In April 2008 I published a column in this magazine that predicted a recovery would begin in 2010 (see “Hang In ‘Til 2010,” April 2008 SLDT www.nxtbook.com/nxtbooks/futurus/ldtoday0408 .) I thought I’d review the current situation and see if that prediction is still reasonable.

I do still believe 2010 will see the beginning of the recovery in most markets in the United States. However, I don’t believe the recovery will look anything like the conditions we saw in the first half of this decade. In fact, I don’t think most of us will see an economic bubble of that proportion again during our lifetimes, and I think that is a good thing.

In much of the country, the real estate industry became more like a free-for-all than a productive industry. The country was awash in liquidity, and everybody was trying to find a place to invest all this cheap capital. It was as if this seemingly unending flow of money made us drunk, and we lost all inhibition.

Well, we’re awake now, and that horrific hangover is beginning to recede. What happens next?

First, we need to recognize that we are part of industry with excellent prospects for the future. We live in one of the few developed countries on earth that is not committing demographic suicide - as a matter of fact, our population is projected to grow from just over 300 million today to almost 440 million people by 2050. Additionally, our housing stock is continually wearing out, and some of it simply is in the wrong location for current needs. These factors will create substantial demand for new housing.

What will successful builders and developers have to do differently in the coming years? First, they will have to get better at what they do. Only about one out of ten builders/developers I have consulted with actually made money building houses in the years between 2002 and 2006. The other 90 percent only made money because their lots appreciated while they were preparing to build on them. Since all appreciation accrues to the land, this factor masked the losses that the builders were experiencing when constructing the improvements. I expect house prices will be constrained by more conservative underwriting by lenders. This means that builders and developers will have to look to productivity increases for their profits, not increasing prices. I don’t mean squeezing subs and suppliers – I mean smarter products more efficiently designed, ­delivered quickly and competently. The good news is that there is tremendous waste in both the land-development and homebuilding processes. I know this is true because some of my clients consistently make net margins of 15 percent and above on their homebuilding operations (excluding their profits on land), while the majority think it’s normal to make two-percent to five-percent net margins. Successful operators in this industry will start every project with a ­reasonable projected market value, subtract their profit, and then build the project out of what’s left. This process will be ­repeated and refined over time, resulting in increasing ­efficiencies in both direct-cost and cycle times with the end result of increased profits and increased customer satisfaction.

The other major change that I expect is that all forms of capital are going to be more expensive. Bank lending will come back, but will be much more conservative and require a great deal more collateral than before. I’m already seeing investor equity coming back into the market, but investors will want to see more “skin in the game” provided by the builders and developers they invest with. This means that company growth will be limited by company equity.

It also means that the successful operators of the future will pay close attention to their operations, since their ability to grow will be enhanced by increases in both their profitability and their ability to turn their inventory more rapidly. SLDT

About the author: Skip Preble, MAI, is an experienced real estate developer and member of the SLDI Executive Board. He is President of Land Analytics, LLC, a firm providing the real estate industry with financial modeling, feasibility analysis and valuation of complex real estate projects. He can be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it