Aiming to Take the High-End Subdivision to Another Level

Over the last dozen years, major builders have sold only 30 new subdivision homes costing $2 million or more in Los Angeles County. Hadi Makarechian is betting he can do nearly triple that with just one project.

As chairman of Newport Beach developer Capital Pacific Holdings Inc., he is building the costliest enclave of new single-family homes currently for sale on the Southern California coast: 79 semi-custom mansions in Rancho Palos Verdes, each with a clear view of the Pacific Ocean and a price tag of $2 million to $4 million.

That is an unprecedented number of such high-end estates being built in Southern California “on spec,” or without pre-signed buyers. And Capital Pacific isn’t the only one. In Orange County, Taylor-Woodrow Homes Inc. has begun construction on a 33-home project along Newport Coast, with prices that will start at $2.4 million. Other companies, including Pacific Bay Homes and Manning Homes, are developing hundreds of houses in the $1-million range.

The flurry of activity in luxury home building reflects the vast amount of wealth that the new economy has created, and it shows just how far Southern California’s real estate industry has come since the early-’90s housing bust cut the values of high-end homes by as much as 40%.

Last year, almost 3,000 houses--existing and new--sold for $1 million or more in Los Angeles and Orange counties--22% more than in the previous year, according to Acxiom/Dataquick Information Systems Inc., a real estate research firm in La Jolla. By comparison, the number of homes sold overall in the two counties rose by 4% last year.

Homes priced at $1 million or more accounted for a record 2% of all transactions last year. But a million-dollar home isn’t what it used to be. In fact, they’re being mass-produced, and more builders are moving into the ultra high-end.

Few have been as aggressive as Capital Pacific, or CPH.

Makarechian, 51, formed the company from the ashes of luxury home builder J.M. Peters Co. after that company went bust in the early ‘90s. The Iranian immigrant, who made his fortune building pricey condominiums in Florida and Washington, D.C., now envisions developing more than 400 mostly million-dollar homes from Santa Barbara to Dana Point over the next three years. Other subdivisions now underway include Ritz Pointe in Monarch Beach and Montecito at Newport Coast. And that’s in addition to the 200 homes over the last five years that the company has sold at its Grand Coto Estates subdivision in Coto de Caza, which is built out, and its Mulholland Park development in Tarzana.

“In California, everybody wants a piece of the ocean,” he says about his choice of locations. “There just isn’t much of it left.”

Even so, Makarechian is taking a huge gamble. Typically, buyers of new multimillion-dollar homes have preferred to have them custom-built. Others may see better value in existing homes--these account for the vast majority of sales in the prestige market. There are still pockets in Rancho Palos Verdes, Malibu, Beverly Hills, Marina del Rey and other wealthy neighborhoods where houses have not quite regained their pre-recession values, according to Acxiom/Dataquick.

Moreover, the number of people in CPH’s price range, although greater than in recent years, is still relatively small. And, of course, there’s no predicting how long the nation’s current economic expansion or highflying stock market will last.

“There’s a question about how deep the market [for these homes] is, and how fast the homes will sell,” says Eric Von der Porten, an analyst at Leeward Investments, a San Carlos, Calif., investment management firm that has a financial stake in CPH. But he says the potential payoff is huge.

By Von der Porten’s analysis, CPH has risked only $3 million in the Rancho Palos Verdes development, while others have staked more than $50 million. Among the company’s joint-venture partners, those with the largest stakes include Farallon Capital Management of San Francisco, which has poured more than $250 million into CPH projects, and the giant California Public Employees’ Retirement System pension fund.

“If we go into a downturn,” Von der Porten said, CPH “will suffer little of the negative effects.”

But as with other publicly traded home builders, CPH’s stock performance has been unimpressive. Over the last year, its shares have traded in the $2-$3 range on the American Stock Exchange, even as its financial performance improved markedly.

For its most recent fiscal year ended Feb. 28, CPH earned $3.3 million, contrasted with a net loss of $2.1 million for the previous year, according to filings with the Securities and Exchange Commission. Total revenue surged 27% during that period, to $271 million. The losses in fiscal 1998 stemmed largely from the write-down of older projects left over from J.M. Peters, the company said.

So far, CPH has completed 16 of the 79 houses planned for Rancho Palos Verdes. An engineer by training, Makarechian roughed out the home designs himself on one of the note pads he carries at all times, and he has been intimately involved in shaping every detail.

