Local Leaders: Luck of the Draw

Click here for Builder's interactive 2007 Local Leaders list.

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Credit: Lonnie Busch

In the debacle that was the housing market in 2007, strategy took a back seat to serendipity for many builders. When two choice neighborhoods in Baton Rouge, La., opened themselves up to more residential development last year, Robert Clegg pounced. Clegg is president of Baton Rouge–based Penn Construction, one of this market’s leaders in closings last year. During that time, it purchased 11 lots in the Fairhill subdivision in the Bluebonnet neighborhood in the south part of the city, and 10 lots in the Spring Lake subdivision in Claiborne Parish. Penn also acquired 30 lots in nearby Central Parish, where it will build its first starter homes, priced from $180,000 to $200,000. Clegg expects his company to build a total of 50 homes in 2008, versus 30 to 40 in previous years.

The same thing occurred in Louisville, Ky., where Ball Homes recaptured the top spot last year after projects that had been delayed in 2006 finally kicked in. “Some stuff started to come on line,” says vice president of construction Mike Ball, including a 200-lot development in the Flat Rock Ridge neighborhood and a 90-lot development in Oldham County.

That Penn Construction, Ball Homes, and other builders across the country found opportunities to acquire land and construct houses might seem anomalous in a year when permits nationwide were off 33 percent, starts fell 25 percent to their lowest level since 1991, and new-home sales dropped 26 percent, the biggest single-year washout on record.

Builder’s 2007 Local Leaders rankings reflect that volatility in the national housing arena (see charts, page 80). The list, which ranks the top 10 builders in 50 metro markets by their closings as a percentage of permits issued in those metros, bears only the faintest resemblance to the 2006 rankings in ­several markets. Yet, a good number of builders shook off the industry’s paralysis and picked up market share through luck, timing, and making tough decisions about scaling back their businesses to meet lower demand. A few even made bold moves (and, more commonly, price concessions) with an eye toward future growth. “Now is not the time to run away,” says Jairo Alvarez Botero, president of Alvarez Construction in Baton Rouge, whose business success during this time is a validation of his own personal triumphs over adversity (see “The Impossible Dream”).

Highs and lows

Eight markets fell off of this year’s list, ranging from the resort-focused Myrtle Beach, S.C., to depressed Detroit. Among the industry’s giant production builders, a financially fragile Beazer Homes dropped out of the top 10 in six of the 50 largest metros, and the industry’s largest builder, D.R. Horton, fell off in three ­others. Former leaders, such as Neumann Homes in Chicago and Trend Homes in Phoenix, succumbed to bankruptcy. And while WCI Communities teetered, other high-rise condo developer/builders were well represented among the top closers in several markets. Magellan Development, for one, was identified by Crain’s Chicago Business as last year’s No. 1 builder in home sales in greater Chicago’s six counties.

But don’t look for a repeat of this trend in 2008, as the condo market’s halcyon days are already a memory in many markets. Hallier Properties, doing business as ­Panorama Group (Panorama being its brand), ranked ninth in closings in Las Vegas in 2007, when it delivered a 33-story tower with 326 units, in which it closed all but 10 by early April 2008. Its first tower, delivered in 2006, had closed all but four of its 308 units by this spring. But Marc ­Ehrlich, Hallier’s president and COO, says business conditions for condos in this market are “horrendous,” with more than 3,000 units available on Las Vegas’ Strip alone. His own company will deliver another tower, with 320 units, in the third quarter. “I don’t think another high-rise will be built here for five years,” he predicts.

Credit: Lonnie Busch

Marked (down) to market

Las Vegas was typical of soaring metros whose wings got clipped by the subprime mortgage mess and a precipitous falloff in housing demand. Las Vegas’ foreclosures tripled in 2007 to 60,000. Two of its high-profile master plans—Focus Property Group’s Inspirata and Kyle Canyon—in March 2008 received default notices on about $765 million in debt, according to The Wall Street Journal. But at the same time, Focus’ Mountain’s Edge, with 1,740 net home sales in Las Vegas, was certified as the country’s top-selling master plan in 2007 by the consulting firm Robert Charles Lesser & Co.

Florida’s limping housing market offered similar contradictions. Most of the $270 million in impairment charges that KB Home’s Southeast region took last year were in the Sunshine State. Yet the Los Angeles–based builder assumed the top ranking among Local Leaders in ­Orlando and Jacksonville, and rose to second in Tampa from seventh in 2006. “When the markets adjusted, we moved quickly to reevaluate our product positioning,” explains Vince DePorre, KB’s region president in Jacksonville. That meant offering smaller, more affordable house plans in its communities. KB also aimed its marketing more directly at renters, who became a “huge” component in its sales last year, says DePorre.

Pricing was the overriding factor in many markets. Jerry Gillis, CEO of FaxonGillis Homes in Memphis, Tenn., notes that when bankrupt Levitt & Sons exited his market last year, it liquidated finished lots—whose hard costs Gillis estimates at between $28,000 and $30,000—for between $17,000 and $18,000. That allowed some builders to come in with homes ranging from $89,900 to $110,000, or $15,000 to $20,000 below what had been the lowest-priced new homes in the market. “A starter product had been what was missing down here,” says Gillis, whose company ranked second in closings in Memphis. FaxonGillis’ sweet spot had been a home selling for $275,000. “I don’t know how sweet that is now,” he says.

In Fort Myers, Fla., the poster child for the housing industry’s grief, GL Homes is building aggressively in a popular area known as Treeline Corridor. The builder’s gated Botanica Lakes community, which includes a clubhouse and ­community center, includes 1,200-square-foot starter homes selling for $179,000. “There is nothing like it in this price range down here,” says Patty Campbell, president of GL’s Florida West division. As of early April, GL had closed 250 of the 685 units it plans to build in this community’s first phase, with unsold houses “in the teens,” says Campbell.

