Takeaways from IBS & NMHC
‘Those who lean into a recession will come out on top.’
Slowdowns magnify the opportunity for permanent improvements. We met with many operators that are focused on long-term competitive positioning and investing in innovation, new markets, lot positions, talent, etc. This also applies to financial sponsors and strategic buyers that are increasingly preparing to deploy capital in a slightly less competitive market, providing attractive entry points to form long-term partnerships. Our M&A pipeline is robust, and conversations are picking up.
Cautious optimism abounds.
The spring selling season is off to a healthy start, with positive trends over the last 4-6 weeks. Builders are successfully enticing buyers with price discounts and mortgage rate buydowns without giving up too much margin. These concessions have reassured consumers they’re not buying at the top. Inventory is lean and pricing is expected to stabilize in the near-term.
Rental vs. retail.
Many homebuilders are still considering build to rent (BTR) strategies to increase velocity and improve overhead absorption. Given higher rates and a more uncertain economy, these new and professionally managed homes are attractive to consumers. We expect this to be a larger and more sustained market segment going forward.
Capital for BTR is widely available.
Tenured equity investors with permanent allocation to single family residential are primarily focused on new construction BTR communities, acquiring these houses at CO (Certificate of Occupancy) and stabilizing quickly. In some cases, investors will provide a substantial deposit to the builder to increase liquidity for the construction process.
Multifamily demand is on hold.
There is still an abundance of apartment inventory in the pipeline, yet there is no consensus on short-term demand. Many operators and owners are uncertain whether the slower lease velocity and lower rents over the winter were a return to seasonality or foreshadow a tougher and more competitive spring leasing season. The positive long-term outlook remains in place, supported by household formations and undersupply of housing nationally; however, market volatility may persist through 2023 as higher interest costs may not be offset by improving net operating income (NOI).
Offsite solutions remain attractive.
Building products companies continue to innovate to address the permanent shortage of field labor and elongated cycle times. New offerings at IBS focused on pre-assembled / ready to assemble products and systems. In addition, energy efficiency and product resiliency are increasingly important attributes. While supply chains have seen some relief with the slowdown in demand, especially those with domestic sourcing, materials with components sourced from China remain turbulent as Covid disruptions continue.