WHEN WE STARTED COMPILING OUR FIRST BUILDER 100 list, the biggest companies were regional players, building only 10,000 homes a year. Highly leveraged and thinly capitalized, these businesses were often run by executives who had come up from the construction trades, and their management tools were pretty basic—a firm handshake, an innate ability to schedule and motivate, and an all-important gut sense for what land to buy and what home to build.
Fast forward to today, and you find some remarkably sophisticated companies at the top, run by executives with advanced business degrees who may never have swung a hammer. Yet they build 40,000 to 50,000 homes a year, and they do it in a systematic fashion, raising capital in the public markets and using research to determine what land to buy and what product will sell.
MBA NEEDED The biggest change in the last 20 years, says Pulte CEO Richard Dugas, “is the fact that we're all very professionally managed. What I mean by that is we're working on things like return on invested capital, vertical integration, and supply chain management.”
Plus, all the information needed to run the company is a mouse-click away. Beazer CEO Ian McCarthy recalls that even 10 years ago, he would ask his division presidents for sales and production information and it would take them a week to respond. Now, with computer systems, he can see every home, every margin, and every schedule behind every home. “I have much better control of a $5 billion company than I did of a $100 million company [10 years ago],” he says.
Despite their size, these mega-builders are better insulated from market vagaries than they used to be. They build in markets all over the country at a variety of price points. “We've got entry-level, we've got move-up, we've got luxury-production, we've got active adult, and we're also doing urban,” says John Landon, co-CEO of Meritage, sounding a familiar refrain.
The only market research done 20 years ago was driving around to see what the other guy was selling, then doing a variation on that theme. Now, it's not uncommon for builders to do psychographic studies on potential buyers before they buy a piece of land. “Focus groups, market research—we didn't do this 20 years ago,” says Steve Hilton, co-CEO of Meritage Corp.
The biggest companies used to be in debt up to their eyeballs. Today most have investment-grade debt. “The ability to bring Wall Street capital to the business and have long-term financing to finance long-term projects has really revolutionized the whole home building industry,” says Landon.
INHERENT DIFFICULTY Yes, the home building industry has made a quantum leap along the evolutionary scale, to be sure. But it's still held back in terms of productivity enhancements by the intense, local nature of the business—building essentially a different home on a different piece of ground every time. That makes it hard to achieve efficiencies.
“Our business is different,” says Ara Hovnanian, CEO of Hovnanian Enterprises. “If you're manufacturing toothpaste, the tooth-paste usage and the design of it is quite the same whether you are in Minnesota, New York, Southern California, or Seattle.”
And for that reason, even though the biggest builders are working on important initiatives, they aren't exactly cutting-edge. Says Dugas, “All these things are areas of business in general that would have been worked on by many companies, you know, 10, 20, 30 years ago, but they are just now getting into the building industry.”
The industry has come a long way. But it still has a long way to go.
Learn more about markets featured in this article: Seattle, WA.