BY LATE JULY, MERCEDES Homes was 45 days into its due diligence period with a builder that served the Washington, D.C.-Virginia market, which Melbourne, Fla.-based Mercedes wants to buy. Mercedes builds in North and South Carolina, so Virginia makes sense, geographically, for expansion. But for Keith Buescher, Mercedes' president, three basic factors will ultimately make or break this deal: having the right people and sufficient capital in place, and being able to find land. The first two, he concedes, are “a lot easier to come by” than the third, “especially in the [D.C.] market, where land availability is impossible.”
Any growth-minded builder can relate to Buescher's concerns. But as they scramble frantically to find the next pot of gold, it's clear their expeditions aren't governed by set rules. Closer looks at four companies that have expanded into new markets within the past 12 months, and one whose new division recently embarked on “Year Two,” reveal that each places different importance on such things as pre-entry market research and post-entry advertising. Each also has its own way of exporting its corporate culture.
But their actions affirm that success or failure of a new division rests with the leadership and market savvy of the person they install to manage it. And it would be hard to overestimate the value of experienced construction managers to keep production moving fast-forward, or local brokers who can provide much-needed advice about everything from land values to local zoning politics.
TREADING CAREFULLY When Indianapolis-based C.P. Morgan Communities decided the time was right to expand outside of its home state of Indiana, its officials were careful to a fault about selecting that breakout market.
This builder spent 18 months analyzing 25 markets before choosing Charlotte, N.C., which it entered on Jan. 3, 2005 (although it had been purchasing land there for several months). During the exploratory stage, Morgan retained the National Association of Realtors' research staff, which provided demographic and economic profiles of each market. The builder also sent “cross-functional” teams to several markets to obtain first-hand observations, says Mark Boyce, Morgan's executive vice president of development.
After paring its choices to finalists that included Tampa and Cincinnati, Morgan picked Charlotte, but not before getting an earful about the market's potential speed bumps from Karla Knotts, a vice president with Knotts Development Resources, a local real estate broker whom the builder retained as a consultant. She red-flagged Morgan on Charlotte's native quirks, such as builders who can't get appraisals for basements, and how pre-selling is “abnormal.” Knotts nevertheless lauds Morgan for the depth of its reconnaissance, “which was far more extensive than what other builders have done.”
Charlotte might have attracted Morgan because no builder there captures more than 7 percent market share. Boyce also spoke approvingly of Charlotte's “strong population and job-creation growth.” More than 20 of the division's 60 employees came from the Indianapolis headquarters. Still, certain specialists, such as the division's purchasing and land managers, came from local ranks.
Morgan is building initially in five communities within this eight-county region. Knotts says the company has 4,000 entitled lots under contract, but Boyce wouldn't disclose Morgan's sales or closing targets for Charlotte. It's a safe bet, though, that the builder will use this market as a template for future expansion.
BORDER CROSSING When Holiday Builders' Pensacola, Fla.-based Gulf Coast division, which celebrated its first anniversary on June 14, started considering expansion late last year, opportunity knocked only 15 miles west, across the Florida state line. Baldwin County, Ala., a fast-growing area that welcomes between 4 million and 5 million tourists annually, has a population that's projected to jump 60 percent to 227,000 by 2020.
Holiday entered Baldwin County last fall and signed its first contracts in early 2005 for six communities within existing subdivisions, says Ron Tuttle, president of the Gulf Coast division. To find land, Holiday turned to local broker Troy Wilson, who runs Daphne, Ala.-based ERA Class.com Realty. Wilson knew Tuttle from when the two worked for The Mitchell Co. “My involvement with [Holiday] is looking at the market to see what's best suited for their product,” says Wilson.