The Big Builder Evolution

Being big provides many benefits, but also challenges
By Patrick S. Duffy

For many veterans of the building industry, it wasn’t that long ago in which the business of homebuilding was much less sophisticated, with owners and division presidents making decisions based on a mix of experience, common sense and a small amount of primary market research (usually taking the form of visiting each other’s model home complex to see what the competition was doing).

Over the last 25 years, however, as the complementary businesses of management and data collection and analysis have evolved, so too has the typical homebuilding operation. According to NAHB, between 2009 and 2015, the one hundred top builders by homes closed increased their market share from 43 to 48 percent, with market leader D.R. Horton alone delivering almost 37,000 new homes. Looking at just the top twenty builders alone, at the same time their market share grew from 31 to 34 percent, meaning that under their analysis, one-third of the market is now dominated by just twenty firms.

To be sure, there are certainly many advantages of company size, especially when facing the multiple headwinds of land availability, scarcity of skilled construction labor, rising home prices, government fees and regulations as well as increasing competition from both other giants as well as nimble local players. Whereas a local niche player is significantly more exposed to business externalities such as job and income growth or changing consumer tastes, those firms with operations in multiple states can much more easily repurpose one product type in another location, expand into new markets, and leverage operational efficiencies across multiple departments.

However, because the issues faced by smaller builders are not always the same as those by their bigger counterparts, in 2009 the largest builders formed Leading Builders of America (LBA), whose mission is to consolidate their influence at the national and state levels to ensure homes remain as affordable as reasonably possible. As part of this effort, LBA focuses on lobbying efforts to encourage job growth, improving energy efficiency, ensuring adequate capital for mortgages, and preserving the mortgage interest deduction.

For smaller builders, the key advantage is being nimble and flexible, especially in urban environments where Greenfield and geometrically simple parcels are in short supply. Smaller builders can also be more proactive in pushing newer, modern designs with a lower unit count because they’re not supporting an entrenched corporate infrastructure with high fixed costs. Being invested at the local level can also assist smaller builders when partnering with municipalities for transit-oriented projects, including an affordable housing component, or fighting pushback from NIMBY neighbors.

Not surprisingly, big and small builders alike share a concern about providing homes people can afford, especially for that key first rung on the home buying ladder. While larger builders can often meet this challenge with lower per-unit costs, they still have to provide incentives for apartment dwellers to move. While more living space and a private backyard space were once sufficient motivators, today a growing dislike of long commutes and less personal time has today’s buyers willing to trade space and privacy for smaller, starter homes with high-end finishes, interesting architecture, and a desire for a more connected, experiential community. This need for connection is also taking place in the travel industry, whether visitors are ditching hotel rooms in favor of an eclectic airbnb space, or guests of all ages staying in hostel dorm rooms once oriented mostly towards those under 30.

Of course, accompanying the rise of bigger builders has been the explosion of the information age, allowing both competitors and buyers to track the real estate market, compare customer reviews and even find neighborhood short cuts on their daily commute. Data itself has increasingly become a commodity, available for free or at a low cost but with the related consequence of information overload. For example, staying fully informed on the movements on the national economy could require regular weekly, monthly and quarterly updates on well over 100 different indicators from a variety of public and private sources. While various companies offer one-stop shopping at data buffets for stock traders and financial pros, the only practical way to wade through the weeds is to focus on the stories being told.

Similarly, telling stories of how a future life might look is also the job of both builders big and small. Whether it’s a summer concert series at a master-planned community or a communal garden serving a block of urban flats and townhomes, the thesis is generally the same: Who do you want to be tomorrow?

Patrick Duffy is a Principal with MetroIntelligence Real Estate Advisors and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.

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