Prospect Homes rose to third in closings in Richmond, Va., last year, from seventh in 2006; and its president, Joe Audi, attributes his company’s gain to bringing a lower-priced product into its communities. “Our average price used to be $365,000, but now 35 percent of our mix is priced under $200,000, which attracts a different type of customer who usually doesn’t have a house to sell,” he says. Centex emerged as the top builder in Sacramento, Calif., and Raleigh, N.C., two markets whose competitive environments could not have been more different. In each, Centex offered “transparent pricing,” with no discounting and only nominal incentives. “Buyers loved it because they didn’t have to rely on their negotiating skills anymore,” says Doug Pautsch, Centex’s division president in Sacramento.

Credit: Lonnie Busch

Faint signs of life

Beyond price, builders broadened their approaches to luring reluctant buyers. In Minneapolis, Key Land Homes emphasized its willingness to customize its 100-plus house plans “to whatever the customer wants,” says vice president Kevin Horkey. Prospect Homes provided advice to buyers about how they should price their existing homes for optimum selling potential.

Home Creations turned itself “into one big sales machine,” says Jalal Farzaneh, president and CEO of this builder, which ranked first in closings in Oklahoma City last year. From the third quarter in 2006 (when its business started trailing off) through the following six months, Home Creations used 10 billboards to promote a 5.75 percent fixed-rate loan it offered through a local mortgage company. And to boost customer traffic, the builder paid its employees $20 for each prospect they brought to its show home.

Home Creations added salespeople last year and is increasing its active communities in Tulsa, Okla., from one to three. Farzaneh notes, too, that by consolidating certain operational responsibilities, his company was able to expand into Vancouver, B.C., where Home Creations is investing in four projects. Home Creations owns 65 percent of one subdivision in suburban Richmond, B.C., where the builder will build 140 condo units that will sell for around $400 per square foot. Other builders, though, are less confident about their immediate futures, as the housing industry’s recovery remains ­uncertain. “I’m hoping we’re as bad as it’s going to get, but I can’t paint a rosy ­picture right now,” says Ball of Ball Homes. Gillis expects his company’s business to be off 40 percent this year. “We’ll struggle to hit our target of 77 homes closed.”

But Clegg was buoyed when Penn Construction sold eight homes in the first two months of the year. KB still looks at Florida as “a great bastion for growth,” says DePorre. And GL, which is based in Sunrise, Fla., is “getting ready to start building again,” says Campbell, because “there are still a lot of people moving here.” Hampton Pitts, Centex’s division president in Raleigh, says his company continues to look for growth opportunities “in a prudent and cautious way.”

Audi admits he’s lowered his projections for Prospect Homes’ 2008 sales since the beginning of the year. But this spring, his company was also negotiating to buy 109 lots that it could take down over a 36-month period. Audi sees evidence that the market is bottoming out and points to a Centex community in Midlothian, Va., called Cambria Cove on Swift Creek Reservoir. “People were ­waiting on line” to buy homes built along the water, says Audi. “Buyers are out there; you just have to know what they are looking for because there’s a lot of product for them to see.”

The Impossible Dream

An immigrant from Colombia has created one of Louisiana’s most successful home building companies.

Alvarez Construction, which has built homes in Baton Rouge, La., for two decades, last year started its own development company in a very big way. Its first project, the 108-acre Jamestown at Old Perkins, will include 227 homes, 110 condos, 106,000 square feet of retail space, 133,000 square feet of offices, and 24 acres of parks, trails, and preserves.

The $100 million project, which should begin construction this summer, is the latest chapter in the eventful, and sometimes rocky, life of Jairo Alvarez Botero, a native Colombian who first came to the U.S. in the 1960s as a student with only $100 in his pocket. Now 70, Alvarez, his wife, Anita, and their three children run a $26 million enterprise that ranked second in closings in Baton Rouge in 2007, according to Hanley Wood Market Intelligence. It also ranked first in the number and value of permits, according to the Baton Rouge Business Report. Alvarez recently added a RE/MAX franchise to his stable and is “looking to complete the circle” through the acquisition of a mortgage company.

Alvarez’ prosperity in America, where he’s a citizen, is a far cry from his humble beginnings in Colombia, where he escaped poverty by joining the army. As an officer in the Presidential Guard, he helped thwart a military coup against the country’s leader, at considerable personal risk. When he returned to his country in 1966, after graduating from Albany (N.Y.) Business College, Alvarez worked for a number of companies before starting his own construction business in the mid-1970s. But as guerilla attacks against the Colombian government continued to escalate, Alvarez relocated his family to the U.S. in 1984. For the next seven years, he ran a yogurt and ice cream parlor in Baton Rouge, through which he came into contact with a local developer, Bob Richardson. Richardson sold Alvarez his first lots in a subdivision called Shenandoah Estates for $18,000, reigniting his construction career.

After Hurricane Katrina demolished his family’s beach house, Alvarez Construction has shifted away from building luxury homes priced in the $800,000s to more affordable products selling for $150,000 to $200,000. “The most important part of my success has been to take into consideration the cycles of the economy,” he says.

Residential construction and family are only two of Alvarez’s passions, which he describes in his recent memoir, No Such Thing As Impossible. Ever since his days in Colombia, Alvarez has been a champion cyclist. He still competes, finishing fifth in a 40-kilometer Senior Olympics event in April. And over the last decade, Alvarez has raised $11 million for St. Jude’s Hospital through an annual raffle of a $300,000 “Dream House.” He is donating the proceeds from his book to various charities in Colombia.