In its production office, Eagle Construction of Va. keeps a "countdown" chart that tracks what this Glen Allen, Va.–based builder needs to accomplish to finish the year in the black. "We're getting close," said Eagle’s president Bud Ohly in October. Close enough that Ohly confidently projected that his company would deliver 135 homes this year, versus 128 in 2008, and "make a little money."
Despite so many unanswered questions—about foreclosures, unemployment, bank financing, unpredictable publicly owned competitors, and fickle home buyers—builders continue to prepare for better days ahead. They haven’t lost confidence in their companies’ ability to ride out the storm and turn things around. Nor have they lost faith in the industry and its seminal place in the U.S. economy.
Some builders also recognize, however, that business will not fall into their laps as it did during the last boom, and to recapture lost ground they must regain the trust of consumers, lenders, investors, suppliers, and even their own associates.
"We want the housing boom back, but we know we’ll have to earn it," says Corey Barton, owner of CBH Homes in Meridian, Idaho.
This article is the second in a new series, Ten for '10: Ideas to Build On, which we’ll be publishing throughout next year. It focuses on 10 ideas builders should consider to capitalize on the early stages of market recovery.
CHANGES THAT LAST
Understandably, most builders are having trouble focusing on growth opportunities these days, after experiencing four years of rejection by customers, banks, and the market in general. During that stretch, more than 80 major companies (ones that built 100 units or more annually) have suspended construction, shut down operations entirely, or fell into bankruptcy, according to estimates from "Builders Gone Bust," a listing of distressed companies on Builder Online.
This "cleansing period" hasn’t been entirely negative, in Ohly’s estimation, because surviving it has forced builders to streamline their operations and business models in ways that should make them stronger. Many have embraced energy-efficient construction and intensified training and development of personnel.
The question is whether these trends have staying power, or will they be marginalized once business conditions return to normal. Builders say they are committed to change. Some can even point to their past performance as proof.
Harwood Homes in Agoura Hills, Calif., was one of the fortunate builders that kept its debt and construction in check. The builder didn’t lose a single project to foreclosure. "We saw early on that people were buying homes they couldn’t afford, so we pulled back," says its president Mike Simon. While Harwood isn’t building homes right now, it is "mapping and adding land" in anticipation of a comeback.
Dick Lombardo, president and CEO of Harkins Builders in Marriottsville, Md., thinks now is the time for builders to re-establish relationships with trade partners; they are "hungry" for business and willing to negotiate on price. Builders who put their procurement house in order during the recession stand to gain the most.
To that point, though, Gary Dahl, a former Lennar executive who is CEO of Builders Choice Sourcing Group, a Sacramento, Calif.–based outsource procurement service, notes that the recession exposed deficiencies in the ways small and midsize builders buy labor and materials. "A lot of them still don’t pay close enough attention to the scope of their subs' work," he observes.
One area where the recession seems to have altered builder attitudes the most is land acquisition. Though opportunities abound—several public builders in their third-quarter conference calls reported that they are aggressively pursuing development deals—private builders are reluctant to jump on them. They don’t want to be saddled with land on their books.
This is particularly true, of course, of insolvent builders such as Ennis Homes, based in Porterville, Calif. At the market's peak, Ennis had around 1,200 finished lots and 5,000 mapped lots. But since filing for Chapter 11 protection in early February, Ennis Homes "has been selling land like crazy," says owner Brian Ennis.
What some builders are putting on their land is different, too. The downturn has given builders time to ponder whether the homes they build match the demographic and financial profiles of current and future customers. Some have adjusted their house plans and construction practices to produce smaller, greener, and less-expensive houses without sacrificing quality.
“We went back to the drawing board to go after every dollar we could by reducing waste and simplifying construction,” says Bill Cellar, who owns Providence Homes by Bill Cellar in Jacksonville, Fla., which will close more than 200 homes in 2009, versus 147 in 2008. The effort allows Providence to build more affordable base houses and offer customers the alternative to pay for options and upgrades. “Our product has to be priced right, because we’re competing with 10- to 15-year-old existing homes, short sales, and foreclosures. That’s what the market’s going to be for the next few years.”
FINDING NEW BUYERS
In this process, builders have rediscovered first-time home buyers. Some say their infatuation will outlast the downturn. But will it, given the propensity of builders in the past to build homes that fetch the highest price and greatest margin?
“That’s the $64,000 question,” says Nelson Chung, president of Pacific Communities in Newport Beach, Calif. “Granted, there are a lot of first-time buyers out there. But they don’t have good credit, so it’s hard to get them qualified, and they don’t have the down payment.”
Barton of CBH Homes notes that demand for his company’s smallest (around 900 square feet) and most economical homes hasn’t been that great. What’s been more useful from a sales standpoint has been the “value packages” that CBH offers to suit different customers’ affordability needs. “We’re finally understand-ing what our customers want and are asking for.”
CBH Homes has experimented with texting, blogging, and other interactive media to stay in contact with brokers, agents, and customers. Barton is not sure how effective this is, though he acknowledges “it’s not something that you can do a little of, or sometimes.”
Richard Elkman, president of Group Two Advertising, thinks builders must do a much better job reaching customers via the marketing platforms these buyers are most comfortable with. “A lot of builders think that all you need is a website,” he says. “But builders don’t have a strategy for analyzing the potential of their traffic. And what [builders] need to ask themselves is what’s your [market] position, what’s your competition, what’s your goal, and what can you afford?”
As they prepare for the future, builders should also be asking themselves if their companies are staffed correctly and sufficiently.
Across the industry, builders laid off anywhere from one-half to two-thirds of their workforces. Those personnel cutbacks were particularly drastic in the field, where access to labor is also limited because there are far fewer immigrant workers in the U.S. It would be difficult for many builders to ratchet up their operations significantly if business conditions suddenly improved.
But builders aren’t eager to elevate their production to boom-era levels, either. Virtually none of the builders interviewed has been replenishing their management teams with new hires. Most say they are content to rely on a “core” of essential associates who will be the foundation of leaner operations with fewer employees and supervisors.