The entrepreneur in American homebuilding lives – despite an array of emergent business and economic throes that will test the mettle of this stalwart breed of local and regional operators.

• The complexion of the market now sharply divides 2022 operational priorities from a later, mid-to-longer term future.
• Compartmentalization of the dynamics of demand – pre- and post-still unknown impacts of high inflation, supply chain chokeholds, and the effects on interest rates of a more aggressive Fed – have begun to worry more business sector strategists as an indefinite "things will get worse before they get better" time period lies ahead.
• Opportunity – both to survive and thrive – will split to those with either or both of heft and agility to serve and secure a resilient, stress-and-shock resistant buyer pool after the impacts of turbulence settle out.

Even in that context, a longtime bulwark of residential construction and real estate's business landscape, privately-capitalized, cycle-tested, and independent operators continue to counter-punch their way to market-by-market carve-out opportunities. Even as future market conditions hang under darkening clouds of high inflation and growing pressure on mortgage interest rates, nimble, agile, and able operators laser focus themselves on niche location, building types, and customer bases not just for survival but for runways to future growth against stiffening odds.

The News

Atlanta-based Grand Oak Builders, LLC, a homebuilder-portfolio company work-in-progress, has acquired Raleigh/Triad North Carolina-based Tradition Homes, a builder of townhomes, villas, and single-family homes.

Tradition, which will rebrand and operate as Grand Tradition under its current operational leadership team, with Van Smith – who started with Tradition after exiting from the prolific Raleigh-area private builder CP Morgan in 2008 – as president, and Dave Schenck, the principal partner in Tradition continuing as a lead advisor.

Grand Oak founding president and ceo Dave Erickson envisions the Tradition Homes deal – the second operator Grand Oak Builders has acquired in calendar 2022 – as the second piece of a larger puzzle.

We reported this past January 13 of the first such piece, the purchase of Kansas City-area operator Lambie Grand. At the time, Erickson – who'd started and sold Grayhawk Homes to American Southern Homes in 2019 – characterized his bootstraps-style roll-up strategy this way:

I'm basically a homebuilding and construction sector entrepreneur," says Erickson. "I know how to build, and I'd like to put together an operating portfolio, starting in one of the hottest housing market regions in the nation right now, stretching from Virginia down and through Texas, to ally with builders who want to continue doing what they do best while we add value both in capital and deep mentorship capability."

As criteria for what he looks at as essential to potential new pieces of the Grand Oak Builders puzzle, here's how he spells out the traits of future alliances.

• Do I like the market?
• Do I like the people running the operation and their team?
• Can the Grand Oak team step in an add value, improve outcomes, etc?
• Does it fit the funding and investment appetite?

A winning formula

Tapping into their own depth of relationships capital on the land and vendors, and leaning hard into a capability-driven operational strategy, even as competitive advantages stack up in favor of big, national, public enterprises, entrepreneurial, privately-capitalized operators continue to see a winning small-ball competitive model to build local and regional power-houses practically under the noses of the big nationals.

My basic nature is to optimize what we're doing and see if we can add some value to an operation like Tradition, and then go on an look for another piece of the puzzle for this private investment vehicle if it makes sense," Erickson says. "Tradition at its essence is a moderate scale production company set up primarily to do townhomes, and what they really need for a growth runway is capital, so that's where we fit in to help that team. We'll see if we can help with support on the operations end as well."

Now that a strong economic recovery and an unabated structural demographic housing demand stream are showing signs that they may be vulnerable to the financial shocks of inflation and interest rates – not to mention graver uncertainties related to the Ukraine war humanitarian crisis and its widening effects – future-forward investment, acquisition, and business combination activity will peel back to reveal urgencies and motivations on both sellers' and buyers' sides of the deals.

Of course, there's an element of caution out there, and we're not about to start going crazy on the acquisition front," Erickson says. "We're always going to make sure we have enough dry powder, and be ready for the opportunities ahead."

Word is foreign-based strategic and financial acquirers continue to troll both the land and homebuilding operator landscape in search of the favorable demographics, population, and household growth trajectories in the U.S. Too, portfolio management – for either geographical market pivots or exposure to surer-shot customer segments in light of possible deterioration among price-sensitive buyers – will continue to spark motivation among buyers, although public homebuilding company stock value declines may dampen some of the more aggressive M&A activity..

For sellers, urgencies span a gamut of reasons. The age and succession-plans of founders and principals, the risk around personal loan guaranties, and constrained capital holding back a winning operational or land formula continue to work to fuel operators' interest in selling or taking on investors.

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