Northern Nevada builders struggle to keep pace with skyrocketing demand for new housing

Grading work has taken more than five months to complete at Desert Wind Homes' Brae Retreat, currently under construction in Somersett in Northwest Reno.

Grading work has taken more than five months to complete at Desert Wind Homes' Brae Retreat, currently under construction in Somersett in Northwest Reno. Photo: Rob Sabo

By Rob Sabo

Monday, April 19, 2021

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Perry Di Loreto started building homes in Northern Nevada when Richard Nixon was president, gas was $.36 a gallon, and the median price of a new home in the U.S. was around $27,000.

Much has changed in the nearly five decades since — especially the regional housing market. To wit: According to the Reno-Sparks Association of Realtors, the median price for a home in Reno was $515,000 in March 2021.

Consumers have been clamoring for more new homes for several years now, yet regional and even national builders have been unable to keep pace with a seemingly insatiable demand for new housing across Greater Reno-Sparks.

Demand is being driven by a tremendous influx of new residents to the Truckee Meadows — according to the Washoe County Consensus Forecast, the region’s population will soar to 520,000 by 2030, a 21 percent increase from 2010 census figures.

Residential developers such as Di Loreto have made the business of building houses their life’s work.

The Northern Nevada Business Weekly recently spoke with Di Loreto and three other regional homebuilders to discuss the challenges they face in meeting the region’s pressing need for residential housing.

Among the factors impacting their ability to move quickly and bring large-scale housing developments online include escalating costs for materials, industry-wide labor shortages, supply chain delays, lengthy regulatory processes, exorbitant out-of-pocket up-front costs — and some savvy hedging to avoid holding an empty bag once the inevitable cyclical downturn finally resurfaces in Northern Nevada

Here are their insights:

Perry Di Loreto, President, Di Loreto Homes of Nevada

Di Loreto Homes is the master developer of Damonte Ranch and has been building in the South Reno community for more than 30 years.

The company is nearly finished with the Damonte Ranch master plan, which was approved for roughly 6,000 homes. Di Loreto began building there in 1987 with a 15-year timeline in mind, but it’s taken twice that long due to riding out the ups-and-downs that are common in the housing industry.

Development is a futures game, Di Loreto said. Developers must work 18 months or more to get in front of any prospective buyers — and much can change in that timeframe.

“You are taking a big risk because you have to go so far out in front,” Di Loreto said.

Regional homebuilders can’t react quickly to spikes in demand because it takes so long to navigate the process of securing all the necessary entitlements and permits that give developers the right to build on raw land, he added.

And when the housing market hits the skids, that demand evaporates faster than water spilled on the sidewalk during a hot Northern Nevada summer day.

Regional homebuilders must have strong land positions to remain competitive with the large national builders active in the region, Di Loreto added. But if they overreact to current demand, they’ll likely be overextended when the next downturn surfaces.

“When we did Damonte Ranch, we were buying years into the future, and we committed to building at a certain pace,” Di Loreto said. “The key to this business is to position yourself so you can ride out those cycles.

“Damonte Ranch did not suffer any financial distress during (the Great Recession). We were able to shut it down and ride it out. But (other) companies lost millions, and they are kind of shy about getting back in.”

A year-over-year run-up in materials costs, spearheaded by a nearly three-fold increase in the price of lumber, has added about $20,000 to each home the company delivers, Di Loreto said.

But continued low interest rates, coupled with an extended exodus of residents from California to cities such as Reno and Boise, are buoying Northern Nevada’s housing market, he added.

“Our market has been so strong for so long that the big homebuilders are getting bold and are making large acquisitions — but the cycle is not kind,” Di Loreto said. “We cannot stay on this trajectory. Home prices can’t keep accelerating at these prices. You just have to hope for a soft letdown instead of a crash.”

Steve Thomsen, General Manager, Ryder Homes of Nevada

Steve Thomsen says builders are paying almost three times as much for a lumber packages as they were just one year ago. Courtesy: Ryder Homes

 

Ryder Homes has built many communities in Reno and Sparks. Ryder was one of the original developers at Somersett and has constructed nearly 400 homes across five different communities in Somersett, including a 64-home subdivision that was completed in January.

Thomsen said the last recession, although more than a decade ago in real time and ancient history when viewed through the lens of recent home values, still haunts regional developers.

“We stopped building new inventory of lots during a 10-year recessionary period,” Thomsen said. “We are paying the price because you couldn’t buy new lots for the price you could pay for bank-owned lots, so we stopped building them.”

Ryder Homes of Nevada also has a strong land position with holdings in Spanish Springs, South Reno and Carson City. Like most projects these days, however, those communities require huge front-end investments to transform raw land into finished lots.

“That’s the whole issue,” Thomsen said. “You have to put forward millions of dollars before you can even begin building. There are a lot of great large master-planned communities (in the area), but they require a lot of money to bring them online.”

