Before the recession, the Atlanta home building market had a somewhat unflattering national reputation (at least to national home builders).
“Before the downturn, Atlanta was known as a pickup builder market where everybody was competing on price,” says Michael Kahn, principal of Michael P. Kahn & Associates.
But then 2007 and 2008 happened. Banks crashed, unemployment soared, and many home builders in Hotlanta hit the skids.
“The pickup truck drivers all went to get jobs somewhere else,” said Metrostudy senior director Eugene James (who covers Atlanta). “Their credit was ruined in many instances. Those days are now gone. The only ones that continued to build were the large privates and publics. Now we look like the other large metros where the publics drive the market.”
In the past five years, a number of national home builders have stormed into the market to grab local privates. Last week, Wilson Parker Homes, the third largest builder in the market with 622 closings in 2015, was scooped up by D.R. Horton, the largest builder in the nation. In May 2014, D.R. Horton bought Crown Communities, which was the largest builder in the market at the time.
“It [that acquisition] put them in a dominant position in that marketplace,” Kahn said. “It’s a dial mover. When you’re at DR Horton and you’re the largest builder, you’re not going to get very much dial movement unless you do a fairly substantial transaction.”
Horton is not alone. In January, Taylor Morrison's corralled Acadia Homes & Neighborhoods. In December 2015, PulteGroup acquired John Wieland and in May Taylor Morrison bought JEH Homes.
In Nov. 2014, Century Communities bought Peachtree. And, that’s not counting some earlier deals where private equity bought stakes in Atlanta-based builders.
Why are these builders so interested in Atlanta? Why now? The answer lies in job growth, selling price, and simply geography.
The King of the Southeast
To Charles Schetter, CEO of Smith Douglas Homes, the value in Atlanta is obvious. “Atlanta is one of the three largest home-building markets in the country,” he says. “It’s the biggest in the Southeast. If you want to have a strong national franchise, you have to be in the Southeast. And if you can’t overlook the Southeast, you have to be in Atlanta.”
Schetter should know. Prior to joining Smith Douglas, he led KB Home into Atlanta with the 2003 purchase of Colony Homes, Smith Douglas's predecessor, back in the metro’s pick-up truck days. The market’s affordability has always been a selling point.
“With an average $220,000 price, you can get to a 20% margin and you can provide a quality home to the middle market,” Schetter says.
Beyond just being the largest market in the Southeast, Atlanta produces jobs. The market has had year-over-year employment increases each month since July 2010, according to U.S. Bureau of Labor Statistics Regional Commissioner Janet S. Rankin.
“There are very few markets as vibrant as the Atlanta market,” Kahn said. “Job creation and all of the other things that create reasons for people to want to buy homes."
That strength makes it obvious why the nation’s number one builder would want to be the top player.
“If you’re DR Horton and you’re already in a dominant position in the Dallas market, and you can become the dominant builder in the Atlanta market, that makes a great deal of sense.”
And, with energy woes throttling Texas, there could be room for Atlanta to climb back up to No. 1 on the starts list.
“The ... slowdown [in Texas] has shined a brighter light on Georgia, specifically the Atlanta market,” James said. “I do think that we will surpass Dallas and we’ll go back to battling for the No. 1 spot against Houston for construction starts over the next couple of years.”
With notables like Crown, Wieland, Wilson Parker, and Peachtree having already found suitors, the question is who's next. Is there anyone left to buy in Atlanta? “There are a few fairly decent sized builders that haven’t been put out for bids, but the ones that are left are certainly targets without question,” Khan said.
As the largest private builder in Atlanta with operations in Raleigh, Birmingham and Charlotte, Schetter knows there will be speculation about Smith Douglas. And, he’s adamant a sale to a larger builder isn’t in the cards. Instead, he wants to follow the path of David Weekley, Shea, and Ashton Woods and access the 8- to 10-year “multi-cycle” money in the public debt market. “As a private, we have no interest in selling,” he said. “The mission is to get big enough to ensure a solid financial foundation."
And, in some cases, Schetter sees some advantages to staying private. “There is a segment of land sellers who prefer to work with tier-one private regional builders,” he said. “It [the consolidation in Atlanta] reduces the competition for that segment of the land sellers and subcontractors.”
But not everyone sees inherent advantages in staying private among the growing list of public home builders in Atlanta.
“If a builder has decent lot positions and they’re doing any kind of volume and they’re a private builder, I think they’re a target for potential acquisition,” James said. “Some private builders want to be purchased, but the price tag isn’t large enough.”