Demography’s barbells–two massive populations on either end of adulthood’s career spectrum–are where fundamental growth and scant current supply add up to residential developers’ and builders’ wildest dream-come-true over the next decade or so. A few puts and takes aside, they will reshape housing’s new and remodeling construction landscape between now and the middle part of the 2020s.
Shifting ground though there may be around factors like how fast and how far interest rates will climb and how housing finance and regulatory policy will impact the market, it’s the fundamentals around two huge generational cohorts–aging Baby Boom members and coming-of-age Millennial adults–where investors, operators, and their myriad partners focus.
So, as we look ahead to where the smart money is betting on volume opportunity in 2017’s initial phase of uncertainty, it’s no surprise that one of the last–or the last–merger and acquisition deal for 2016 is a case-study in customer segmentation portfolio management, here spotlighting the 55+ potential in 2017 and beyond.
Lennar has acquired the assets of a three-generation builder of 55+ communities in the Central New Jersey area, Kokes Family Home Builders, which is currently active in two 55+ neighborhoods–The Fairways and The Reserve–in Ocean County, N.J.’s Manchester and Barnegat Townships. Builder Advisor Group worked with the Kokes family on the deal, one of five transactions Builder Advisory Group handled in 2016. A statement says the group is currently active on transactions in five states in the Carolinas, Florida, Texas, and California expected to settle in the months ahead in 2017.
The total acquisition, which is three communities, is just under 500 homesites. One of the communities is existing finished homesites which will be rebranded and opened for sales shortly. The other two need to be improved. What this deal lacks in magnitude is offset by its nature. We’ll get back to this, but first, let’s review motivations for mergers and acquisitions in the world of home building, even as some of the ground shifts around the cost of money, the geography of opportunity, and where policy will impact on fundamentals of supply and demand.
Motivators for buyers include:
- Asset and portfolio management
- Incremental volume growth
- Geographical opportunity due to economic recovery trends
- Portfolio assembly in US residential real estate
- Financial investment opportunity based on builders’ needs for capital
- Integration of site-built and factory-built platforms
Motivators for sellers include:
- Family company exit strategy
- Need for capital infusion for AD&C plan for 36 to 48 months ahead
- Geographic expansion plans
- Mitigation of risk ahead
In securing the Kokes land and neighborhood holdings, Lennar gains access to lots where they’re few and far between in the Greater Philadelphia, Central Jersey, and Metropolitan New York area. Metrostudy regional director Quita Syhapanya notes specifically that the Central Jersey market is mature, and lots are hard to come by. He says:
“Lennar does well in the active adult market and this acquisition helps bolster their presence in this segment with attractive positions both in already-selling communities, as well as any land positions that Kokes Family Builders already have.”
Now, Lennar, as you know, recently agreed to purchase Florida-centric WCI Communities, another public, in a deal that will likely close in the next month or so. With its emphasis on second- and retirement home neighborhoods, WCI too signals a deepening of Lennar’s investment in a segment that–while it doesn’t get the hype that Millennial, entry-level markets receive–is likely to be where the surer, more profitable volume activity shifts and drifts away from the ultra-high-end and second-time move-up level juggernaut, to a more precisely-targeted, more contemporarily designed and engineered 55+ living offering.
A number of companies who hadn’t had dedicated “active adult community” divisions have formalized strategies to engage that market in the past 24 months or so, and the question “what is the next 55+ community success formula going to look like?” challenges both incumbents like Pulte’s Del Webb and Shea’s Trilogy brands as well as a half-dozen or so initiates into the fray.
As a matter of fact, our own teaming with Taylor Morrison on the NEXTadventure Home program focuses on disciplines, discovery, design, and deliverables that aim squarely at that very question. Tour the BUILDER Taylor Morrison NEXTadventure home virtually or join us in person at the International Builders’ Show by registering here now.
Lennar’s mastery at both managing its portfolio of assets and course-correcting it opportunistically a step ahead of the market is practically indisputable. Its year-end pick-up of a potentially valuable pipeline of already-developed lots in operating neighborhoods may look like a bread-and-butter deal on the surface.
But we think it’s telling that as many large, public, regional and super-regional players practically trip over themselves to shore up their offerings to the entry-level segment that had once been their area of dominance, Lennar’s ahead of that pack. Lennar’s doing just fine with its “Everything’s Included” resale-and-rental killer first-time buyer offerings.
For critical Q1 2017 margins especially, a strong hand in 55+ is a must. That’s why WCIC and Kokes are brilliant strokes for Lennar.
