Rod Cullum harbors no illusions about his ability to compete directly with the big guys. “When we do the analysis and look at the risk/reward scenario and the hierarchy in our market,” says Cullum, a custom builder in Scottsdale, Ariz., the numbers just don't add up for many popular housing products. “In the starter market, there is no supply, but I can't compete in that market as a small builder ... . As a small builder, you can't control enough land to produce enough product to make that profitable for you.”
So Cullum has moved in the opposite direction from his high-volume counterparts. At Cullum Homes, he builds truly high-end custom homes, spending two to three years constructing residences that sell for $2 million to $7 million. “It's a very small sliver of the market,” acknowledges Cullum, who did $10.5 million in revenue last year. But it is one that has brought him profitability and protection from the national companies that dominate his Southwestern market. (Public home builders qualified as eight of the 10 largest builders in Phoenix in 2002.)
As national builders, both public and private, control an ever-increasing percentage of housing activity, more small builders are thinking like Cullum, seeking and finding safe havens for their companies. These niches may be market segments, like Cullum's high-end homes, but they may also be product offerings that only you provide in a crowded marketplace—universal design, urban lofts, specialty infill, or developments that mix new construction with rehab. Or you might go geographic, finding a refuge in seaside communities or rural areas that hold little appeal for national builders seeking the advantages volume brings.
Your business will thank you. “I've reviewed suburban home builders' net margins, and I'd find another line of work if I was working for those margins in suburbia,” says Mack Bissette, CEO of the Springfield Restoration Group, which builds historically accurate new homes in historic Atlanta and Jacksonville, Fla., neighborhoods. (In Atlanta, it operates as Springdale Homes.) “The only way it works in suburbia is if you have economies of scale.”
Discover Your Specialty Where is your niche? That depends on you and your competition. “The best niche is at the intersection of what you do really, really well and what is difficult for the big builders to do,” says Al Trellis of the Mt. Airy, Md.–based Home Builders Network, who's counseled countless builders on improving and focusing their businesses.
For Los Angeles builder Structure Development, that niche emerged when company founders realized that many of L.A.'s residential lots were about the same width—50 to 60 feet. Now Structure goes after teardown buyers, offering them new homes sized for L.A. city lots, along with demolition services. “There's an enormous amount of product that needs to be developed and land in L.A. that needs to be recycled,” says Robert Kleiman, who serves as Structure principal with Mark Sapiro. “There is a huge need to redevelop old neighborhoods.”
But the scattered sites involved in such work generally make it unattractive to big builders, leaving Structure with its own Southern California niche as well as an unexpected benefit. By building on a customer's land, on a lot already zoned for single-family, “we eliminated the nightmare of builders—the long, up-front entitlement process,” Kleiman says. “There is no controversy in the neighborhood, because we are improving real estate values.”
If you're searching for your sweet spot, Trellis suggests making two lists. One of them should include things you as a small builder do well, what you do fairly well, and what you could do well if you learned how. The other list should include things that your larger competitors typically don't do well because of their size and priorities, what they could do well if they wanted to, and the areas in which they excel, thanks to their advantages. Look at the areas where the two lists overlap (if you prefer, this can also be done graphically through Venn diagrams, which rely on overlapping circles to express relationships between ideas), and you'll find your niche, just as the builders profiled in this story have done.
What you may discover is that your best opportunity for going niche lies in specializing within a specialty. That means building not just infill but infill lofts. It could be constructing not just beach homes but also substantial remodels of beach homes. It may mean creating not just custom homes but seriously luxurious custom homes with eye-popping price tags. “You've got to stay out of efficient markets,” says Bissette, because larger companies have too many advantages over you. “We look for inefficient markets. In historic urban infill neighborhoods, there has been a lack of capital, a lack of construction expertise, and a lack of financial backing because of crime concerns and the perception that things will never change. You've got to see things change and know it before anyone else does. It's a timing thing.”
Thanks to that sense of timing, Bissette expects Springfield Renovation Group's revenue to double this year, from $13 million in 2003 to $26 million in 2004.
Prepare for Challenges Moving into a niche isn't necessarily easy—the leaders of small home building companies not only have to develop a concept, they have to execute it, too—but the future of your business could depend on it. “It's not easy for the little guy to beat the big guy,” says Trellis. “But can a small- to mid-sized builder evolve, learn, change, and do what's necessary to compete with the guys who have the natural advantage?” Of course.
You just have to prepare yourself for the challenges. In many smaller markets, you will have less pressure from the biggest builders, but the tiniest builders still will nibble at your margins with their lower overhead. “In D.C., the people we competed against were the same size, in terms of volume and people,” says Mark Martin of Sandmark Construction and Real Estate, who moved in the mid-1990s from the suburbs of Northern Virginia to the Outer Banks of North Carolina, where he now does beach homes and substantial renovations, generating $5 million in revenue in 2003. “Here we're competing against someone who does two homes a year.”
