WHEN HORACE HOGAN PULLED UP TO THE HEADQUARTERS OF the Brehm Co. in Sorrento Mesa, Calif., one day in April 1999, he didn't know what was coming. He and Woody Brehm, company founder, CEO, and board chairman, would lunch in nearby Del Mar, he supposed, and, “catch up with one another.” Instead, Hogan, Brehm, and two of Brehm's management team climbed into Woody's silver Dodge Durango and drove northeast into Riverside County at the southern end of what Californians called the Inland Empire.
Throughout the afternoon they looked at parcels of land, but none looked quite right to Hogan. His instincts were rooted in discipline and experience. Hogan graduated Harvard with a master's in city and regional planning with a concentration in real estate development. Since 1978, he's worked in Southern California, including the Inland Empire first as a student intern for Mission Viejo Corp., a large master plan developer and builder, and later as vice president of sales, marketing, product development, production control, and project regulatory compliance. In 1989, he co-founded Pacific Gateway Homes.
As the afternoon waned, the group visited a parcel in the Murrieta area that looked like it offered better possibilities for development. Brehm asked Hogan to work up an idea of how the land might be developed. Hogan agreed.
Hogan didn't know then that the trip had been a job interview. Neither man knew the parcel would become the first of many highly successful and profitable projects for the company in the Inland Empire. And no one imagined how together these men would thoroughly remake and ultimately transplant this deeply rooted San Diego builder in the following few years.
Looking Outward Brehm had considered building in the Inland Empire for close to a decade, but there was never enough time to explore the unfamiliar market. The reason to explore new territories could not have been more fundamental: land.
“I am somewhat of a dinosaur, having come up through the field, and I've known that if I ever stop growing mentally it would harm the company, myself, and all the people here. I had to make sure that my mind-set never impeded the company,” Brehm says.
First as a consultant and later in his present position as president and COO, Hogan helped Brehm make, “a pretty aggressive move into [Riverside] County,” Hogan recalls. Hogan put together a plan for the site and helped secure it for the company. “We created a mini master planned community with four different housing products starting under $200,000 and going up to just about $300,000,” he explains.
It was an ambitious project—457 lots, which was more than double the company's yearly closings then. To finance the project, Brehm secured funding from Hearthstone, the largest institutional investment management firm in the U.S. dedicated to residential home building, with whom Brehm and Hogan had worked before.
The project became Vintage Reserve and an unqualified success. In 2001, it won the grand award for excellence and three other Laurel awards from the Sales and Marketing Council of the Building Industry Association of the Inland Empire. And it established a pattern for many of the projects that followed.
Brehm continued to move north in the Inland Empire, developing communities such as Canyon Lake, Sheraton, Montage, Moreno Ranch, Wildomar, and Blackmore Ranch. This expansion was fueled in large part by Hearthstone, which has invested more than $570 million in a dozen Brehm projects since Vintage Reserve—in excess of $95 million last year alone. More is reportedly on the way.
Weighing The Risks With the advantage of hindsight, this string of successes can appear almost inevitable. In reality, they were anything but. Success masks the magnitude of the risks taken—and the formidable organizational and operational challenges that had to be bested—as Hogan led the company's move from its native habitat into new business territory.
Certainly, the Inland Empire market offered some clear advantages. The cost of a lot in San Diego typically is 300 percent more than a lot in Riverside County. There's more land available, too, held by a variety of farmers, dairymen, investors, and developers rather than a couple of large landholders, as is the case in nearby Orange County, Hogan explains. “It was a lot more of a level playing field and a lot more opportunity,” he says.
The economy is vigorous and is fueled internally by robust job growth and externally by home buyers from Orange, San Diego, and Los Angeles counties looking for more affordable housing.
Despite these advantages, transplanting operations to the new area was a formidable job. The most critical problem was people.
“The primary concern we had initially was that we didn't know the subcontractor base [in the Inland Empire] at all,” Hogan says. “This company has a strong focus on value engineering and producing a quality product.” The company's experience building single-family homes and condominiums in an environment where construction problems and defect litigation have been all too common strengthened its resolve “to produce a product that performed in a superior manner and didn't become subject to those sorts of legal challenges,” Hogan explains.
Months of thorough due diligence touring other job sites, seeing what was being built, evaluating quality and workmanship, and speaking with the trades on the sites made it clear to vice president of operations, Tim Godfrey, that the quality Brehm needed wasn't going to come from the existing subcontractor base.
“I think there was so much work up there and they didn't have supervision to control it. They were just bombing out houses. We had to create the standards up there,” Godfrey says.
The company acted decisively. It recruited consultants, retired architects, and individuals who did single-home and multifamily inspections to walk the jobs, inspect everything, and train both site managers and contractors. Management brought contractors in to discuss the standards Brehm expected. “We have very strong documents when it comes to scopes of work,” Hogan explains, “so we wanted to make sure everyone understood what we were looking for and the compliance we expected.” The company convinced some San Diego subcontractors to travel into Riverside County—paying a premium for labor—and formed blended teams to raise the overall quality level. The programs proved successful. Today, local subcontractors perform all but a small fraction of the work.
