Is there life after the downturn?
It's a question many builders have to be asking themselves as home prices keep falling, the credit markets keep tightening, and consumers curl up in a fetal position and remain on the sidelines.
It all looks bleak, and the future looks uncertain. So BUILDER asked more than a dozen builders around the country how they plan to get their companies through the next six to 12 months. A few are simply in a state of paralysis, while others are in holding patterns, living off inventories and assets they can liquidate, which they hope will outlast the downturn. "Many builders have or will shut up shop until 2010 or 2011, when a market recovery might be achieved," predicts Mick Pattinson, owner of Carlsbad, Calif.-based Barratt American. That is pretty much what he's done after Barratt lost its bank financing earlier this year.
But some builders, despite seemingly dismal prospects, can see daylight and believe their companies can remain solvent long enough to come out of this recession stronger and more aggressive. Indeed, several builders have been executing a "last man standing" strategy for at least a year with an eye toward picking up the pieces—especially personnel talent and land—left behind by failing or more desperate competitors.
"Cutting expenses is only one-quarter of the solution" to survive, says Jalal Farzaneh, CEO with Home Creations in Norman, Okla., whose business is actually up this year by 10% and is on track to close 420 homes. Farzaneh thinks builders need to spend more on marketing to explain the value of purchasing a new home versus an existing house. Farzaneh also recommends that builders align themselves more closely with Realtors and create incentives such as extended warranties to boost sales, "especially when you're competing with so many bank repos," he says.
Nanette Overly, vice president of sales and marketing services for Epcon Communities Franchising in Dublin, Ohio, also thinks it's a good idea for builders to link up with Realtors “that are working hard and in the market for the long haul." But any survival strategy must start with the products being offered, she asserts. Epcon recently rolled out a redesigned line of condominiums that targets empty nesters and emphasizes open and outdoor living space. "There are buyers out there, and you have to focus on those things that generate sales," says Overly.
Getting buyers to come out of their shells is a challenge every builder recognizes but considerably fewer are meeting. Having tried just about everything to resuscitate business over the past 18 months—including generous incentives, price discounts, two-for-one sales—some builders are justifiably nervous about what the immediate future holds for their companies and the housing industry. "It's going to be very tough," predicts Dave Brown, the 76-year-old CEO of Brown Family Communities in Tempe, Ariz., who has seen it all during his 47-year career as a builder. "I said a while back that this wasn't going to be as bad as 1985, but I was wrong." He counts 17 builders in his market that have either gone bankrupt or out of business. His own company expects to close 225 homes this year, from more than 1,000 in 2005.
Michael Lander says he was fortunate that his company, The Lander Group, a Minneapolis-based urban neighborhood developer, wasn't saddled with a lot of unsold inventory when the market tanked. Still, buyer demand remains dormant, and Lander has shelved or canceled six projects that were fully entitled and in their marketing stages. "I've cut my staff and am focusing on a couple of smaller rental projects, managing my assets and limited cash." In response to market conditions, MCZ Development in Chicago has been designing smaller, more affordable (under $250,000) homes and condos. "Our 2,100-square-foot model is now 1,850 square feet, is more efficient, better designed, and sustainable," says CEO Michael Lerner, who is considering offering buyers some kind of financing option that might revolve around tax and energy credits. But, he notes, "We're not chasing a lot of [land] deals like we used to."
What worries builders is that their efforts will be for naught until something changes in the psychology of buyers that is preventing them from re-entering the housing market in large-enough numbers to stabilize the industry. Chuck Miller, a builder in Boise, Idaho, says that consumers are going through a crisis of confidence about whether housing will continue to be a good long-term investment, about whether they can still qualify for a mortgage, and about whether the economy will slip deeper into recession. But John Walker, CFO of Seabrook Land Company in Pacific Beach, Wash., sees this problem in starker terms when he identifies consumers' "fear" as his company's most imposing competitor. "We get a lot of excited buyers [who] appear ready to go, but state the economy [as their reason] for wanting to hold off." As Walker, Overly, and other builders point out, and not without some frustration, there are still buyers out there kicking the tires who would probably pull the trigger if they could somehow secure financing.
