Lenny Wolfe is no 'fraidy-cat. But to hear the tale of his daunting first run-in with a big builder a couple of years ago at an evening meeting with Riviera Beach, Fla., city officials, you might imagine just the opposite. Call it a healthy dose of humility.
An overworked, fatigued, and too-often reactionary board of city commissioners and planners makes for a reason-defying, nerve-fraying night in itself. Still, for Wolfe, president of Coral Gables, Fla.-based Cornerstone Group Development, the primary cause of anxiety that April 2004 evening was hardly a lack of confidence in a proposal for a 402-unit, gated-yet-affordable townhome project his team had meticulously prepared. Rather, as he listened to a litany of achievements and accolades from a competing bidder—D.R. Horton—who wanted to develop the 35-acre property, gut-churning fear kicked in—big time.
“I remember sitting through the presentation and being awestruck at how impressive their company was,” Wolfe recalls. “Eighty-four consecutive quarters of increased earnings … the largest home builders in America … I admit, I was honestly afraid. I caught myself thinking, ‘What are we doing here? How are we ever going to win this?'”
Rather than ceding the victory to Horton, Wolfe seized the moment, upped his ante to $5.75 million, and did what he needed to do to win the commissioners over on Cornerstone's Marsh Harbor proposition, which broke ground last spring and will complete construction in April 2007. Cornerstone's provenance until that time had been affordable rental units—more than 17,000 of them—since its inception in 1993. As it became more difficult to compete in rental construction and the opportunity in for-sale boomed in recent years, Wolfe and his partners dove in headlong, redirecting Cornerstone's expertise in multifamily infill sites whole-hog into the for-sale marketplace.
HOME FIELD EDGE Now, just as the nation's biggest builders adjust their growth models to include urban, multifamily, attached, and infill units—at levels from 15 percent to 25 percent of their total activity in the next few years—they're bumping up against formidable obstacles among companies such as Cornerstone, Atlanta-based Lane Co., and MCZ of Chicago.
Big builders assume that cities and the owners of blighted pieces of land will welcome their offer for a win-win renewal plan—and dollars—with unbridled glee. Stiff competition for those distressed parcels is not in the cost assumption equation. As often happens, a local insider and an acquisitive national player can each look at an identical parcel, but develop radically different sets of risk and benefit analyses—hence, the widely divergent bid ceilings each player operates under.
“Every market certainly has its own competitors for these deals,” acknowledges Phil Simmons, president of John Laing Urban. “But we often see that [local competitors] are the ones that mis-assess some critical component. Usually, they realize the defect of their assumption and drop out. Sometimes they go ahead and close and do just fine. But we have lost deals to companies that won based on estimations that, in our assumption, were just plain wrong.”
What Simmons clearly observes is that the denizens of multifamily rental building, wise to the peculiarities of urban development, and plugged in with both city officials and real estate intelligence, can flex both their home field advantage muscle and their highly streamlined decision-chain nimbleness to a decided advantage in certain markets—South Florida for one.
Which gives big builders three options to consider: 1) Adjust their infill land cost assumptions to reflect and out-pay tactical opposition to their bids; 2) join entrenched market-canny players to mitigate risk, but compromise profit margin on these initiatives; 3) buy these opponents before they master the for-sale market and become serious competitors.
“We came from the school of hard knocks,” Wolfe says. “Back when we began, affordable rental housing was the ‘A-word' no one wanted to hear.” But the company—active in four key Florida markets—thrived and, in turn, honed the political, regulatory, and civic skills that Wolfe and his three partners knew they could apply in the for-sale arena.
Learn more about markets featured in this article: Orlando, FL.