Stockton: It’s Home to Big Builders
If one is to believe the doom-and-gloomers at the recent convention of the National Assn. of Home Builders, the several large apartment builders based in this Central Valley city might as well forget 1987--and ‘88, ’89 and ’90.
Economists at the Dallas convention predicted sharp declines in apartment starts, at least 30% nationally, with murderous declines in some major overbuilt markets.
In spite of the bad news forecast for apartment developers, virtually all of the major builders interviewed here believe that apartments will continue to be built in solid markets in all parts of the nation--and that they will build their share of them.
As Dave Fisher, vice president of Robertson Homes said: “We’re happy that the tax act passed. In the past three years so many people got into the apartment business because of the tax angle. You didn’t have to be good, they thought, because tax benefits would help you out--even save you. If you were $1 million over budget and didn’t collect the rents, you got $500,000 of that back from Uncle Sam.”
Stockton is home base to two of the nation’s largest apartment builders, A. G. Spanos Construction Inc. and Robertson Homes, 13th and 19th in the country, respectively, according to a ranking of the top 482 builders in the July, 1986, issue of Professional Builder magazine.
The Grupe Co. of Stockton ranked 45th in the same list, while Barnett-Range Corp., ranked 58th. Gibraltar Community Builders, based both in Stockton and Century City, ranked 244th and is a unit of Gibraltar Savings, Beverly Hills. Not ranked is the Nylen Co., founded 11 years ago by James P. Nylen, who learned the development business during his four years at Spanos.
In another ranking, in the May, 1986, issue of Builder magazine, Spanos ranked seventh in the nation, while Robertson was 10th.
Alex G. Spanos, 63, is possibly the main reason why this deep-water port of 190,000 is such a popular headquarters for large developers.
He’s suitably modest about his influence: “I’d like to think Stockton people have been a little more innovative than others in other parts of the country,” Spanos said. “A lot of the people who once worked for me and have left have done extremely well themselves. This is a big country--big enough for as many (as) want to go out and do it on their own.”
Why Stockton? It’s certainly not because of any particular tax advantage, and getting to Stockton by commercial airline is not the easiest task. (This is no problem for Spanos: as part of his varied business interests that include majority ownership of the San Diego Chargers football team, Spanos owns the A. G. Spanos Jet Center, which operates aircraft at the Stockton Municipal Airport.)
Perhaps it’s because of the city’s limited housing construction market--about 2,000 housing starts a year--that Stockton-based firms have become national builders by necessity. Gibraltar Community Developers and Nylen build mostly in California, but most of the other Stockton-based builders are active nationally.
When he was asked the question, why Stockton? native son Alex Spanos answered with another question: “How come American Savings & Loan, the nation’s largest, is based in Stockton?”
American Savings, a unit of Irvine-based Financial Corp. of America (FCA), has played an important role in financing many of the projects of the firms based in the city, he said.
As to the future of apartment building, Spanos believes that there is no doubt that last year’s so-called tax reform will have a tremendous negative effect.
The new law has taken the incentive away from builders, he said. “Since you can’t write off your losses, you better be sure your apartments are cash flowing now.”
It doesn’t matter if the project is in Stockton, Sacramento, Phoenix, or wherever in the country, a builder must concern himself about a cash flow or otherwise he’ll be in trouble going in, Spanos said.
Apartment starts will be down sharply at the Spanos firm this year: “In 1984, we built 14,000 units; in 1985, about 6,000; last year, less than 3,000. This year, and from here on in, I expect to build about 2,000 a year for our own and for investors. Before we build we have to be sure our projects are cash flowing from the start.”
The phrase “smart builders will still be around, others will have problems” is anything but a cliche to Spanos. Rent control won’t have a dramatic effect because most construction will be in areas free of rent control, he said.
In overbuilt Oil Patch markets such as Texas, Oklahoma and Louisiana, apartment builders are in trouble: Spanos said that it will take 10 years to absorb the apartments in Oklahoma City.
