The experts weigh in on the state of the market

Read excerpt  from The experts weigh in on the state of the market The Registry.  Interview with Robert Freed, president & CEO of SummerHill Homes that appeared in Bay Area Real Estate Journal – Dec 2008/Jan 2009.

We know about financing issues and the current state of the market, but what issues/trends are we not talking about that we should be?
Robert Freed (RF) – The risk profile for residential real estate has increased dramatically. As economic conditions stabilize in the future, I still expect that the risk associated with the residential market will be perceived as very high. The result will be less debt and equity available for development and the cost of this capital will be higher as compared to the prior 5-7 years. To support higher risk and cost of capital, profit margins on proposed developments will have to be substantial.

What’s the employment outlook for this industry in the next 12 months?�
RF – Lousy and getting worse. Unfortunately there is a large number of very experienced, very qualifi ed residential professionals who are unemployed. For companies thinking about the future, the opportunity to hire this caliber of individual is one of the few silver linings of this real estate depression.

How will your organization respond to the market changes in 2009?�
In a word—aggressively. We have right-sized our headcount, we have hired some very experienced individuals for key leadership positions, and we are re-examining our operating policies and procedures in order to improve our effi ciency. In open communities, we are focused on reducing debt by aggressively pricing our homes and managing our standing inventory. We are maintaining key banking relationships, and we are building new equity relationships as we prepare for the future.

Outside of the Bay Area, what projects or things are happening in 2009 that you’ll be paying attention to and why?�
RF – No real surprises here, we are watching economic data both locally and nationally for indications of a bottom. We are watching reports on consumer confi dence, mortgage rates, mortgage availability and underwriting standards. We are watching and hoping for leadership in Washington.

What will get people into open houses in 2009?�
RF – Affordability and confidence as they look forward. I also believe that an individual who understands and appreciates that home ownership is not just an investment decision will be more willing to acquire a home in the next 12 months. Home is our sanctuary, a gathering place for friends and family, a place to create life-long memories, the difference between a neighborhood and a zip code. I believe that there is an emotional quotient that should be calculated and considered when purchasing a home.

If you were dispensing advice to a young professional entering the market in 2009, what do you say?�
RF – The ongoing staff reductions are making it very challenging for young professionals to break in—or stay in—the homebuilding industry these days, which is unfortunate. However, there are options and strategies for those who are serious about  succeeding in the industry. They may try approaching city or county planning departments, redevelopment agencies—basically, looking at their career options through a different portal. Financial institutions with large numbers of REOs in their portfolios could also be looking for help. These types of career considerations could position a young person to be a real player when the market returns. But my advice is patience, because housing challenges are now a global issue and will be for some time.

What sectors of the residential market will fare best or worst in 2009?�
RF – It appears that residential rental projects will continue to outperform for-sale projects. For-sale projects in the best locations will perform better than those projects in inferior locations, and all for-sale projects must be priced below the resale medians if any reasonable level of absorption is to occur.

How will the Bay Area fare in relation to other parts of the country?�
RF – We believe that the core Bay Area will actually out-perform the rest of the United States. There’s just too much of an upside to living in the Bay Area to keep us in recovery-mode for too many years. The Bay Area has tremendous lifestyle opportunities and diversity. The uniqueness of the Bay Area is its ability to reinvent itself—we’re the high tech center of the universe with worldclass universities contributing to a highly educated and affluent population. It is one of our nation’s premier regions to live—the only hindrance has been the high cost of housing. With a moderation in housing prices here and throughout California, we should be prepared for an upswing within 3-5 years.

How will a successful deal look like in 2009?�
RF – For home buyers, a successful deal will be the purchase of a home that fits their lifestyle and that is affordable for their income level. For the home builder/ developer, a successful deal will be a site that can be optioned at an appropriate price with time to complete entitlements and a closing that is not scheduled to occur any sooner than the middle of 2010.

What surprises you most about the residential market right now?�
RF- I am surprised by the depth of the decline of residential values in the outer ring of the Bay Area.