2009 may be year to build on

Run Date: December 26, 2008

By Carolyn Said
Chronicle Staff Writer

Developer knows credit is still tough, but hopes changes will help

Robert Freed vividly recalls the first house he saw under construction. When he was in the second grade, his parents built a home in Saratoga.

“There was a point in time when the foundation had been poured,” he said. “I walked it with my grandmother and grandfather; they put coins in the comers of the foundation to bring us good luck. It was the first time I knew of such a tradition; I remember the experience being so wonderful.”

Since then, Freed has gone on to mastermind the building of umpteen homes around the United States as a senior executive at KB Homes, Davidon Homes and Blackhawk Corp.

These days, Freed has returned to his Bay Area roots as CEO of builder SummerHill Homes of Palo Alto, which has projects under way in San Jose, Palo Alto, Menlo Park, San Bruno, South San Francisco, Fremont and Union City. Its focus is infill development — using land within built-up areas — which he considers the right approach for the Bay Area. SummerHill projects range from smaller, single-family detached homes to condos, with density per acre ranging from “north of 30″ to six units. Freed joined SummerHill in September 2007 — just after the credit crunch really walloped the already-foundering real estate market

“My timing could be considered either impeccable or unfortunate,” he said dryly.

He sees his role as guiding the company through the turbulence and positioning it to emerge strong amid a shrunken field of competitors.

Builder says bargain hunters making sales ‘like daily hand-to-hand combat’

While the entire real estate market is reeling from the foreclosure crisis, plunging home prices, drastically tightened lending and this year’s Wall Street meltdowns, home builders are among the most affected.

“It’s been a brutal year for new home builders, especially for private builders,” said Patrick Duffy, principal of consulting firm Metro Intelligence Real Estate Advisors in Los Angeles. That’s because private builders rely heavily on bank financing, which has been effectively shut off in recent months, he said. Public firms have more options, such as lines of credit and selling stock.

The industry’s own trade group, the California Building Industry Association, said home building is in “dire straits.” The pace of home sales in October, for instance, was “extraordinarily bad,” it said, down 63 percent from a year earlier. New-home starts have plunged to record lows. CBIA projects that only 66,000 new homes and condos will be built in California this year, compared with 160,500 in 2006.

Duffy said SummerHill’s saving grace likely is that it’s owned by Marcus & Millichap, a national real estate investment brokerage from Encino (Los Angeles County). “I would think having Marcus & Millichap behind them would be analogous to having a public company behind them,” he said. “That leverage probably helps.”

Freed doesn’t mince words when talking about the obstacles.

“This is definitely the most challenging and most severe downturn I’ve experienced,” he said. “It gets tougher and tougher to secure financing. Revenues are clearly down. Absorption rates — the rate at which one sells — are clearly down. There are fewer buyers, and they’re looking for what they perceive to be bargains at the expense of the seller. It’s like daily hand-to-hand combat.”

Like most of its competitors, SummerHill has had to reduce staff significantly, shrinking from about 125 positions to 80. At the same time, “We’ve taken the opportunity to hire some very senior people who became available to us because of the downturn,” Freed said.

In another move to be ready to rebound once the market turns around, “We’ve made a conscious decision to maintain staffing levels in land acquisition and forward planning” — obtaining government approvals, for instance.

The homes now in the sales pipeline are part of projects initiated in 2005 and 2006. “They have very little profit,” Freed said. ”We’re trying to recapttue any equity left in the deals to generate cash, reduce our debt and position the company with a leaner balance sheet as we move forward.”

He’s not optimistic about the $700 billion bailout loosening banks’ purse-strings any time soon.

“I think 2009 will be a difficult time for firms such as ourselves to close on properties where the closings need to be financed with bank debt,” he said.

His workaround? “To look at controlling a few good properties in 2009 where the close of escrow is not calendared until 2010 or beyond.”

The development timeline is so long, with so many months of city and environmental permits, that that kind of planning is necessary anyway.

The one exception would be if “distressed assets” come on the market. In that case, SummerHill would try to snap them up — and he thinks the financing will be available.

“The money sitting on the sidelines in residential real estate is waiting for distressed sales where there is more profit,” he said.

Freed has some thoughts about steps the government could take to address the housing market and economy.

In assessing how to tackle the foreclosure crisis, he thinks it’s important to distinguish between people who bought homes they simply cannot afford, and those who can continue to make payments but are discouraged because their home values have declined. For the former group, “we have to recognize that we can’t save their homes.” He thinks facilitating the foreclosure process through a simple way for them to sign over their home, perhaps in exchange for renting it for 12 to 18 months, makes sense.

For the latter group “those people who made good decisions” but now own homes worth less than their mortgages, he thinks the government could give them a tax credit for the next five years to facilitate their staying in their homes and keeping current on their mortgage.

Like virtually everyone in the building and real estate industry, he thinks lower mortgage rates will help revive sales.

“What will clean up the housing mess more quickly than anything is affordability,” he said. “When these homes because more affordable because of lower interest rates and decreases in value, that’s where we will find the bottom. People will buy houses because they see they can afford them.”

E·mail Carolyn Said at csaid@sfchronicle.com.

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The “Solar Advantage” defines Vantage

Run Date: Winter, 2008

by Scott Tiernan

In mid-2006, Cheryl O’Connor had a dilemma, one she reflected on for weeks. The Warmington Homes Vice President of Sales and Marketing was finalizing the list of features to be offered at Vantage, a new town home community in Palo Alto, Ca. The project had a list of “green” features that were already part of the community, but the City of Palo Alto had requested that the builder offer the homebuyers solar panels as an option.

