The throttles of growth have gained a familiar, almost textured feel in the hands of home building executives: Develop new communities; expand into new markets; create new product designs; and find new ways to slice the customer lifestyle and value continuum. Yet for senior executives—like veteran pilots adapting to a new generation of long-range, computer-controlled aircraft—mastering those controls even in the best of times remains a work in progress.
Most builders are indeed enjoying a period of abundant demand and a rich backlog of orders. But as the largest builders look to sustain their long-term growth trajectories, it may not be long before the pressures to grow will come to be measured in G-forces.
Even as builders have gained new disciplines in securing lots and streamlining production, the sheer number of communities that must be developed annually to maintain long-term growth objectives has grown enormous in scale. And with every new project comes a new tangle of issues that can take years to iron out.
Just how these organic expansion efforts are fueling big builder growth this year—and their repercussions on purchasing operations in particular—becomes clearer in a new national survey of leading home building executives, commissioned by BIG BUILDER magazine.
Growth Initiatives When it comes to expansion strategies, virtually half (46 percent) of big builders surveyed said their companies planned to move into new geographic markets in 2004. Nearly as many (43 percent) reported launching initiatives to target new demographic markets. And 17 percent of executives reported plans to become more involved in multifamily construction, the study found. Nearly one-third of the nation's big builders also say they believe they will be able to boost their yield per home through better options and upgrades sales.
The study reflects the strategic views of more than 400 CEOs, division presidents, project managers, and purchasing directors among the nation's top 100 builders and firms building at least 100 homes per year, based on a survey completed in the fall of 2003.
Five things are clear from how executives currently view the market:
First: Builders need to brace for a steady invasion of new competitors coming over the horizon—as well as builders moving into new customer segments within existing markets offering a wider, more tailored array of product.
Second: Internally, builders are looking for new ways to leverage their purchasing operations, not only by consolidating supply lines, but also by trying to manage the broader supply chain process involving suppliers, distributors, and installers to root out inefficiencies (see “Power Purchasing” article).
Third: The variables that drive home builders' purchasing decisions continue to depend heavily on how they add value to the homes they build, either by the perceived value they offer home buyers in builders' showrooms, or by the hidden value they provide builders through simpler installation (see “Growth Options” and “Deciding Factor”).
Fourth: Builders are getting better at instituting and enforcing national account programs. While local product selection is still heavily influenced by what subcontractors prefer and distributors can reliably deliver, 33 percent of big builders now report that local managers can no longer override any national purchasing agreements. Suppliers, however, continue to struggle with how best to sell builders on a national basis while also supporting them on a local level (see “Point of Contact”).
Fifth: Builder optimism continues to be broad and pervasive. Coming off a year when new-home sales and production hit historic highs, 87 percent of the nation's high-production builders—and six out of 10 executives managing companies building less than 1,000 homes a year—still expected to build more homes in 2004 than the year before. In fact, only 1 percent of high-production builders and 4 percent of the remaining builders, respectively, expected to build fewer houses in 2004 than in 2003. The balance of executives expected this year's production would at least equal what they produced in 2003.
Critical Market Mass As big home builders continue to stratify into distinct volume tiers, so does their mix of growth strategies. That's readily apparent when the study's findings are broken out among three groups: high-production builders (producing more than 1,000 homes a year annually); mid-size volume builders (starting 250 to 1,000 homes a year); and regional builders (building 100 to 250 homes each year).
Among high-production builders, targeting new customer segments ranked as the most common expansion strategy for 2004 (by 59 percent of executives). Almost as many executives (53 percent) said their companies would also be moving into new geographic markets.
Acquisitions are expected to play an important role in accomplishing both strategies. Four out of 10 high-production executives (43 percent) said they expect their respective companies will acquire another firm in 2004 alone. Even a few mid-size builders (6 percent) planned to make acquisitions this year.
It's evident, however, that with only a limited number of desirable companies willing to sell in a given year, acquisitions won't be enough to fuel big builders' appetites for growth. As a consequence, builders are putting a high priority on expanding their market penetration within the markets they are already in or have recently entered.
Critical mass within a market is clearly important to executives like Richard Dugas, president and CEO of Pulte Homes. Dugas continues to see plenty of leverage and margin opportunities in market areas where a builder can cluster—and secure supply lines for—2,000 to 3,000 home starts a year versus only a few hundred.
The Bloomfield Hills, Mich.-based builder's joint venture with the Southwest's largest framing and foundation contractor, Pratte Development Co., is but one example of how Pulte is attempting to leverage its resources. The joint venture, announced in January, is intended to improve construction quality, supply chain logistics, and scheduling control in Pulte's Nevada and Arizona operations.
