Houston-based Castlerock Communities would be well on its way toward its goal of operating in 15 markets in nine states, if market conditions were healthier. Maybe it’s a good thing that they aren’t. CEO Greg Yakim sounds almost relieved to be operating a smaller company in only three relatively stable Texas markets.
“Right now, we could be a 400- to 800-unit builder and make money,” says Yakim, whose company is on pace to close 450 homes in 2010. Within those markets, Castlerock controls more than 2,400 lots, with only $300,000 in earnest money committed to land options. And the company, for all intents and purposes, is debt free.
Even as business consultants tell builders to concentrate on building sustainable, profitable companies in a limited number of markets, some builders are hatching expansion plans. They aren’t motivated by achieving safety in regional diversification as much as by seizing opportunities and by their natural entrepreneurial instincts.
But expansion doesn’t make sense right now, says Chuck Shinn, a financial consultant who works mostly with smaller and midsized builders to achieve profitable growth. “Most private [builders] are just hanging on for dear life,” says the principal of Shinn Consulting in Littleton, Colo., whose surveys show even the best builders lost money over the last two years. “Why do they need to expand? They should be focusing on improving their profitability.”
True enough. But that doesn’t make builders such as Yakim, a former Kimball Hill Homes executive, any less covetous of the opportunities he sees in Sacramento, Calif., and Phoenix, markets where his former employer used to operate. “We’ll go to places that we already know well.” But he adds quickly, “We’re in no hurry.”
Other builders aren’t as reluctant; they are seizing opportunities, created by a weakened industry, to expand into markets they perceive as desirable. M/I Homes diversified from its Midwestern base into Houston, one of the best-performing, largest housing markets in the country. D.R. Horton strengthened its Florida presence by entering Sarasota. Lennar entered Atlanta, another of the country’s largest markets. Ashton Woods Homes stormed Raleigh, N.C., and Austin, Texas, two of the healthiest markets. And the PulteGroup moved into the fertile Pacific Northwest by virtue of its merger with Centex.
These maneuvers are exceptions to the rule, though. Far more builders are adamant about confining their growth to existing markets, and they are aggressively buying and optioning land in those places to prove it. “Geographic expansion is not a near-term priority for us,” says Jim Zeumer, a spokesman for PulteGroup, which operates in 67 markets in 29 states. Barry Gittleman, vice president of strategy and land for John Wieland Homes and Neighborhoods, answers “absolutely not” when asked whether his company wants to expand beyond its five markets in four Southeastern states.
While most builders seem to be taking a bottom line–oriented approach to growth, the question is whether that will continue once the market picks up again. Ken Campbell, CEO of Irvine, Calif.–based Standard Pacific, doubts that some builders can resist the urge to pounce on what looks like a great deal outside their territories. “A lot of companies are driven by ego, which remains remarkably intact even after the downturn,” he says.
Campbell insists Stan Pac isn’t looking to expand. Instead, it’s focused on digging deeper into its Southern California base. In August, the company acquired the rights to purchase 468 acres in Northern San Diego, where it plans to build 737 homes and sell developed lots to other builders.
Steve Hilton, CEO of Meritage Homes, is pursuing a similar strategy. He points out that there’s “plenty of room to grow” in the dozen markets where his company already operates. Meritage currently commands less than 5 percent market share in each of its markets, compared to other public builders that, in better times at least, commonly captured up to 30 percent of sales in certain markets. The Scottsdale, Ariz.–based builder has designs on becoming an even bigger player in its hometown: In the first half of 2010, the company spent nearly $100 million for 2,800 lots in the Phoenix area.