O’Connor knew that homebuyers consider options to their new home very carefully. She was concerned that buyers would choose not to upgrade their homes with solar panels because of the additional up-front cost. O’Connor knew that this would be a huge benefit to the buyers over the next few years as they would spend fewer dollars on energy costs

O’Connor, a veteran of more than 25 years of homebuilding, knew that “going green” was a movement that was steadily gaining traction and momentum in the homebuilding industry, especially in Northern California. For several years, Warmington Homes had studied the impact of ramping up their efforts in integrating energy efficiency measures in their new home communities.

At an internal Warmington meeting in the fall of 2006, the decision was made and the city of Palo Alto was notified of the builder’s decision:

The builder would not offer the rooftop solar systems as an optional feature for Vantage homebuyers.

“No, we will go all-solar at Vantage,” said O’Connor. “The rooftop photovoltaic systems will be an included feature on every one of the homes here.”

And overnight, the largest solar-powered residential community ever built in Palo Alto (and the San Francisco Bay Area Peninsula for that matter) became a reality.

“We had studied our options and progress in going green for several years,” said O’Connor. “The fact is, going all-solar was an ideal choice for a new community in Palo Alto. There’s a very affluent, educated and environmentally focused pool of homebuyers here. It just came down to the fact that Vantage was the right neighborhood in the right city at the right time.”

Besides solar, Warmington integrated a host of additional energy efficient features at Vantage, including:
• tank less, on-demand water heaters
• dual-flush toilets
• energy efficient dishwasher, windows, air conditioning and heating
• drought resistant landscaping with drip irrigation
• motion sensors and climate control system to monitor lighting
• recycled fly ash in concrete
• engineered lumber
• formaldehyde-free fiberglass insulation
• low- or no-VOC paint and finishes

But the solar photovoltaic system is the most significant of Vantage’s green factors.
Compared against the Green Points rating system developed by Alameda County (www.greenpointrated.org), Vantage scored 110 points, far exceeding the Green Points minimum of 50 points.

Buyer Andrew Yu, a director of engineering at nearby Yahoo, was attracted by both Vantage’s Palo Alto address and its green features. “I definitely like the dual-flush toilet feature to save water,” he said. “I think this is a really smart thing to do.”

The Irvine, Calif.-based KTGY Group designed the 76-unit community in the inspired style of Joseph Eichler. In fact, Vantage is directly adjacent to a classic Eichler-built neighborhood in Palo Alto.

The Warmington Homes staff worked closely with the City of Palo Alto throughout the planning of the project. “Palo Alto was very enthusiastic about working with a homebuilder in putting in place a multi-faceted green building community,” said Lindsay Joye, a solar programs engineer with Palo Alto’s utility division.

“Warmington Homes went above and beyond what the city of Palo Alto suggested be included at Vantage from a solar energy perspective,” continued Joye. “This has really helped to call attention to Palo Alto’s efforts in encouraging our residents to consider going solar.”

O’Connor also recognized that homebuyers are increasingly aware of the impact of building practices on the health of the occupants and the environment. “There were a number of issues that impacted our decisions at Vantage,” said O’Connor. “We factored in health, quality of life, energy costs, building quality and dwindling natural resources.”

A fundamental goal of green building is to create “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (The United Nations Commission on Sustainable Development).

One individual who recognizes that is Sam Zhou, a Vantage homeowner and Silicon Valley tech worker. Zhou was interested in the community’s green features – especially after experiencing the rolling blackouts in California during the summers of 2000 and 2001.

He is a big fan of the rooftop solar panel systems at Vantage. Zhou moved to the United States from China nearly twenty years ago. He said living in such an environmentally friendly home makes him feel good, especially after returning from China every year where he visits his parents.

“The pollution over there is so bad. When we were buying our home at Vantage, it’s sort of all related,” Zhou said. “You have to be conscious about the environment you’re in so you can save it for the future generations.”

Green homes are becoming more commonplace as homebuyers begin to recognize and appreciate the added value to the investment and the beneficial impact on the environment. With all the benefits to the homeowner it is easy to overlook the advantages green building offers to the environment.

Every Vantage home has a copy of a “Homeowner Manual of Green Features and Benefits” that helps homeowners to understand and maximize the performance of their new home.

Besides the standard green benefits incorporated into all the homes at Vantage, Warmington has offered an optional “Green Package of Interior Finishes.”
The package includes products with low or no Volatile Organic Compounds (VOC’s), or formaldehyde, helping to improve indoor air quality.

Also featured are products made with recycled content and with materials that are naturally replenished in a shorter time span. Such environmentally friendly products provide superior comfort and performance while reducing stress on natural resources

Even in today’s challenging new home market, Vantage has proven to be very popular with Silicon Valley homebuyers. According to the Ryness Report, since opening in May 2007, Vantage has routinely attracted a large number of visitors, which in turn has translated into new home sales.

That fact has not gone un-noticed by other homebuilders in Silicon Valley who are now integrating similar green and sustainable features in their own new home neighborhoods.

Warmington’s O’Connor said the sales success at Vantage has led to a decision to incorporate green and sustainable elements to more of the builder’s new home communities in Northern California.

“We’re going to evaluate the use of solar and green elements on a community by community basis as we move forward. Vantage has been a tremendous experience for us. We were very pleased at how many homebuyers said going green was an important factor in their home buying decision. We now have great opportunities ahead of us to put into place on a larger scale all the best green building practices and features that are found at Vantage.”