Hard Times and Green Shoots

Signs of Spring

A Dwindling Workforce: Layoffs, correspondingly, are on the rise.

But even in 2009’s harsh business landscape, some companies have found pockets of opportunity—and are developing ways to exploit it. Texas builder Edward Servigon of Servigon Homes expects his company’s closings to be up 45 percent through 2009 compared to 2008, and he identified three growth sectors: “Urban infill, on-your-lot, and developer-assisted-exit communities.” In a follow-up interview, Servigon explained that his company’s strategy involves helping municipalities use Community Development Block Grant funds to expand affordable housing opportunities for urban dwellers—while also helping developers finish and sell out stalled projects.

“We’ve been able to join up with certain cities and develop a plan to do workforce housing,” says Servigon. At the same time, he’s helping “troubled developers” get out from under partially built neighborhoods where builders have gone broke or pulled out. “They can’t sell lots unless there’s a building on them, typically, but they’re not builders. So we look at the communities and help them figure out what’s best to put in that community and finish it out.”

It’s different work from Servigon’s earlier production building experience. But it’s a matter of adapting to new realities, he says: “In the past, we used to create a market—wherever we put a flag, that’s where people would come. Now, we’ve got to go where the market is.”

Cary, N.C., builder Wayne Holt of DreamLiving New Homes is also finding opportunity amid trouble. “We knew there were going to be new-construction foreclosures that would need to be completed and sold,” Holt explains. So he pitched the idea to banks he was already dealing with for his construction financing and teamed up with an old friend in the real estate business. “We sold the seven homes I had standing coming into 2009,” says Holt, “plus two homes that we took in trade. And I sold a Parade of Homes house that I built from the ground up. So we’re going to end up with 10 closings this year, up from five last year.” And that’s not counting the income from numerous bank-owned projects that Holt has finished up for banks, listed, and sold.

But some builders aren’t playing a new game—they’re sticking to their basic game plan (albeit with a few adjustments). In the Las Vegas market, production builder American West Homes saw closings rise 55 percent in 2009. Major price cuts helped, says company vice president Leslie Bausher: “We opened up 2009 with price reductions as large as 30 percent,” she notes. The company also opened a new affordable community: “With homes of 1,216 to 2,188 square feet priced from $188,500 to $238,500, the community successfully competed with foreclosures. We sold 46 homes in this community [in 2009], so it has been the major contributor,” she adds.

But American West also made 37 sales in a 9-year-old community where the 3,000-square-foot–plus plans sell for $299,500 to $378,500. Says Bausher, “It is the ultimate proof that the right product in the right location will sell, given the right price.” 2009’s total of 140 closings is a far cry from the 700 the company used to see in a good year, she says—but it’s a big improvement from 2008’s “abysmal” total of 92.

Flagging Income, Sagging Sales: Survey respondents have earned less money each year since 2007, the result of a decline in sales. (See graph "Will Your Company Increase, Decrease, or Keep Closings Consistent in 2009 vs. 2008.")

And in Ohio and Indiana, production builder Fischer Homes is rolling with the changes: Volume has bounced back 15 percent in 2009. “We’ve always viewed the business cycles as normal,” explains CEO Bob Hawksley. “So you watch the signs, you see it coming, and then you stop buying at the height, and you start buying at the low. And right now, there are opportunities for people who are well capitalized and run a good ship.”

Fischer has benefited from the failure of small competitors, says Hawksley: “The lenders have really pulled back credit for the businesses that aren’t as credit-worthy, and that has heavily affected some of the smaller guys. Some of that business has fallen into our camp.” At the same time, big national companies have pulled back: “Beazer and Ryland cleared out of Cincinnati, and Centex pulled out of Columbus. We acquired some of that.” Fischer has also expanded into Indianapolis—the home city of competitor C.P. Morgan, who, in Hawksley’s words, “went poof” in February of 2009.

Fischer’s cautious approach to development has helped, Hawksley says. “We keep land development operations entirely separate from home building operations,” he explains. “It’s a separate profit center, it does arms-length business with our home building side, and it is a different risk model. People who put land development and home building together, and put the lot and development costs into their home building margins, are going to ultimately go out of the development business. Because it entails a different risk, and it requires a different margin than the home building business.”

 

Toward the tail end of the boom, says Hawksley, he watched competitors invest in lots at four times the cost his own analysis could justify. “We just sat on the sidelines and shook our heads and said, ‘Wow. How are they getting that to work?’ And we didn’t jump in,” he says. 

Now, says Hawksley, businesses that made smart choices before the downturn are set to reap rewards coming out of it. “We think there is opportunity to pick up bargain land in our markets and to grow and capture market share. Our costs are in pretty good shape. Our margins today are not what they were in 2006, but they’re still higher than our expenses. And we are surviving it and positioning ourselves to really capitalize on it coming out.”

BUILDER'S 2010 "State of the Industry" survey sought to obtain data from builders about market conditions, challenges facing their companies, and their strategies for coping during the recession. In October 2009, we sent e-mails to 15,000 readers and received 381 responses. Web consulting firm Synergy Interactive managed the e-mail blasts, and Specpan, a market research firm, managed the results.

A Dwindling Workforce: Builders who employ large numbers of workers are disappearing from the survey sample.