List Research By Loretta Williams
ACCORDING TO JUST about everyone, the odds are against the Next 100. Compared with public builders, these local and regional companies don't have the land, the capital, or the financial discipline to compete effectively with their national counterparts over the long term. Or so the odds-makers say.
Last year, the Next 100 closed more than 45,000 homes—a fraction of the BUILDER 100's closings and barely more than the largest publics, to be sure—but those numbers provide only a partial picture of these companies, many of which are more dynamic, creative, financially sophisticated, and profitable than one might expect.
“On the whole, the private builders that are well-organized and know their market can outdo the publics in almost anything,” says Chuck Shinn, who heads up Shinn Consulting and The Lee Evans Group, two Littleton, Colo., firms providing business management advice to builders. After years in the industry, he believes an annual volume of 400 closings represents the ideal-size home building company. “From a financial standpoint, they can afford the systems, they can manage the procedures, and they can be of a critical mass,” Shinn explains. “It seems to be the sweet spot where everything clicks.”
The Entrepreneurs And The Establishment
Thinking Ahead That's certainly true at Miller and Smith, a Virginia builder founded in 1964. Last year, the family-owned company delivered 351 homes and generated $199 million in the hot and highly competitive market of metropolitan Washington—just the type of place where one would expect a local builder to lose to the publics. “When the nationals come in, it raises the level of competition and winnows out the people who aren't doing the fundamentals properly,” observes Douglas Smith, president of the McLean, Va.–based company.
No such winnowing occurred at Miller and Smith, whose architecturally distinctive homes and neighborhoods cause buyers to camp outside for 10 days in anticipation of new releases. Such sales energy is not accidental, but the result of a decision Miller and Smith executives made a decade ago, when the nationals began arriving on the Virginia builder's home turf. “We saw in the mid-1990s that the home building industry was going to consolidate. In what other industry do the top 10 companies control such a relatively small part of the market?” says Smith, a second-generation builder. “We asked, ‘How do we differentiate ourselves?' We focused on the design of our homes.”
Today, the company rarely builds the same product twice, constantly devising fresh designs and floor plans every two to two-and-a-half years. Those ideas certainly get appropriated by other builders, Smith says, but the company worries little about the copy-cat impact; by the time imitations appear, “we're on to the next generation.”
Such innovations are on display in the company's conference room. Against the backdrop of Miller and Smith's contemporary offices hang colorful renderings of The Peninsula, a 500-home Delaware beachfront community that is the builder's first foray into the resort/second-home market. Located within a day's drive of D.C., the project is a natural extension of Miller and Smith's suburban Washington business. The single-family detached beach homes are expected to sell for $500,000, the builder's current average sales price; and likely buyers are the same affluent professionals choosing Miller and Smith's core product.
Claiming A Spot Of course, product innovations will stay on paper forever if a builder can't get the dirt, but Smith and other Next 100 builders say they've found ways to keep gaining ground. At Shugart Enterprises in Winston-Salem, N.C., CEO Grover Shugart Jr. says his company is returning to land development after taking a break from dirt to focus on home building operations. “We found out there weren't enough people for us to depend on” for a supply of 500 lots annually, says Shugart, who closed 483 homes for $61 million in 2003. “Since we couldn't get out of it, we thought we better get back into it.”
Back in Virginia, Miller and Smith also does its own land development, providing finished lots both to its own home building division and to other builders. It's a business the company has reassessed in recent years, deciding in 2000 to boost its typical land holdings from three years' supply to five years to stay ahead of the entitlement and demand curve.
Land supply and cost, while undeniably related, are two different issues for the Next 100 builders, who can't draw on the same checkbooks as their public counterparts. “The biggest complaint I hear is not ‘I can't get land,' it's the price of the land,” says Shinn. “Or they have to go hard earlier, buying land for cash before they've done all the due diligence. The publics have been bidding the prices up for sure.”
Craig Perry, president and CEO of Centerline Homes in Coral Springs, Fla., agrees. “We're doing the same land buys we've been doing,” says Perry, whose company delivered 466 homes in 2003. “I don't think the land is real constrained—maybe the price becomes too high for us and maybe the public home builders are willing to take the risk.”
Playing Smart And if there's one thing the Next 100 companies watch carefully, it's their costs. While these builders remain creative and entrepreneurial, the smart ones also manage their business tightly. In North Carolina, Shugart has aggressively reduced waste and construction expense so his entry-level homes offer both attractive pricing and value compared with his public competitors. “The easiest thing to do is increase the price [of the house],” he says. “We've tried to work real hard on controlling costs while not cutting the quality of the home.”
The initiative, which goes as far as telling flooring installers where to seam the carpet, has paid off: Shugart has improved his margins by a half-dozen percentage points while doubling his volume since the mid-1990s.
It's a telling example of how hands-on these Next 100 executives are willing to be to stay in the home building game. After all, they are quite aware of the pressure consolidation places on them. “The publics—they have staying power advantages, which are big,” Perry admits. “They are getting better buying power. They went out to Wall Street and got public money. They grow 20 percent a year, which is hard to manage, so I don't want to say it is easy to compete with them.
“But,” he adds, “the publics are only as good as their local operator allows them to be.”