As the calendar turns to 2016, the industry faces a number of important questions about the best ways to build, the best products to use, and the best plan of attack for this part of the economic cycle. BUILDER talked to a host of home building experts about how builders should evaluate these important questions.
What is the most important step builders can take, given economic restraints, to build resilient homes?
“The roof is your home’s first line of defense against many natural disasters, including windstorms, hail, wildfire, and severe winter weather. Post-event research has shown the cost of interior damage can be three to nine times greater than the cost of repairing the roof. Your roof system has to work together to help protect your home from the ravages of Mother Nature.” — Tim Reinhold, Insurance Institute for Business & Home Safety
“Assess the vulnerabilities that may exist at the building site, including flooding, earthquake, wildfire, winter storms. Develop a mitigation plan for the greatest threats and design homes to keep homeowners safe in the event of an extended power outage.” — Alex Wilson, Resilient Design Institute
What is the biggest step politicians or the industry could take to ease the labor burden?
“Increase the focus on efficiency gains that allow us to get more done with the same number of people. Too many resources are lost waiting for something to be done or fixing something. Some examples include poor design, jobsite readiness, and jobsite damage.” — Tony Callahan, Callahan Consulting Group
“People want to work for managers they respect and admire. The main reason people leave jobs is because of their manager. Successful builders must have an inordinate share of the best workers. Money will play a role, but the manager will play a greater role.” — Martin Freedland, Berke Consulting
What’s the key for unlocking millennial demand?
“Companies have to understand that there are new touch points. This generation spends money wisely; they don’t have a lot and also have many tools for smart shopping. They want a connection that makes products and services relevant to their lifestyle.” — Susan Yashinsky, Sphere Trending
What is the one step the industry needs to take to get products to the jobsite more efficiently?
“Gaining visibility to your house costs at the SKU level enables myriad cost management strategies that are impossible if you only focus on managing contracts, and it requires a high level of trust among each entity of the supply chain. This trust brings to light some of the things we do that cost others money.” — Ken Pinto, Kenzai USA
“The biggest impediment to the efficient delivery of products to the jobsite is the lack of product-level detail of what actually needs to be delivered. The biggest step that could be taken would be to adopt a process that includes product specificity and systems integration from the onset of activity.” — Felix Vasquez, Hyphen Solutions
What is the No. 1 step builders can take to weather the next recession, whether it comes next year or in five years?
“The most important thing home builders can do is spread out their debt maturities and refinance, where possible, through longer-term fixed rate debt at these current attractive low rates. Historically, if you look at home builders who got in trouble, it was typically due to the right side of the balance sheet. There were a lot of impairments on land and there was a significant price correction. Also, the duration of the land extended because the market slowed so significantly. With going out of business risk, the liability structure is really the key. So managing liabilities prudently by spreading them out is important. That is what I would focus on as priority No. 1. So you look at the maturity schedule and you identify the near-term costs of debt repurchase if that’s needed.” — Jade Rahmani, Keefe, Bruyette & Woods
“The primary action builders can take is to reduce land exposure. This action can take several forms and should likely include all of the following: less outright land buying, shorter land deals, less raw land and more finished lot buying, utilizing land bankers to off-load risk, and greater use of options on friendly terms and non-recourse joint ventures. All this demands the builder become a much more efficient vertical builder, which is the biggest impediment to builders implementing all of the above.” — Stephen East, Evercore ISI
Will the mergers and acquisitions pace of the past couple of years continue into 2016?
“As we enter 2016, factors that drove the last few years of M&A are still relevant, but they are beginning to play a smaller role. At the same time other drivers are beginning to play a bigger role: Markets with limited land availability may best be expanded in or entered through an acquisition whereby both a land pipeline and management team can be brought on board. Newly minted publics and some larger regionals are using acquisitions to grow and expand their geographic footprints. Builders who survived the downturn do not want to go through another one. And this is especially true for many survivors who are in the later stages of their careers. They recognize that selling the business is probably their best, and perhaps only viable, exit strategy. It’s a lot easier for estate planning to split cash than split a home building entity, and not all children are equally able. And the best time to sell is when there are potentially multiple interested buyers. Ultimately, we feel that there will still be an active M&A market in 2016, albeit perhaps not as active as the last several years and perhaps limited to fewer markets. After 2016, our crystal ball is a bit fuzzy.” — Michael Kahn, Michael P. Kahn & Associates
As builders look to unlock the entry-level market, will they venture farther out to C and D land positions in the next year?
“The answer is dependent upon each market and submarket. That being said, I personally believe the size of the millennials’ buying contingent, as well as the less-than-wealthy boomers’ appetite for new homes, is nearly overwhelming when compared to the past 10 years of housing activity. I believe those price-conscious buying groups will go to both urban/suburban infill attached homes and detached homes in C and D locations. The key for success in the C and D locations will be identifying which municipalities have the least expensive fees, so the builder can keep its fixed costs low and operate in a regulatory environment conducive to its high-volume business model.” — Jeff Handlin, Oread Capital & Development
What is the most important step builders can take to ensure that the products they spec are healthy, meet code, and won’t get them sued?
“Become as knowledgeable as possible and don’t stick your head in the sand claiming ignorance. Making informed decisions about product selection can help keep you out of court and out of expensive callback situations. Start by putting at least one person in charge of tracking information on the materials incorporated into your homes and make them responsible for communicating key information to team members. Prioritize the most common building products that could create health consequences for your customers and conduct research on potential hazards. Where possible, use independent, third-party product certification services. Ask your product distributor to take an active role in screening building products they offer. Finally, subscribe to membership services offered by BuildingGreen, Green Building Advisor, and the Healthy Building Network.” — Larry Zarker, Building Performance Institute