Paying for those projects can be financially burdensome for regional builders. Regardless of the strength of their balance sheets, they can’t compete with the financial wherewithal of national publicly traded homebuilders such as D.R. Horton, Lennar and Toll Brothers.

“Ryder is a 60-year-old company, and we are fortunate that we can burden some of those high front-loading costs,” Thomsen said. “But it is millions of dollars in front-loaded costs just to build those lots.”

Ryder Homes also has to foot the bill for infrastructure such as water, sewer, roads, roundabouts, site grading and improvements to Pyramid Highway for its nearly 300-home Shadow Hills community in Spanish Springs. The company likely won’t recoup any of those costs until its first closing sometime in 2022.

Meanwhile, Thomsen said builders are paying almost three times as much for lumber packages as they were just one year ago. And anything that has a circuit board or is manufactured outside the U.S. has been a problem to procure.

“Our supply chain is being crushed right now — we can’t get appliances,” Thomsen said. “We’ll get a house finished, but we can’t close on it because we don’t have an oven or microwave or dishwasher. The supply chain is kicking our butts right now.”

And that was before the massive Ever Given container ship got stuck in the Suez Canal in late March, creating additional global supply chain bottlenecks.

Victor Rameker, Co-Owner, Desert Wind Homes

Victor Rameker says routine supply chain delays have become the norm over the past year. Courtesy: Desert Wind Homes

 

Desert Wind Homes is currently working to bring its upscale Brae Retreat community at Somersett online. Campbell Construction has been performing extensive grading work to develop lots on the hillside project located on a mountaintop between the first and second roundabouts on Somersett Parkway. It’s the last planned community in Somersett.

Two of the biggest challenges with the project — and really with any new large build, Rameker said — is navigating the cumbersome entitlement processes and finding suitable building sites. Outside of North Valleys and Spanish Springs, there’s no “easy” land left.

Developers are faced with monumental grading challenges in order to cut in new lots. It’s taken more than five months of grading just to prepare for vertical construction at Brae Retreat.

Rameker was frank about the costs Desert Wind has staked into the venture.

Securing entitlements, water rights and paying fees to the city of Reno, NV Energy, Truckee Meadows Water Authority and other governing organizations runs about $12,000 to $15,000 per lot.

From there, tack on an additional $5,000 to $7,000 per lot for civil and hydrological engineering, geotechnical reports, landscape planning and the like, then factor in another $3,500 for structural and architectural engineering, as well as an extra $15,000 for building permits.

“That’s just the paperwork,” Rameker said. “That’s not buying the dirt or turning the dirt — it’s just securing the right to go in and develop. It also doesn’t factor in general liability insurance, which is very expensive in the state of Nevada because of construction defect laws — that’s another $4,000 to $5,000 per lot.”

It’s a multimillion-dollar endeavor. Some builders take out construction loans early in the process to foot the bill, but Desert Wind relies on an extensive network of private investors to help manage its debt load.

“We are a small family-owned homebuilding company,” Rameker said. “We are unique in that we don’t get loans for the land, entitlement or development (phases). The first loan we put in, generally speaking, is on the construction side.

“We survived the downturn in 2008 because we did not have acquisition and development debt. We decided coming out of the downturn that we didn’t ever want to be beholden to a lender. Our equity is raised through friends and family and a lot of subcontractors who work with us. That’s really been the source of our financing over the last decade or so.”

Like other regional builders, supply chain delays also impact Desert Wind’s ability to deliver homes on schedule. Rameker said that 30- to 45-day delays on a six-month build schedule are common due to supply chain issues.

Combine that with the fact that construction labor is at a premium, from forming concrete foundations all the way through finished landscaping, and routine delays have become the norm.

Rob Fitzgerald, Managing Member, Northern Nevada Homes

The huge infrastructure and development costs are the main reason why Northern Nevada Homes divested its West Meadows Estates off Highway 40 in Verdi to D.R. Horton back in 2016.

Since then, however, costs have only continued to spiral upward and impact builders’ ability to kick off and complete communities. For example, Northern Nevada Homes is currently working on Cottages at Comstock a mile or so north of the University of Nevada, Reno.

“The cost of lumber is up approximately 400% year-over-year,” Fitzgerald said. “It’s so high it’s almost hard to understand. I fear the worst.”

Current prices for lumber have added close to $20,000 per door to every home the company builds, Fitzgerald said.
And every other consumable used in the building industry has increased in price as well.

“Pipe, wiring, everything — there’s not one thing we incorporate into a home that’s not up,” he said. “Most is just 5 to 10 to 15%, but lumber is pushing 400%.”

Those costs don’t typically put additional pressure on developers’ bottom line since they are passed on to consumers.
But they are just one more factor that contributes to the run-up in new home prices that have excluded many residents of the Truckee Meadows out of the new housing market, Fitzgerald said.

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