On the other hand, California markets will absorb the surplus apartments in three to five years, indicating that California is not dramatically overbuilt, Spanos said.
Finding Absorption Areas
The key to success in apartments is finding areas that can absorb what can be built in at least three years, Spanos said, adding that where these areas are is “for me to know and for my competitors to find out.”
Fisher, vice president of Robertson Homes, used to do custom homes in Grupe developments and built several commercial projects in joint venture with Grupe. From this fairly modest start, he and partner Bart Robertson went into apartment building for their own account and for investors, primarily syndications.
In 1986, Robertson Homes built 4,500 apartment units, down from 7,100 in 1985. This year, Fisher predicts that the firm will construct 5,500 units. The firm is privately held, with all stock held by Fisher and Robertson.
Fisher agrees with Spanos that tax reform will weed out the weak players, those who expected the tax advantages to bail them out.
He is bullish about apartment construction, especially the upscale units that Robertson specializes in: “We build our apartments like a home, with amenities like microwave ovens in every unit, side-by-side washer and dryer hookups in every unit, fireplaces in half the units. We’re going for the upscale renters who are just on the edge of buying a home.”
In the Southland, the firm is active in Rancho Cucamonga, Ontario and Moreno Valley.
Robertson is not going to diversify, Fisher said. “We have our niche, like anyone who is successful. We’re the only apartment builder in the country that builds only apartments. That way, we can tell people who invest with us that we put all of our attention into making money for them. The more other builders diversify, the better we can compete with them in what we do best.”
Increasing Ownership
Fisher credits his firm’s sophisticated computer software with keeping up on delinquent tenants and vacancies: “I can tell you in seconds if we have a vacancy in one of our developments anywhere in the nation, who is delinquent in rent and who are the slow payers.”
Although the firm has traditionally marketed 80% of its units to investors and and kept the rest, Robertson Homes has been increasing its percentage of ownership.
Before last year’s tax act, pension funds couldn’t use write-offs the way syndicators could, allowing syndicators to pay more for a project than pension funds could. The tax act leveled the playing field--with some of the players still on it--allowing pension funds and insurance companies to become serious players in a search for cash flow projects, Fisher added.
Hal Barnett lives on Nob Hill in San Francisco, while his partner Jim Range lives in Stockton, where Barnett-Range Corp. is based. The firm expects a sharp drop in construction in the wake of tax reform. In 1985, Barnett-Range built nearly 4,800 units to rank as the nation’s 10th largest apartment builder, Barnett said.
“This year we’re finishing up our 1986 starts and will build 1,500 to 1,700 units, all in California,” he added.
Plan Single-Family Houses
In past years the firm built in the Maryland suburbs of Washington, in St. Louis, South Florida, Atlanta and in Virginia Beach, Va.
In addition to apartments, Barnett-Range plans to build 600 single-family houses in the Bay Area, in Alameda, Contra Costa, Napa and Solano counties.
“We’re building the first 500 units of an eventual 1,200-unit apartment project in San Diego with an insurance company, but the rest of the units will be for our own account,” Barnett said.
Corey M. Patick, chief executive officer of Gibraltar Community Builders, said his company will continue to concentrate on the California market this year, building about 1,500 apartments for the firm’s own account. This is down from about 4,000 units in 1986.
The state’s most overbuilt apartment markets are largely in Central and Northern California, cities such as Fresno and Sacramento, where rents are down 5% to 7%.
“The new tax law should help to stabilize these markets in about two or three years,” he said. “We like markets like Contra Costa County in the (San Francisco) Bay Area. Antioch in Contra Costa County will see the kind of growth we’re seeing around Mowry Avenue in Fremont in Alameda County.
East Bay’s Lower Rents
The numbers speak for themselves, he said: “From 1975 to 1984, San Francisco County grew 2% from 695,000 to 706,000. Contra Costa County experienced a 19% population increase from 586,600 to 693,700.”