Every week, he arrives unannounced at the site to inspect the work. On a recent walk-through, he ordered workers to replace a strip of molding between a ceiling and the wall--for the 10th time--because it did not look straight enough to him. He motioned the crew to lower an interior window a few inches so the view of the ocean from the top of a broad stairwell would be unobstructed.

These mansions are 4,000 to 8,000 square feet, with four-car garages, master suites larger than many people’s homes, and high-speed wiring for faster and multiple access to the Internet. They are designed for those who lack the time or patience to build themselves a custom house. At Rancho Palos Verdes, the buyers purchase a shell, then customize the home to suit their tastes.

Options include a system that will page the owner if the temperature in the wine cellar grows too warm or cool; and an electronic security system that scans fingerprints, retinas or tokens for home entry, enabling the owner to give visitors, gardeners or nannies partial or full access to the house.

Makarechian says he has already sold one home, although he declined to disclose the buyer or the selling price. He says more than 1,500 people, some from as far away as China, have expressed interest in the properties by registering their names and addresses.

But he says many of his potential buyers are among the region’s nouveau riche, especially members of the “dot-com,” sports and entertainment industries.

“People buy homes to entertain and to make an impression on friends and family,” he says.

The big question, however, is how many of those people will be willing to pay such a premium for a new luxury home.

CPH has set prices that far exceed those of typical existing homes--built 30 years ago and averaging 4,000 square feet--that comprise the bulk of the listings along the peninsula. Since 1997, the average selling price in Rancho Palos Verdes has been $927,500, or $231 per square foot, less than half the square-foot cost of a new CPH house, according to research firm First American Real Estate Solutions in Anaheim.

Nima Nattagh, an analyst at First American, says there’s clearly a market for new oceanfront homes. But CPH’s success, he says, may hinge on whether wealthy individuals see their net worth continue to rise.

Real estate analysts say some potential high-end buyers haven’t considered the peninsula as a place to look for a newly built home, concentrating instead on Beverly Hills and other areas that are closer to freeways.

CPH also faces increasing competition from other new-home builders. Ocean Trails had been planning a 75-unit site in Rancho Palos Verdes, also with homes in the $2-million range, although that project’s future is now in limbo because of financial problems, analysts say.

“Is it risky? It is,” admitted Makarechian as he steered his black Range Rover along the San Diego Freeway toward the Rancho Palos Verdes site the other day. But he thinks that even if the economy sours, the luxury market will recover faster than less expensive sectors, as it did in the last recession.

“I’ve seen three recessions, and in all these times, the desirable location was less risky than a less desirable one.”

Over the years, Makarechian has learned when it’s time to move from one place to another.

He grew up in Iran watching his parents operate a big construction company that built military bases and other large-scale projects. He came to the United States in the mid-’60s, when he was 16, to study civil engineering at the State University of New York in Buffalo. He earned his degree there, got married, then returned to Iran to help grow his family’s business. But as tensions between Iran and the United States escalated, he fled to Florida. The couple settled near his wife’s relatives there, and he took a construction job.

Using his savings, he began building condominiums along Fort Myers Beach, an affluent city on the Gulf Coast. But when Florida’s economy slipped into recession in the early 1980s, he moved his family to Washington, D.C. And there, he began building townhouses along the subway line near a regional mall in suburban Maryland, eventually developing more than 1,000 units in all by the mid-1980s. The project was wildly popular, and he earned a handsome profit selling, for example, 1,100-square-foot units for $250,000.

But as more builders began to follow the same strategy, he decided to sell the business. He moved to California in 1990 at age 41, planning to retire. For six months, he dawdled around his house in Big Canyon in Newport Beach. Then he and a minority partner, Dale Dowers, bought J.M. Peters in 1992 for $47 million. At that time, the company was involved in projects to build 115 homes in Orange and Riverside counties.

But the company was also in default on $200 million in loans, and Makarechian knew he would have to sell Peters properties and settle a number of pending legal cases against that company before he could grow the business as he envisioned.

Today, analysts credit him for making astute land acquisitions, such as the Rancho Palos Verdes site, and for making bold moves at the right time.

“Any time you build a large project targeted to a small audience, there’s a lot of risk involved,” says John Burns, an analyst at Meyers Group, an Irvine firm that tracks new-home projects. “But if I had to pick [when] to do it, it would be now because demand is as high today as it’s been in a long time.”