Sales for Excel Homes, the modular home manufacturer in Camp Hill, Pa., will be off this year by 15%, but the company's four factories are "relatively booked" through November, says CEO Steve Scharnhorst. Excel hasn't been hit as hard by the downturn as other builders, he explains, because the markets it serves—from Atlanta to New England and as far west as Detroit—weren't as overbuilt as, say, Florida or California. That being said, Excel last year put into place a number of internal measures (which Scharnhorst did not elaborate on) to ensure that it would have enough liquidity to get through at least the first half of 2009.
Cash flow is, as always, the lifeblood of builders large and small. And if the downturn persists, more companies might eventually need to jump into bed with hedge funds or other investors as ownership partners just to keep their businesses afloat, suggests John Bittner, a partner with Grant Thornton, an accounting and tax-consulting firm. Until that eventuality, other builders are tapping less draconian revenue streams by diversifying their construction activities. Carmen Dominguez, whose Orlando, Fla.-based company built The New American Home in 2007, is pursuing more commercial work and recently filed to secure a minority contractor's license to build government projects in her market. Stanley Martin Homes in Metro Washington, D.C. has added staff to handle its burgeoning custom-home business, which produced 18 sales through July. "It's essentially a cash-based business rather than an asset-based business," says Steve Alloy, the builder's president. The Catskill Farms, a small builder in upstate New York, is executing a more fundamentals-focused survival strategy, says its owner Charles Petersheim: to make sure it doesn't lose any deals it has in motion.
Petersheim sounds like an eternal optimist when he conveys that his company continues to look for "great talent hitting the marketplace" and "great deals. Cash flow willing, it's a great time to lay the foundation for the next phase-in of our long-term strategic plan." And as bad as market conditions are today, there are builders preparing for brighter days and maneuvering for future growth.
Jim Soules, who recently sold his interest in Seattle-based The Cottage Company, says he's exploring a move "into the next generation of green homes," which he is convinced will emerge in such innovative markets as Seattle, Santa Barbara, and San Francisco. Magellan Development in Chicago is building an 87-story high-rise called Aqua with 275 condos, all but 14 of which had been sold through late September at an average price of $525 per square foot, which is "considerably higher" than what Magellan usually fetches, says co-CEO Joel Carlins. Aqua is part of Magellan's 28-acre Lakeshore East complex, whose leased units are now charging "the highest rents we've ever gotten," he says.
Yesterday, Fischer Homes of Crestview Hills, Ky., announced that it had purchased 1,303 lots in Columbus, Cincinnati, and Dayton, Ohio, from Beazer Homes USA. That deal breaks down to 242 developed sites and 294 acres that still need some development and construction work but will contain 1,061 home sites, says Brian Fannin, Fischer's director of marketing. Fischer paid Beazer a total of $2.9 million for this acquisition, which works out to $2,226 per lot. Earlier this year, it entered the Columbus market by buying 280 lots from Centex. Bob Hawksley, Fischer's president, tells BUILDER that a conservative land-buying strategy has been one of the things that helped sustain Fischer through the downturn. "We didn't buy a lot of land when things went stupid, so our land cost basis is probably 25 to 35 percent" lower than what other builders paid per acre. "If you're going to be in the land development business, it has to be a profit center."
The majority of builders, though, don't have the financial wherewithal to make such a bold real estate move. Most are probably more like Elite Homes in Louisville, Ky., which is getting by one project at a time. Its owner, Joe Pusateri, is working with a local bank to finish three homes left unfinished by a bankrupt builder. He's also talking to other banks about doing contractor-for-fee work. Elite has finished two "shell condos" in one building for $1 million each and has done six remodeling jobs this year, compared to one in 2007. "I would hate to lay off people who I will need back a year or two from now, or dismantle our organization that we have worked so hard to build," says Pusateri.
John Caulfield is a senior editor at BUILDER magazine. Boyce Thompson, Alison Rice, Jenny Sullivan, Ethan Butterfield, and Nigel Maynard contributed reporting for this article.
Learn more about markets featured in this article: San Diego, CA, Oklahoma City, OK, Columbus, OH, Phoenix, AZ, Minneapolis-St. Paul, MN, Chicago, IL, Boise City, ID, Orlando, FL, Washington, DC, Seattle, WA, Cincinnati, OH, Los Angeles, CA, Dayton, OH.