How are builders of all sizes and niches responding to the downturn? What's in their business plan for 2008? What are they doing on the sales front that seems to be working with today's seemingly all-too-patient buyer? These were the questions we sought to answer when we set out to interview four builders in each of three cities as part of our Builder Roundtable this fall.
Our readers may have fewer sales to occupy their attention, but they are staying incredibly busy revamping their operations so that they emerge from the downturn in fighting shape. Here are the top 15 actions builders are taking.
- Re-writing job descriptions. They are asking their people to wear multiple hats and moving managers down to contact level with customers, suppliers, and subcontractors. Well-capitalized builders are examining functions that they outsource with an eye toward bringing them in-house. Others are making necessary personnel reductions to improve cash flow.
- Building homes faster. Many are bringing their subcontractors and suppliers in for meetings to talk about how they can work more effectively together. They are providing subcontractors with better information on tightened schedules. They are asking subcontractors to work more closely together and monitoring jobsites more closely.
- Value-engineering their designs. Builders are taking wasted space out of houses, removing vaulted space, extra bedrooms, and rarely used formal rooms. They have engaged in classic value engineering-trying to achieve the same architectural look with less-expensive products. But many have also developed new sets of smaller plans, because this is the most effective way to save on direct construction costs.
- Lowering direct construction costs. Recent home price declines have led to redoubled efforts to lower direct construction costs. Builders have negotiated additional savings with subcontractors and suppliers. They have improved scopes of work, subcontractor walk-throughs, and quality control to lower costs per square foot.
- Redoubling training efforts. The rising tide of sales earlier in the decade lifted all boats. Now builders are separating their best salespeople from the rest and providing continuous training to help them achieve sales goals. Few salespeople have the necessary background to prospect for sales in today's market.
- Emphasizing sales fundamentals. Builders report that there are still buyers out there looking to add more space, downsize, or move to a better location. It's vitally important in this sales environment for salespeople to develop close relationships with buyers to find out why they are looking for a new home. Is it because they are adding a new member to the family, looking to retire, relocating from a different city?
- Competing with resales. Builders are feeling the pinch from "used" homes. Resales don't have the great features of new homes, but they often enjoy an advantage in their location. Builders are emphasizing energy-efficiency, green construction, and floor plans that suit today's lifestyles-things buyers can't find in existing homes.
- Adjusting their marketing mix. Most builders are dedicating more resources to online advertising and personal marketing campaigns at the expense of newspaper ads. They recognize that sales won't occur overnight anymore, and they are trying to develop long-term relationships with customers.
- Adjusting where they build. Builders reported that they are doing less work in outlying suburban fringe locations, in some cases shutting down projects until the market returns. In each market, they reported that closer-in locations are selling much better than outlying locations. The best-performing locations are often urban.
- Working closely with their banks. The builders we interviewed are taking a proactive approach toward banking relations. Several reported that they have renegotiated lending terms. Others confessed that banks had asked them to put more equity into deals. They all seemed to be feeling the credit squeeze. Everyone is very focused on cash flow.
- Taking their case to the government. Builders cited unnecessary municipal regulation, designed to benefit existing-home owners, as a major impediment to the provision of affordable housing. They agreed that building at higher densities is necessary to achieve lower price points, but said it remains extremely difficult to do so because of government regulation.
- Becoming better leaders. Builder executives emphasized the importance of great leadership during trying times. They advised that builders run their companies with more financial transparency. Though it's tempting to retreat behind a desk during hard times, they suggested that managers spend more time interacting with their people.
- Being realistic about the future. Most builders go into 2008 with lowered expectations, though a minority expects the market to rebound late in the year. For the most part, builders are budgeting for the worst and hoping for better.
- Watching closely for signs of a comeback. Builders are keeping a close eye on key metrics to look for signs of a comeback. They are monitoring levels of unsold inventory-both new and existing. They are keeping close tabs on consumer sentiment, cancellations, and traffic. That said, most builders we interviewed don't expect a turnaround until 2009, at the earliest, given trouble in the credit markets.
- Positioning their company for recovery. If history is any guide, the comeback, when it comes, will be swift. Builders want to make sure they are ready. They are upgrading managers and changing incentive plans to hold on to key employees. Many are entitling land so that it's ready for building once the market turns.