoubtedly a new wave of small-business real estate developers that will be focused on coastal California’s many “infill” opportunities. These will mostly concentrate on sites in existing communities that will require a new set of development skills oriented to high barrier-to-entry locations. These sites usually have issues of assembly, and will be subject to the complexities of entitlement, environment, redevelopment, adaptive reuse, mixed use and entrenched neighborhood resistance.
But like their former employer, Olson, which made its mark in Southern California by constructing two- to four-story residential condominium projects in infill and redevelopment districts, the principals have a long-term plan for City Ventures to build to this “sweet spot in the market,” as Pauker describes it.
Washed Up Car Dealership
What are they seeing and watching? One hint, says Pauker, is to look at the commercial downturn. He observes that the recent Roger Penske walk-away from purchasing Saturn from General Motors is a precursor. Apparently, Saturn will shut down, the latest of a compression of scale in the auto business. “What do you do with a vacant car dealership? Nobody in the commercial area is going to come in and back-fill these sites.”
In other words, they view a washed-up car dealership as a mixed-use development waiting to happen. City Ventures intends to work with cities and property owners on similar “gray field” opportunities.
It’s positioning itself early in the cycle. It is way too premature for most new residential construction to start. But in a way, this is exactly the right strategy. Each of the targeted coastal California markets has been virtually dormant of housing starts during the past four years. New and resale inventory has to be absorbed. Demand has to outstrip supply. Prices have to rise. Only then can new housing development take hold.
But it is also an anticipatory process. To get to the “sticks and bricks” stage, you have to start early. The best case scenario is to find properties with some sort of preliminary entitlement, or the potential for approval. The ideal is a property with a tentative map. “You pull the trigger (on a purchase of land) today and it will not produce a home until Thanksgiving of next year, or more realistically not until the end of 2010 or 2011,” cautioned Pauker.
The successful players will be working with cities, in effect forming public-private partnerships to accomplish such things as rezoning, better use of city-owned property to raise capital, or just to help these projects reform a tax base decimated with the closure of car dealerships and big box malls.
Many in the housing industry see an impending turnaround in the housing market, now having witnessed several months of price increases.
If developers do not start today, with an up to 24-month lead time, there will inevitably be competitors. We do not yet know who will be building housing once the market does revive. Undoubtedly, other ventures like this one will be formed from experienced people coming out of large companies. The point is that it will be difficult for the larger developers to find the economy of scale to build infill.
So City Ventures is attempting to establish a foothold with an urban land pipeline. To be the “go-to guys,” as Pauker puts it, “we needed to start now.”