It's indicative, says Dugas, of the kind of measures high-volume builders are likely to take to improve operating efficiencies going forward.
So are Pulte's recent initiatives to roll out Del Webb active adult communities in Atlanta, Philadelphia, and New Jersey, where Pulte already has an existing presence. The expansion moves not only bulk up operations within geographic markets, but continue to drive growth within demographic strata.
Active adult product already represents about 37 percent of Pulte's production, which last year totaled 32,690 U.S. closings.
Segment Penetration The fact that Pulte has more than 100 new Del Webb communities reportedly in the entitlement-development pipeline, as well as a growing number of Pulte-brand active adult communities, suggests the scale and refinement with which builders are pursuing aging baby boomers in transition, among other demographic groups.
Pulte is certainly not alone. Beazer Homes, D.R. Horton, Centex, Shea, and a veritable “Who's Who” of other big builders continue to announce new communities targeted toward aging boomers.
Hovnanian Enterprises, with its Four Seasons communities in seven states, expects active adult product to grow from about 8 percent of 2002's output to about 13 percent of this year's production, and continue climbing toward 20 percent over the next couple years, according to a company spokesman.
And that's just one demographic group. Builders continue to diversify with comparable intensity into a variety of other lifestyle segments.
Toll Brothers' recent acquisition of Manhattan Building Co.—which it renamed City Living by Toll Brothers—is but one example of how a broad swath of big builders, including Lennar Corp., Centex Homes, and Hovnanian Enterprises, are fortifying their infill development teams to capture the growing number of high-income professionals who don't have children. One of the expected outcomes for 2004: A growing number of mid-rise, mixed-use, and even high-rise projects now in development by companies traditionally associated with single-family suburban homes.
Strategy Shifts It's not just big builders that are jumping into new markets and expanding into new demographic segments. Two years ago, Horace Hogan, president and COO of San Diego-area builder Brehm Communities, made a bold decision. Recognizing that land supplies in Brehm's native market were vanishing fast, Hogan effectively transplanted the company's operations north into Riverside County. The Carlsbad, Calif.-based builder, which built 90 percent of its 300 move-up homes in San Diego County in 2002, expects this year to deliver 90 percent of its 440 new homes outside its home market. And because the land is cheaper, the builder will be able to serve entry level as well as move-up buyers profitably.
As high-production home builders continue to become a formidable presence in more and more of our nation's markets, mid-size and regional builders are increasingly being forced to pursue alternative strategies. Among the options: Expanding further into multifamily and light commercial construction projects.
Multifamily construction already plays a significant role in big builders' 2003 project portfolios. Overall, 55 percent of big builders surveyed reported their firms were actively engaged in multifamily projects in 2003. High-production builders relied on multifamily a little less than the average; mid-size builders a little more.
The difference in throttle pressures between high-production and smaller builders appeared to be carrying over in 2004. Only 13 percent of high-production home builders said they expected their firms to become newly involved with multifamily construction. About 18 percent of mid-size and 19 percent of regional builders, on the other hand, said they expected multifamily projects would be a key part of their firm's growth agenda this year.
The disparity in strategies was more pronounced on the issue of light commercial construction. Only 4 percent of high-production builders expected to tackle light commercial projects, compared to 11 percent of mid-size builders and 16 percent of regional builders, the study found.
Prepare To Exit? For many mid-size and regional builders, another strategy under consideration remains largely unspoken: the exit strategy. But it seems unlikely that many builders will exercise that strategy in 2004; not so long as access to capital remains relatively easy and the demand for product continues to appear so strong.
Only 1 percent of executives, in fact, envisioned being on the selling end of an acquisition deal in 2004. That suggests both the underlying optimism builders continue to have in growing their businesses in 2004 and the degree to which buyout offers are rarely predictable.
Looking beyond 2004, however, the outlook promises to grow more challenging, especially for mid-size builders.
Big builders know their future growth depends on securing steady streams of new land packages. As a result, most are moving aggressively to hire local land—and increasingly, entitlement—experts to tap into property pipelines.
It won't be any easier for smaller regional builders, but many are still able to move more quickly and flexibly to seize infill and other pockets of opportunities.
As a result, while the vast majority of big home builders can count on another busy year in 2004, a number of senior executives, in all likelihood, will also be working hard behind the scenes buffing up their companies' operations and balance sheets.
The study was commissioned by BIG BUILDER magazine and conducted by Readex, a nationally recognized research company based in Stillwater, Minn. The resulting margin of error is +/- 4.7 percent at the 95 percent confidence level. For more information on the study, contact BIG BUILDER's editor Wyatt Kash at email@example.com.