PRIVATE EQUITY’S ROLE IN THE HOUSING RECOVERY

Look around the city of Atlanta today, and you’ll probably see indicators that the housing market is on the rebound. Inside The Perimeter and out, dirt is moving and builders are building. According to data released in May by the U.S. Census Bureau and the Department of Housing and Urban Development, residential construction rose 7.0 percent month-over-month, and was up 46.7 percent year-over-year. If traditional lenders have appropriately become more conservative in their underwriting, then what’s fueling this building boom?

Builders and developers are partnering with private equity (PE) at levels not seen in previous homebuilding cycles.  As the homebuilding market rebounds, the equity requirements for land deals and any potential lending by financial institutions are much greater than in the last cycle. This has created a great opportunity for PE to significantly participate in the recovery as developers and builders look for capital to acquire land for projects, recapitalize existing portfolios and ensure future growth.

Most private homebuilders of any scale have turned to PE. PE firms are giving homebuilders the ability to respond more quickly in a market where residential land prices in prime locations are escalating rapidly. Additionally – and symbiotically – builder/PE partnerships are providing enough equity in development projects to give banks the comfort they need to start lending on residential real estate again, creating a virtuous circle.

Mega PE players like Blackstone Group to smaller firms like Mountain Real Estate Capital are raising billions for development projects and other residential real estate deals as the much-anticipated opportunities to provide financing have finally materialized. Developers and homebuilding companies are joining forces with private equity firms to get the deals done.

But as capital has become more abundant, “A” location lots have been and continue to be absorbed by newly capitalized builders. In Atlanta, because of a shrinking lot supply and the fact that many land development companies were severely dislocated in the downturn, builders are discovering that the business has fundamentally changed and become more vertically integrated.  Builders are realizing that they now need to build the lots and the homes.  If a builder/PE partnership can find deals, in all likelihood they will be taking them from raw land to a completed home in-house.

What we’re seeing across the country is homebuilders buying, building and preparing for a strong run when the market balance leans in their favor.  The positive news for all concerned is that housing supply is down, creating the opportunity homebuilders have long awaited and, at least currently, there are fewer competitors. Despite the fact that PE firms have traditionally funded office buildings, shopping centers and other big commercial properties, by betting on the residential market, PE has hastened the recovery, strengthened surviving companies, brought traditional lenders back to the market and undoubtedly reignited the building boom.

by Terry Russell

This article first appeared in the June 21, 2013 online edition of the Atlanta Business Chronicle.