A chieving the top spot in a local market is a coup for any builder, even if it only translates into 4 percent or 5 percent market share, a pretty typical figure for the leading builder. But being king of the hill can provide more than a PR boost. It can get a company first crack at the precious few parcels of land for sale in or near most cities. Subcontractors looking for steady work often pledge their loyalty to the hottest builders. And vendors will provide bigger discounts for bigger orders.
"There's a whole host of very powerful benefits which can translate to additional growth, which is why we think we've got the ability to continue to grow," says Robert H. Schottenstein, president of Columbus, Ohio-based M/I Homes. M/I boasts a phenomenal 20.1 percent share of its hometown market. That's the fifth largest share of any of the top 50 markets studied by Builder.
Only a handful of builders manage to take down such a Home Depot-like percentage of a local market--16 percent, 20 percent, or even 30 percent of sales. In most cases, these market leaders leave the No. 2 builder far behind. In San Diego, a D.R. Horton trifecta of builders--Horton, Continental, and Western Pacific Housing--created through a series of mergers since 2001, pocketed 16.2 percent of market share. That leaves second-place KB Home with only 8.4 percent and third-place Shea Homes with 7.1 percent, according to data compiled by The Meyers Group, a research firm based in Costa Mesa, Calif.
Indianapolis is another market with above-average consolidation. Atlanta-based Beazer Homes USA debuted in second place on the list of local leaders in that market, nipping at the heels of privately owned local builder C.P. Morgan, after acquiring 2001's top-ranked Crossmann Communities last year. C.P. Morgan and Beazer/Crossmann have tied up a combined 32.2 percent of the sales in Indianapolis, leaving third-ranked Davis Homes with a respectable but distant 8.6 percent.
In Columbus, the battle rages between M/I and Dominion Homes, who take turns at the top spot. In 2001, M/I held the top spot, with 18.7 percent market share, leaving Dominion to claim 17.7 percent of the market. That figure, says market analyst Ken Danter of The Danter Co., "would be gangbusters ... in any market except Columbus." But this year, Dominion claimed the throne, with 22.1 percent.
The granddaddy of market share remains KB Home's San Antonio division. KB has managed to hold onto the lead it inherited in 1995 when it acquired local hotshot Rayco. It commanded a staggering 31.3 percent of the San Antonio market last year, hovering high above D.R. Horton/Continental Homes, which weighed in at No. 2 with 15.8 percent. KB can lay claim to the biggest percentage of any top-50 market.
Strategy or by-product?
For some, market dominance is a core business strategy. D.R. Horton has made it no secret that it covets the No. 1 or No. 2 ranking in every market where it builds. It has set out to accomplish that by collecting smaller companies with strong standing in their local communities. The strategy is paying off for the Arlington, Texas-based big builder, which landed in one of the top two spots in 13 top markets in 2002 .
In some of them, the builder is winning by a mile. D.R. Horton and its newly acquired division, Milburn Homes, tucked away 27 percent of market share in Austin, Texas, topping KB Home's 19.2 percent share in that market. Horton also came out on top in Denver. Its family members Continental Homes, Trimark, and Melody Homes command a robust 19.8 percent of the market, besting Lennar Corp./U.S. Home at 11.8 percent, and long-time market darling Richmond American Homes (an M.D.C. Holdings company) with 11.7 percent.
Builders who have reached the pinnacle say it's a by-product of hard work, a dedicated team, a good product, affordable pricing, and a little bit of luck. "We don't get up in the morning and try to figure out how we can remain the No. 1 builder in Columbus," says Schottenstein. "We get up every morning and come to work and focus on the principles that have gotten us to where we are. If that results in our remaining the No. 1 business in Columbus, so be it, but we want to continue to grow our operation in Columbus without regard to any other builder."
Each local leader may capitalize on unique strengths to get there. But companies with robust market rankings typically responded with similar strategies to a few common building blockades.
One is growth through acquisitions. Just as D.R. Horton's trademark spate of acquisitions helped it leapfrog over market leaders in Denver and elsewhere, Beazer Homes USA propelled itself from fifth to first in the Charlotte, N.C., pecking order after pairing with Crossmann Communities, which ranked sixth in the market in 2001.
