Captain PicardPlease forgive the somewhat cryptic headline of this blog.  For those that are not “trekkies”, it is a play on one of the more well known lines from episode 102 of Star Trek The Next Generation (air date September 30, 1991) in which Captain Picard must decipher the Tamarians’ metaphorical language to create communication and prevent conflict (http://en.wikipedia.org/wiki/Darmok). 

I have decided to try to speak metaphorically here in the hope that     homebuilders and residential developers will listen and thereby also prevent conflict: 

          Two homebuilders meet on the street, the first looks beaten down and haggard while the other looks to be the picture of health and extremely prosperous. 

          The first says to the second, “Well you look great!  How are you surviving the housing downturn?” 

          The second builder responds, “Actually, I got out of the housing business and I gave all of my developments back to the banks.” 

          The first asks, “then what are you doing now?” 

          The second answers, “I am now exclusively doing commercial properties.  In fact, I am concentrating on building houses of worship and business is great”. 

          The first, being somewhat awed, compliments his friend on his success and asks, “How does one go about specializing in houses of worship?  Do you pick a specific religious denomination and then solicit those congregations or leaders? I know that you are a Catholic, do you have a special relationship with the leadership of your church?”  

          “And what about the architectural requirements”, he continues.  “Have you partnered with a design firm that already has those contacts?  Quite honestly, this is all very interesting.  Is there room in that field for me too and, if so, how should I get started as my homebuilding business is just barely hanging on?” 

          “Well” replied the second builder, “I really did not give the process much thought beforehand………..I build them on spec”. 

An outrageous scenario?  Maybe.  But it appears to me that the lack of foresight of this builder’s venture into commercial property was illustrative of an all too common and widespread occurrence over the last several years and the repercussions are just about to hit.  If you believe that the collapse of the residential industry had far-reaching impact, just wait for the commercial sector’s destruction in 2010 and this builder’s supposed development of houses of worship will be just the tip of the iceberg as office, retail and even the industrial components start their domino tumble. 

The impact of the forthcoming commercial real estate debacle will be most severely felt within the banking and related financial communities and the end result will be an even scarcer supply of funds for residential development and homebuilding for the next several years. Developers who wish to stay in business will need to locate alternative sources of funding and the most probable source will be in the equity markets.  So don’t delay, start seeking those funds now.  And for those fortunate enough to secure equity funding, it will be both more limited and more expensive than what was previously available from the banking community. 

For the developers that can continue to do business, they will find that except for the larger public homebuilders, their customers (the builders) will be even more severely limited in their access to capital and financing and therefore be both unwilling and unable to purchase larger tracts of homesites.  Developers will find themselves increasingly required to become financial partners with homebuilders, financing the homesite purchases, subordinating to model and construction loans, perhaps structuring an equity “kicker” on the back end to create the necessary ROI.  

The original metaphor from Star Trek TNG is “Darmok and Jalad at Tanagra” and refers to a situation in which heroes must learn to trust each other so that they may work together to defeat a common foe.  And it is certainly applicable to our industry in which homebuilders and developers must work together to survive and prosper in the current economy. But that’s just my opinion. 

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