Habor Custom Development, Inc. president and CEO Sterling Griffin sees lots of open road for growth as the real estate developer helps to fill a massive shortage of housing units in the United States.
Already, the Gig Harbor, Washington-based company has expanded from its roots in the Seattle metro region a few years ago into other states including California, Texas and Florida.
Proactive sat down with Griffin to find out where the company sees opportunities in the housing market and whether it’s likely to continue its rapid expansion as interest rates rise.
You’ve expanded your footprint rapidly over the past few years. Has your strategy remained the same, following the high-tech job market?
Our expansion strategy has remained the same. Our goal is to move into the fastest-growing regions of the US. And if you look at our current markets, they all share one common denominator: they maintain a steady flow of in-migration, which for us is the movement of individuals and families to a metro area, usually for economic reasons, like a new high-tech job or retirement.
Are you looking to expand further? If so, which states have you identified?
We are looking at expansion opportunities within the current states we are established in, as well as other key markets. I won't talk about the individual states but will point out that our target markets today are focused in the southwest and southeast regions of the US, and really the best way to describe what we're looking for in those regional markets are rapid growth, strong economies, low tax structures and lots of sunshine.
Does your target market for homebuyers remain the same?
It’s important to point out that our philosophy is to be product agnostic so we are just as satisfied selling a $300,000 condominium, as we are a $1.5 million house in Austin. So, it's really the business case that drives the decision. If we determine that the best opportunity for the property is a mid-level house, $700,000, or condominium or luxury home, we take a look at it, run our numbers, refine the metrics, and then we proceed.
How about demand for those properties? Has the coronavirus (COVID-19) pandemic affected your business as more people work from home and employers adopt flexible work policies?
COVID-19 has been without question a significant boost to builders nationwide. The pandemic exacerbated the already significant shortage of housing nationally, which is now estimated at over five million units across the US. It also created urban flight, which caused a mass exodus from metro areas to the suburbs and rural areas, in the US and in other major cities around the world.
In those areas, in the suburbs, is where we acquire land and develop properties, so it has benefited our company directly by limiting supply and driving up home prices. When we say limiting supply, how COVID-19 exacerbated the existing shortage was people were afraid to list their homes on the resale market, because they were afraid of contracting or spreading the virus, so it curtailed a significant part of the home buyer market by taking those homes literally off the market. And as a result, you have this massive shortage today, which actually started with the 2008/2009 downturn because you had a decade of no inventory being created in the US. Literally, a fraction of the required developed lot inventory necessary to maintain a balanced market was created over a decade. So, coming into 2018 there was a 3.3 million unit home shortage nationally across probably 29 states, it’s been estimated. And that figure today is widely reported at over five million units.
The Federal Reserve is set to start tapering its stimulus and tightening monetary policy. Do you see that as a threat to demand for your developments?
Anytime the Federal Reserve tightens monetary policy, interest rates correspondingly rise and it does have an impact on sales. However, we believe that with the critical shortage of residential inventory across the US the demand will continue for new construction for several years. Millennials need a place to live. When you have this type of shortage, people still need housing. So, homes will still be built and homes will still be purchased.
You recently closed a $36 million underwritten public offering. How will the proceeds be used to expand Harbor Custom Development?
The majority of the funds from the recent preferred round of financing are earmarked for acquisition, construction, and development of our existing and future projects.
What are your immediate priorities?
Our immediate priority is to execute on our plan. We have a number of projects in various stages of entitlements, horizontal and vertical construction. If you look at that potential revenue from those projects, it exceeds $700 million over the next two-and-a-half to three years.
What would you say is the investment case for Harbor Custom Development?
First, I would say that today I believe our stock is undervalued. We’ve been one of the fastest-growing companies in our space for the last two years and I anticipate that trend to continue for the next two to three years.
In addition, our business model allows us to monetize real estate assets at multiple stages in the development cycle, which provides the company income diversification and dependable revenue.
Also, we are product agnostic, as I mentioned before. We're not pigeonholed into one building product or type. We're equally satisfied selling developed lots as we are luxury homes. This provides our company significant flexibility.
And then finally, I'd say, your expansion model is unique to the industry and very similar to a franchise agreement that allows us to move into regions quickly by contracting with local developers and general contractors, without incurring substantial personnel or infrastructure costs, so we've got a pretty tight model and it works very well for us, allowing to expand quickly and efficiently.
Contact the author at stephen.gunnion@proactiveinvestors.com