Even über-builders that can afford to buy their way to the top face risks and challenges along the way. San Diego's Western Pacific Housing, a D.R. Horton division, for example, changed its product mix to fuel its growth. The company turned its attention from single-family homes to low-rise condos in response to a dearth of land and a demand from underserved, first-time home buyers. A recession-confounding spurt of job growth has left area home builders unable to keep pace with demand, says Sherman Harmer, managing principal of the Urban Development Group in San Diego, who notes builders are putting up about one home for every three new jobs.
For Western Pacific Housing, low-rise condos represent a paradigm shift. The firm started work on three low-rise buildings in the heart of downtown San Diego at a time when many builders were shying away from lawsuit-prone new condos. It sold all 148 of the units shortly after it put them on the market.
"I'm not one to step out of the box too far, but if you are always following the pack, it's kind of hard to be dynamic," notes David Lopez, vice president of sales and marketing for Western Pacific Housing. He says the treble risks of building in a downtown location, offering condos, and working on unfamiliar low-rises looks to some "like we're stepping way out ... . But there's not much risk when you manage it properly."
Indeed, says Stacey Dwyer, D.R. Horton's executive vice president of investor relations, it's fair to say that there is less risk building in a booming market like San Diego, whose good economic fortune and downtown facelift have made it prime real estate, than elsewhere. "There seems to be a whole lot more reward than there is risk," she notes.
By contrast, San Antonio's job market teeters on stagnant, yet Dwyer says D.R. Horton and its Continental Homes division hope to whittle the immense gap between the No. 2 company and first-ranked KB Home. "We're not willing to lose money to do it," notes Dwyer, who says the company has not put a limit on how much it is willing to spend in its quest to unseat a reigning leader.
The firm regularly convenes an operating committee of top executives and regional presidents, who study each division's performance and move corporate funds to those making the best profits. Typically, she says, divisions that fare the best are the ones with the best opportunities to buy land. "The opportunity to grow," she says, "is directly related to the amount of land you can control."
Jeff Meyers of The Meyers Group concurs. "The biggest risk for home builders today is land, and it's also the biggest reward," he notes. "You've got to take a pretty significant land position in the market so you can get your pipeline of lots to hit the volumes you're trying to achieve." The amount of land a builder can control, top builders agree, is related to the firm's market share.
Being No. 1 "gets you a first look" at the best locations and largest lots, says Larry Oglesby, regional general manager for KB Home's Texas divisions. "It's not so much that you can get better deals," adds Schottenstein. "The key is to get the deals. You're not going to steal anything today because land is scarce and there is a lot of competition. The goal is to secure it and tie it up." Land owners, adds Rob Hutton, division president of Horton's Austin-based Milburn Homes, prefer to sell to builders who will "burn through those lots very quickly. If I'm carrying paper, I'll be cashed out."
Staying on top
Still, notes Lopez, "A good market makes heroes out of everybody." And standout success in a market, especially during an economic downturn, can position a well-heeled builder to reap even greater rewards once the outlook brightens. "If they have financial resources ... then they have the opportunity in poor times to push other builders out of the market, which lets them advance their market share," explains Jonathan Shaltz, a market analyst with Austin-based Builders Update.
At the same time, though, wild achievement in a local market bears some pressure to stay on top, says Greg Hastings, division president for D.R. Horton and Continental Homes brands in San Diego. "You can't build for the sake of being the biggest builder," he says. "We need to be the best builder." That means not settling for B-list land when top-of-the-line plots are harder to come by. "We have to rise to the challenge of replacing [inventory] year after year with good quality projects," he says.
Hutton, of Horton-owned Milburn Homes, agrees. "How do you stay No. 1? You train like you're No. 2," he says. "We try to stay No. 1 in Austin by approaching the business, sales, land sales, communities, construction, quality of homes, with the sense that we're No. 2 and we're trying to be No. 1."
Sharon O'Malley is a freelance writer based in College Park, Md.