Buying land in bad times leads to pay dirt

Developers profit after scooping up sites in depths of housing meltdown

Todd Palmaer of Standard Pacific Homes, at the firm’s Casera at Portola Spring development, recalls looking for the silver lining in the dark days of the housing bust. His company began snapping up land in 2009. ‘You never know when you're at the bottom of the market,’ Mr. Palmaer says.

In the depth of the recession, homebuilders stopped building. Sales offices closed. Buyers vanished. Developers mothballed housing projects.

But as the housing industry reeled from a global economic meltdown, Irvine, Calif.-based Standard Pacific Homes began to invest in the next housing boom.

By late 2009, the company had begun to buy land.

“If there’s a silver lining to the lousy market, it’s the land-buying market,” former CEO Ken Campbell said during a 2010 call with industry analysts. “[In] 2014, the market’s going to be good, and you need to buy the land now for 2014.”

By the end of 2012, Standard Pacific had spent $1.6 billion, accumulating almost 20,000 sites in seven states in three years. The company plans to spend from $600 million to $900 million more on land this year.

“You never know when you’re at the bottom of the market,” Todd Palmaer, the firm’s California and Southwest regional president, said recently. “But the outlook [in 2009] was tomorrow will be better than today, and we ought to be investing in land — aggressively.”

Standard Pacific wasn’t the only company making a land grab. Many other large homebuilding firms nationwide — particularly publicly traded firms — began investing in land during the recession.

Land was cheap. Many developers were selling property at bargain rates to stay afloat. Some projects had gone bust and went back to lenders to be auctioned off to the highest bidders.

Developers such as Lennar, Pulte Group, DR Horton, and KB Home — four of the nation’s biggest builders — spent between $500 million to $1 billion apiece buying land in the past year. Standard Pacific — ranked 13th in the nation by Builder Magazine in terms of sales — has been one of the most aggressive property buyers.

Standard Pacific spent $711 million buying lots and undeveloped land in 2012. Top-ranked builder DR Horton — which had four times the revenue of Standard Pacific, according to Builder Magazine’s latest survey — spent $785 million.

“All other builders have done something similar, but in a smaller scale and not as aggressively,” said Alex Barron, founder and senior research analyst of the Housing Research Center in El Paso. “So now those companies are facing finished lot and community shortages and are out desperately looking for land and having to pay top dollar.”

The buying program is all the more surprising for a company on the brink of bankruptcy five years ago. But MatlinPatterson Global Advisors LLC, a distressed private equity firm, rescued Standard Pacific in 2008 and injected a half-billion dollars into it. Within a year, new leadership launched the land-buying program.

Getting in the land game early has paid off. In the summer of 2011, only 1 in 5 developers responding to a monthly survey by the National Association of Home Builders expressed concern about finding buildable lots, said Steve Melman, the group’s director of economic services.

By the end of last year, nearly half were worried that a land shortage would be an issue in 2013.

“They haven’t developed any lots for six years, and the big builders were selling lots,” Mr. Melman said. “Now that you want to build, they’re in short supply.”

A year later, Standard Pacific’s new management launched the land buying program.

Standard Pacific, which specializes in pricier move-up homes, is on the verge of selling out its Casero development in Irvine, Calif., built on land purchased in 2011. And the company is preparing to launch new developments in Florida, North Carolina, and Texas.

But as the pace of sales picks up, there’s pressure to find new lots in prime areas. Company officials say that 25 percent of their revenue needs to be spent buying more land.

Mr. Barron predicted that Standard Pacific will gain market share and reap higher-than-average profit margins because of its land purchases.

“At the time, it seemed kind of premature and kind of jumping the gun,” he said. “I guess in hindsight, it’s going to work out brilliantly.”