Tackling Turnover Retaining employees was the other critical challenge. Moving its headquarters into northern San Diego County to facilitate operations in Riverside created a long and prohibitive commute for many employees. Management knew where people lived, stuck pins in a map, and “identified key associates that we wanted to retain and the means by which we might be able to soften the blow in terms of moving the office north,” Hogan says.
Locating the new office near the Carlsbad train station, providing a company vehicle to transport employees between station and office, and purchasing rail passes to pay the additional expenses helped. Additionally, “we put together packages for the key members of the team to try and retain their services,” says Hogan.
Despite all the company's efforts, employee turnover was 88 percent in 2001, the year of the move, says Marcy O'Connell, human resources manager. Yet the company was able to retain about two-thirds of its senior managers. “It wasn't fool proof,” says Hogan, “but we were pretty pleased with the way it worked.”
The management team was brought back up to strength by the addition of two vice presidents: one for planning and acquisition; one for forward planning. With these additions, the team today, “is a real blending of a home builder and people with more development background,” Hogan says, that reflects “the nature of our business in Southern California.”
Recasting The Business Simultaneously, Brehm's marketing changed along with its locale, products, and buyers. For most of its history in San Diego, Brehm built reasonably priced homes for first-time and first move-up buyers, but escalating land prices had changed that. With the move into the Inland Empire, Brehm homes were more affordable, lots and products were bigger, and the marketing emphasis shifted, explains Alice Cummings, senior vice president of sales and marketing.
“In the past five or six years, the size of our product has probably increased an average of 1,000 square feet per house,” she says. “We're seeing more demand for the four-car garage. We have more extended families so the granny suite is showing up in our projects, too. We are stressing square footage and value now more than we do status, for instance, which we used to do in some of the higher-end communities in San Diego.”
Of course, affordability is relative. When Brehm began building in the Inland Empire, its products started at about $200,000. Today's products start in the high $300,000s, with prices in a community opening next year running into the $700,000s.
Rapidly rising home prices are just one of the ways in which the changes Hogan and Brehm brought about have worked out better than either could have known. While they could see the market moving in the right direction, “we did not anticipate the strong growth” at a pace Hogan calls “absolutely torrid.”
Today, the business is a flexible mix of building and development. Hogan cites one recent project in Lake Ellsinore as an example. In November 2001, the company closed on the land for $2.5 million. It made various improvements on the property, graded it, and sold it for more than $20 million in just a year. “That was more than we thought we were going to make from building the houses when we went into the deal,” says Hogan. Another project still in progress has earned more than $23 million so far, thanks in large part to the sharply higher value of the land. “Everyone looks real smart when those kinds of things happen,” Hogan says. But the fundamentals of supply and demand are the root cause, he adds.
In fact the only downside for Woody Brehm is emotional. He thought the company would continue building in San Diego even as it shifted its center of operations into Riverside County. But that hasn't proved to be the case and he had to let go of roots he'd put down for three decades.
There's no question, however, that the move has been hugely successful and worth all the effort. In fact, Brehm counsels other builders faced with a similar situation to make their decision—and make their move earlier rather than later.
“If you think you should make a move, do your homework, feel comfortable with your people, talk it over with your key management, and see how you're going to implement it, but don't wait,” says Brehm. “Don't grow just for growth's sake. But if you think it is an appropriate business decision, do it.”
It is home to some 3.4 million residents—about the same number as Connecticut and slightly less than Oregon and Oklahoma—and growing rapidly. The population more than doubled from 1980 to 2002. Another 1.6 million residents are forecast by 2020, according to the U.S. Census Bureau and the Inland Empire Economic Partnership, a private, nonprofit development group.
Home buyers embrace the area for its booming economy, thriving job market, and housing that offers an affordable alternative to areas such as San Diego, Orange County, and Los Angeles.
The Inland Empire has added jobs every year since 1983, right through the state's serious recession of the early 1990s. From 1990 to 2002, there were 340,820 new jobs created in the area; that's almost 63,000 more than in San Diego and nearly 90,000 more than in Orange County. More than 400,000 new jobs are forecast by the end of this decade, driven by an influx of manufacturing, distribution, technology, service, and other sectors.
The area boasts a $77 billion economy, the IEEP says. Personal income jumped nearly 500 percent from 1980 until 2000, putting the Inland Empire on a par with Iowa and ahead of Kansas ($74 billion), Nevada ($60 billion), and 18 other states.
Compared to California coastal communities, the Inland Empire offers new home buyers downright bargains, and surveys indicate buyers are increasingly willing to commute as much as two hours to grab them. The median price of a new Inland Empire home in the third quarter of 2002 was $257,000 compared to $330,000 in Los Angeles, $415,000 in San Diego, and $512,750 in Orange County.