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The local regulatory & entitlement environment in many top west coast locales is full of NIMBYs and building there is more expensive on top of it.
I imagine Wood ran an analysis that the could take 5 years and spend $3M in pursuit to do a deal in LA or do 4 deals that take 6 months to permit that still only cost $3M in pursuit in other markets.
NIMBYism is a plague.
Honestly happy to see it. I've sworn never to invest in California MF/residential in the current regulatory environment because of how absurd the regulations are. Glad to see much larger players make the same decision. Would love to see how the NIMBY's will regulate their way to more housing if all the developers leave.
Basically it turns out that crappy local politics do indeed impact business and economic climate
New construction is impossible to pencil in these states, outside of tertiary locations which Wood Partners does not operate in. They see the staffing as wasted overhead until numbers make sense again.
Good news for existing properties in these states. Supply is why these markets always perform better in downturns and why most foreclosures today are in Texas.
For folks familiar with R&V, the shop based in San Diego, how are they able to pencil deals in CA when many shops cannot? What am I missing?
They own literally everything in SD and only in SD.
Wood for example can just go elsewhere - R&V wont
Well that sounds like a “you” problem for Woods. They can acquire/operate in the markets R&V is acquiring in but are not able to.
Good question. I suppose R&V has moved more towards larger, BFR type developments. Perhaps is more of a volume issue and the time needed to develop. R&V is much more patient.
My take, having grown a West Coast operation of a large “merchant build” developer is that the biggest reason for having West Coast operations are 1) big fat promotes, 2) big development fees due to big budgets (relative to payroll costs), 3) capital markets interest particularly from institutional buyers for delicious exits and market exposure.
#2 and #3 are still there and won’t change. #1 is the issue.
This worked with NIMBY cities in rising rent growth environments, that outpaced construction pricing growth. NIMBY-ism has been the main reason for big fat promotes as it limits supply (build vs buy decisions), and NIMBY-ism has been around for a long time.
We are at the other side of a 22 year economic cycle (maybe longer than that), where land prices need to decrease, cap rates are rising instead of falling, rent control risk is growing, construction prices still too high, muni fees high, BMR % high, community benefits high, density adding general and specific plans in the rear view mirror, OPEX growth exceeding revenue growth, tenant quality declining, and white collar employment stagnating. And most devastating, you can buy a fairly new stabilized multifamily asset cheaper than fund a brand new development (or below replacement costs).
Now I’m all for West Coast real estate employment, so why keep operations here:
- limited supply: from the LP perspective, you want to be allocated in supply constrained markets with the long term pursuit of value creation. Other markets might be booming but they also bust. Development operations are a long term play.
- acquisitions takedowns with density adds: this works for value add strategies to add units - small and large takedowns. I think the densification movement is just beginning. But that means less pure play development.
- talent: the West Coast development professional who wants to live on the West Coast has experience in the hardest to develop markets. Give these professionals a larger market area.
The pullback could be an indication of overall weakness in development. A company specific preservation strategy (merchant build is a tough business to be in). There are regional developers only based on the West Coast.
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