Dive Brief:

• Lennar Corp. has halted plans to spin off its multifamily subsidiary, Quarterra, by the end of the year due to unfavorable market conditions, according to the company’s fourth-quarter earnings call. 
• ”We believe that we have a very high-end public company waiting and almost ready to enter the public arena,” Chairman Stuart Miller said on the earnings call. “But we're going to postpone for the time being and wait for the right timing.”
• In July, the Miami-based home builder rebranded its vertically integrated multifamily apartment builder, developer and asset manager LMC as Quarterra Multifamily. At the time, Lennar reiterated that the business would be spun off later in 2022. The rebranding was the first step in positioning Quarterra as an independent, New York Stock Exchange–listed alternative asset manager, Quarterra Multifamily President Todd Farrell said in the press release.

Dive Insight:

Lennar launched its multifamily subsidiary in 2011, and it quickly became one of the top apartment producers in the country. Currently, it’s the No. 24 developer, according to the National Multifamily Housing Council.

In addition to its multifamily business, Lennar also had plans to spin off other non-core assets, like its single-family rental business and some land holdings, according to Alan Ratner, managing director with New York City–based real estate research and advisory firm Zelman & Associates, a unit of Walker & Dunlop.

“They made the decision based on capital market conditions that by doing this now, the new company stock probably would not receive a multiple that they felt like it was worth,” Ratner said. “They wanted to wait for a better time when equity market conditions were better and it might be more positively received by the market.”

Right now, the stock market is under a lot of pressure, he noted.

“You’re not seeing a lot of value ascribed to businesses that either are smaller cap in nature or don't have a clear comp set,” Ratner said. “I think that's what this business is going to look like. There are not a whole lot of competitors that you can point to say, ‘Here is what the right valuation should be.’” 

Miller didn’t provide timing for when Quarterra would be spun off but remained confident it would happen.

“We assume that it will probably be whenever we are past the tumultuous Fed tightening cycle that we’re likely going to be sitting in for the next year or so,” Ratner said.

A slowing market

Overall, Miller expects the production of multifamily and single-family homes to drop between a quarter and a third in 2023, which will exacerbate the housing shortage. In real terms, he said the 1.5 million homes built a year over the last couple of years could fall to 1 million in 2023.

Issues in the capital markets, caused by interest rate increases, are the culprit behind slowing starts.

“The multifamily capital markets are very frozen up right now,” Miller said on the call. “I think that the number of new communities coming out of the ground for multifamily and even the single-family for-rent buyers are kind of seized up because of the capital markets considerations.”

However, the news isn’t all bad for builders and apartment developers. Limited new and existing home inventory and slowing multifamily construction, combined with the housing production shortfall over the past decade, could leave “the industry in the middle of what we believe will be a fairly short duration correction without an inventory overhang to resolve,” according to Miller. 

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