Take a look at what builders tell the National Association of Home Builders their top 10 problems were, holding them back in 2016 and showing up as risk in their 2017 plans.
Four of them on the list--labor cost/availability, lot cost/availability, local hook-up, inspection, and impact fees, and materials costs--loom as even greater threats in 2017 than last year.
Take a look at the challenges again, and know this much.
Some of your peers are looking at that same chart and saying to themselves, "bring it on."
They're the ones who look at challenges that bedevil most of the other players in their business community and, instead, see growth. They see opportunity.
They're not the feint of heart. Mid-to-late cycle, mistakes can turn risks quickly into very deep holes that suck up resources and can paralyze a company for years, if they survive at all.
As a matter of fact, some companies will look at risk--risk that framers, or slab pourers, or dry-wallers, or the finishing trades are going to be hard to predictively manage through the start-to-completion schedule of their tens, or scores, or hundreds, or even thousands of homes in 2017--and their reaction to that risk may be, "give me this challenge; I'll deal with it. Others may be held back by this; not us."
It's not that these, perhaps, exceptional companies believe they'll avoid the forces--external, among partners, and internal--that oppose their growth and success. Immunity to risk is not an option. What's more, resilience in response to risk and being willing to take risks are different, but correlated competences among residential developers and builders.
And, we're hearing, some look at that risk to their volume-growth outlook and will double-down on their access to both labor and lots via the near-term first-best-option to deal with those constraints--acquisition.
Mergers and acquisitions are queueing up as we speak, and we expect that 2017 may set up to be an even more robust year for deals than last year. We expect there'll be some deals closing even in the next few weeks or so, focusing on the hyper-active Southeast, up along into Pennsylvania. A couple of motivators among potential buyers are right there on that list of builders' challenges, labor and lots.
There are several different types of organizations on the prowl for acquisition targets, looking particularly for strong single- or multi-market private operators who may be one capital infusion shy of two or three really good years of growth ahead.
- Small publics, still flush with cash and riding strong operational data over the past couple of years of recovery, but under pressure from the investment community to grow or get punished in their stock values if they don't.
- Big publics, also flush with cash and looking to access lots, local intel and relationships, and scale in an operational arena to flow more volume through an extant overhead infrastructure.
- Japanese or Chinese buyers--Daiwa House, Sumitomo, North American Sekisui House (from Japan), and Nanjing, China-based Landsea Group--looking to roll-up a portfolio of U.S. operators and real estate investments as an alternative to suppressed growth opportunity in their own domestic arenas.
- A fourth category of potential buyer we'd characterize as an innovation heat-seeker, a big company in search of a smaller player whose solved for an operational competitive advantage in either technology or workflow process. Think Clayton Homes, a manufactured home builder looking to break beyond its business-model bounds, both in real estate and lot acquisition and in operational processes, by buying stick-builder private home building operators.
Constraints, pain points, challenges like labor and lot costs will spur m&a discussions because there's always opportunity in better geographic and operational scale.
For sellers, the big motivators are pretty much the same as ever.
- Succession planning: founder-owners may look for a visible-but-not-immediate pathway to an exit, based not only on their age and their family's interests, but on the relative value of their land asset in light of the above companies' current hunger for a lot pipeline in a market where growth is occurring on a predictable model.
- Expansion: Some private builders need access to capital to fuel opportunity to iterate their current operational template in adjacent or related market arenas they know, and will look at selling as one way to cash in on that future opportunity.
- Need: Some builders, even with more access to acquisition, construction, and development finance money available to them in the market, are reaching a point where it's difficult for them to compete in their own market with bigger, more well-heeled competitors, and face having to sell or suffer degradation of their valuation because they can't bring a two- to three-year lot pipeline to the bargaining table along with their local expertise and proven credibility in the local market.
Either way, the fact is, some organizations and their leaders thrive on what's painful, subversive, and constraining for most of the others. Question is, do those Top 10 "significant problems" keep you up at night? Or do they make you wake up in the morning excited to know that you and your team have what it takes to turn them all into your exclusive opportunity to win the day?
