IF THERE WERE A PIE CHART depicting how the heads of small- and mid-sized builders spend their time, it would reveal a clear trend: These builders are devoting more of their time to finding and developing land.
“Land will be the most serious issue the industry will face in the long run,” says NAHB economist Gopal Ahluwalia.
Few smaller builders would argue with him. Already, many report dramatic increases in the price of land. Builders who, until recently, bought only finished lots have started development arms to capture the middleman costs, while others have begun to hire employees who are devoted to hunting for ground.
Five years from now, they say, land acquisition and development will consume even more of their time as big builders continue to buy up large parcels and government regulations lengthen the entitlement process.
Philip Nanula, president of Essex Homes of Western New York, describes land in Erie County as scarce, despite the fact that only about 1,200 building permits are pulled there each year. It's due, he says, to upstate New York's aging infrastructure—sewer capacity in Clarence, N.Y., has been pushed to the max—and the lengthy local approval process.
“What used to take two and a half years now takes four,” Nanula says. Builders may have to alter their development strategy to achieve their business plans in coming years. “You'll have to start earlier and plan for [projects] to take longer,” he suggests.
Some builders in Pennsylvania adopted a different strategy: They pooled their resources and bought land together.
When a 380-acre plot of land in suburban Philadelphia went up for sale three years ago, builder Frank McKee couldn't resist. Though his company specializes in attached homes and the land included 120 lots zoned for single-family homes, McKee fought other proposals—including some from national builders—to win the contract.
The Springfield, Pa.–based builder turned to two area builders, John Dewey of Dewey Homes and Matt Thompson of Thompson Homes, when he decided a month later to sell the single-family lots. The three entered into a joint venture, with McKee retaining the townhouse lots; Dewey and Thompson each agreed to build 60 single-family homes off a common product line.
The builders rave about the project, with the homes selling faster and for more than projected. Dewey says he'd do it again, though he cautions that the venture was more complicated, legally, to get started than he expected. He attributes much of the success to working with builders who share his goals. “As a group, we're much stronger than we would be as stand-alone builders,” he says.
In 2003, the top 100 builders captured 34 percent of new-home closings, a trend with few signs of fading. So how will small builders compete with their larger counterparts in the future?
Some say specialization is the answer. “You have to find a niche,” says Mike Dishberger, CEO of Houston-based Sandcastle Homes. In his market, three-story, more luxurious town-houses are common; Dishberger has responded with a two-story, less-equipped model that he describes as “a slam dunk.”
In Huntsville, Ala., builder Mike Friday says he competes by offering a distinctly different product than the big builders. One key for his business, Woodland Homes of Huntsville, will be moving into multifamily construction, which Friday says is an underserved part of the market. “I have no problem competing as long as [the big builders] have their product line and price point,” Friday says.