The labor pool is often more limited. “You have to manage your business properly because there is no excess labor here,” says Lance Johnson of Lance Johnson Building Co., which builds in Northwest Arkansas. “The subcontractor community is stretched to the max.” But even if labor is ample, their expertise may not be. In Arizona, Cullum employs 31 people, many of whom handle the detailed tile, floor work, and cabinetry in his multimillion-dollar homes. “You pretty much have to have a flawless house,” he says.
Just as niche builders must manage around a smaller number of available workers, they must also prepare to appeal to a smaller, more specific group of buyers. In Seattle, for example, architect/developer Val Thomas just completed the 19th Avenue Lofts, a building of primarily one-bedroom units with 13-foot ceilings, steel balconies, wood ceilings, and concrete floors. “They're not the type of housing for everybody,” he admits. “They're for people who want something that challenges them.”
Plenty did. Priced in the $200s, all but two of the 19th Avenue Lofts sold within two months of the building's opening.
Such specialty housing products also demand that builders have a sophisticated understanding of the potential buyers. In Detroit, Crosswinds Communities rehabilitated a block of 1890s row homes as part of a 500-home new development called Woodward Place at Brush Park. But in a nod to the uniqueness of the restored townhouses, the rehabs are known as the Brownstones at John R. “It gives those six units a completely separate identity,” explains Spencer Roed, senior vice president at Crosswinds, who says the Brownstone buyers differ significantly from the new-home buyers at Woodward Place, despite the fact that they are basically purchasing in the same community. While demographics between the two groups are similar, the psychographics are not. “The people who want rehabs are people who really want a rehab,” Roed says. “They have more money, they want to be different, and they want something that not everyone else has.”
Reap the Rewards Of course, pushing the market is always a gamble, but niche builders say they must be willing to roll the dice. “If you're looking to stay ahead of what everybody's doing, it does require more risk,” says Thomas, the loft developer. “It takes more risk because you're looking to prove a new market area every time.”
And greater risk also brings greater rewards. For successful niche builders, margins can be higher, referrals are better, and the competition is limited, giving small builders the confidence that they have found a safe port that they will be able to defend.“
Yes, I have a smaller piece of the [new-home buyer] pie—people ordering the new Maybach or Ferrari or Mercedes SL 600, people who are the heads of companies or have recently retired and sold their companies,” says Cullum. “There are only 55 to 60 homes a year that sell in this category in Phoenix. But my competition is fairly finite, so they're easy to track and follow.”
A former appraiser, Bissette watches neighborhoods closely. “We're always asking, ‘Is it time to go in?'” If the government has begun reinvesting in the community, other developers are involved, and homeowners appear committed to updating their own properties, the builder answers that timing question with a yes. “We're looking for change,” Bissette says.
The formula appears to be working, judging by the company's growth. (Revenue is expected to double in 2004, to $26 million.) Last year, the company expanded to Jacksonville, Fla., where its homes have already won accolades from local historic groups. More cities may be on the way: Bis-sette thinks that Tampa, Fla., might be next. And, after years of scattered-site building, the company is now working on its first subdivision: a 47-unit community in Atlanta.
People don't want to move “because they can't find a lot with a view as good as what they have, or they've known their neighbors forever,” explains Martin, who completed nine major renovations in 2003 in addition to new construction and minor remodels. The substantial renovations are big jobs, often doubling the size of the house and costing the client more than $400,000. One popular option: adding a tower, which provides additional bedrooms and vantage points for beachgoers. “We try to maximize ocean views,” Martin says.
It's a satisfying specialty for Martin, who says there are fewer competitors than in new construction, where land costs have skyrocketed. As the land supply tightens in the Outer Banks like everywhere else, the renovations keep his subs busy and his volume up. Plus, he adds, the major renovation work “is something we enjoy, just to see the house transformed from what it was.”
Almost immediately, he began testing universal design features in his homes: putting a bedroom and bathroom on the first floor, widening doorways, and adding a zero-entrance-step entryway. “It was all under a $400 change,” Wendt says. “It was so simple. That's when we made the decision to go forward.”
Four years later, Wendt Builders only does universal design. Each of the 50 homes it builds a year includes subtle touches designed for its active adult residents. Bathrooms have handheld showers, garages have stoplights that indicate just how far the car can be parked in the garage, and switchplates near the front door have 911 flash switches, which make garage lights blink on and off, speeding emergency workers' arrival at the right house after a 911 call.
Sales are strong and growing, according to Wendt. All the press attention and strong referrals haven't hurt either. “Word of mouth has been our best sales tool,” the builder says.
What Wal-Mart has done is expand tremendously—and required its suppliers to do the same, especially in the area surrounding Bentonville, Ark., where the discount retailer is based. It has benefited small builders like Johnson, whose 40 closings and $9 million in revenue for 2003 make him a good-size builder for the area. “We sell a lot of homes to Wal-Mart employees, but as Wal-Mart grows, they are requiring all the vendors who do business with them to have a local office,” says Johnson, who notes that new subdivisions get dubbed “Vendorville” because of the obvious connection between the new residents and Wal-Mart.
Despite the absence of national builders, Northwest Arkansas remains a competitive market. “Everyone's a home builder,” Johnson says, and “everybody's who's not a home builder is a developer.”