The biggest contributing factor is, of course, the affordability of housing in East Bay counties, Patick said. The average rental cost per square foot per month for a two-bedroom apartment in San Francisco is $1.15. In Alameda County, across the bay, the figure is 83 cents, and it’s even cheaper in Sacramento, Stockton and Fresno.
The most dramatic effect of the new tax laws, Patick said, will be the decline in land values in California.
“We will begin to see diminishing land values almost immediately, and over the next 10 years, they may fall as much as 30%,” he said.
“The new legislation places more emphasis on sound economic returns for real estate investment by wiping out the tax incentives that spurred development in the past. In order to provide acceptable yields and make real estate competitive with alternative forms of investment, a reduction in the cost of buildable land must be realized. Land costs are one of the few variables in the construction process, so this is where I expect to see declines.”
San Diego Growth Area
In addition to its apartment developments, Gibraltar Community Builders has seven single-family communities and two commercial centers under development.
The unit of $11-billion Gibraltar was formed in 1983 by the merger of Lurtsema Patick Financial with Gibraltar Financial Corp. The company also has an office in San Diego, an area that Hal Lurtsema, the president, and Patick see as a major source of growth in the state.
Greenlaw (Fritz) Grupe Jr. is a farm kid who thought he wanted to be a farmer but who ended up as a developer. After graduating from UC Berkeley in 1960, he worked on the family farm, 20 miles east of Stockton.
Like many a farmer, his father was interested in real estate, an interest his son shared. Fritz Grupe sold houses for a while and developed small commercial projects. His present firm dates back to 1965, when he took over 12 houses and 33 lots from a bankrupt developer.
Marin County Model
His first planned community was Lincoln Village West in Stockton, with planning started in 1966 for this project. He roughly modeled the lake-oriented development on a similar project in the Marin County community of Tiburon, where 20 years ago, a lucky buyer could get a house on the lake for $50,000.
“Our first lots on Lincoln Village West sold for $9,000, and the highest resale recently was $175,000,” Grupe said.
Grupe is a big critic of the so-called tax reform measure adopted last fall. For one thing, it’s complicated--”Even people who can afford expensive lawyers and accountants can’t understand the law.”
He believes that the measure doesn’t address the major problems of the economy, such as the budget and trade deficits.
“The intent of the measure was to be revenue neutral, but we’ll probably be facing tax increases down the line to solve the deficit problems,” he said.
Helped Lower Rents
Even the good news isn’t all that good, Grupe said: “The law was supposed to put the ‘real’ back in real estate by reducing tax-motivated decisions.
“The only problem is that these tax-motivated decisions helped a lot of people live cheaper. Without the tax benefits, rents will be higher, impacting low- and moderate-income people the most. The tax benefits were one of the only things that kept rents down, since government-subsidized programs are pretty much nonexistent.
Grupe built about 1,900 apartment units last year and plans to build about 2,100 this year. He has an apartment development in Chino Hills and likes well-planned areas such as Chino Hills. Emphasis at the firm will continue to be on the lake-oriented planned communities that are the firm’s signature developments, including Quail Lakes in Stockton, Inland Harbor in Sacramento and Woodward Lake in Fresno.
Expects More Building
The Nylen Co. Inc. didn’t appear in the Professional Builder “Housing Giants” list last summer, but president James P. Nylen expects to build 1,500 apartment units this year, up from about 1,000 last year. This should put him on the prestigious list this year. The firm didn’t build apartments at all until 1985, he added.
After attending Cal State Fresno, Nylen joined Spanos in 1972, working in the leasing and property management division. He left in 1976, building single-family houses in Stockton and Modesto.
“We’re looking at single-family developments in Tracy and Manteca, in the Stockton area, as well as Fort Collins, Colo.,” he said. “Single-family development is much more cyclical than apartment development, but as long as it is profitable, we’ll do it.”
