The macro economy and the market-rate residential real estate and construction economy are heavily related and entwined, but not the same.

So, while, "lack of clarity about direction of economy and markets has put damper on M&A," in the macro economy, a parallel reality of would-be seller and buyer motivations continues to motor along on its own ebb-and-flow of local and strategic energy sources and reserves in homebuilding's domain.

Slowing down in the big picture, and even a quickly correcting set of dynamics within housing's discrete economic activities will not likely derail a number of new combinations and even more explorations of M&A deals.

The reason is relatively simple – an undeterred abundance of would-be acquirers courting an equally impressive cohort of potential sellers, whose motivation ranges across a broad gamut of reasons, from personal health, to family financial planning, to succession visibility, to exposure to personal loan guaranty risk.

This morning, news comes of a private-to-private acquisition, featuring Atlanta-based roll-up company Grand Oak Builders' purchase of single-market private counter-puncher, San Antonio-based Bellaire Homes.

For Dave Erickson's Grand Oak Builders, the deal represents his roll-up vehicle's third acquisition in 2022, the first being Kansas City-area homebuilder Lambie Custom Homes in January, and the second, Carolinas Triad area stand-out Tradition Homes in April.

What Homebuilders Need to Know About The Deal

Net, net, this latest combination pairs a serial start-up, multi-decade homebuilding entrepreneur in Dave Erickson with his third rifle-shot purchase. This time, Grand Oak adds a well-proven operator in the nation's sixth most-active new home market. Moreover, Bellaire's braintrust – consisting of a team lead by James Japhet and Ross Benline, who together have 60 years' experience in the San Antonio Valley – will stay engaged with the firm, availing of a deeper line of capital for growth in a market that could prove to be an exception to downward housing market trends thanks to its relative affordability.

A statement from Grand Oak Builders this morning summarizes details of the combination this way:

Grand Oak Builders, LLC, is pleased to announce the addition of San Antonio, Texas based Bellaire-Hagen, LTD, dba Bellaire Homes to the roster of Grand Oak Builders. Bellaire Homes is a production scale home builder with a history of design flexibility for individual customers in the San Antonio regional market. The new company will operate as Bellaire Grand, LLC dba Bellaire Homes.  Ross Benline, the long-time Chief Operating Officer of Bellaire Homes will continue as the President and Chief Operating Officer for the new company with James Japhet, the figurehead partner of Bellaire Homes, continuing as an advisor to Bellaire Grand, LLC.  Hazeloop-Walsh, LLC provided sell-side guidance to Bellaire-Hagen in the transaction.

“We are really pleased to partner with James, Ross and the Bellaire staff,” said Dave Erickson, President and CEO of Grand Oak Builders, “The Bellaire team has a well-established operating structure and over 900 lots as a pipeline for the future, which gives us a great launching pad for entry into the San Antonio market. We’re excited about the possibilities ahead as we build upon the great history of Bellaire Homes across San Antonio.” Bellaire Homes closed 113 houses in 2021 and is on track to close 126 units in 2022.

Ross Benline, the Chief Operating Officer for Bellaire Homes has been in the San Antonio market since 1996 and has been the COO of Bellaire Homes LLC in San Antonio since its formation in 2014. “We are extremely excited about the current acquisition of Bellaire Homes by Grand Oak Builders”, said Benline. “We felt like this acquisition was completely aligned with our strategic thought process and managerial philosophy. As important, we are excited that the acquisition will continue to provide the capital to support our continued expansion in the San Antonio and surrounding markets. Most of all we welcome the opportunities this acquisition will create for our entire team including our valued employees, our developer partners, our vendors/suppliers, and our other trade partners to be part of this fantastic transition.”

Bellaire's eight actively-selling neighborhoods feature homes prices from the low $300,000s to the mid-$600s, reflecting strength in an "affordable" position in the San Antonio-New Braunfels, TX, market. What the Bellaire Homes addition reflects about Grand Oak Builders' game plan is that Erickson's choosing his partners not based on any narrowed operational pattern, but more based on his take on the specific strategic and operating character of his targets' leadership and teams. What's more, we understand from Erickson that even as James Japhet moves into an advisory role, his ongoing activities in the land acquisition and development area in a market he knows about as well as anybody adds to the sustainable upside to the Grand Oak-Bellaire deal.

What the deal means in mid-2022

It's no secret now that aggressive moves on the part of the Federal Reserve to push borrowing costs upward and slow down economic demand among consumers has summarily kicked new-home development and construction into a post-boom limbo, if not an out-and-out collapse.

The jury's still out on the extent of damage to new home demand dynamics. Still, homebuilders and their partners reluctantly have needed to shift gears to defensive business and financial tactics even as they reluctantly bid goodbye to a particular alignment of stars that caused many of their businesses to soar like never before.

Despite its challenges – a global supply chain meltdown and ongoing labor capacity constraints to mention just two – the pandemic-era stretch likely will go down as a one for the history books in terms of sheer profitability and unflinching demand for new homes.

Moving on from that period, builders – large, medium, small, public, private, offshore-owned, etc. – will make adjustments as decisively as their local market operations call for, including some undesirable-but-necessary damage control moves. One chief executive of a large privately-owned homebuilder whose operating footprint include some of the most-active new-home markets describes peer executives as going through stages of mourning for a period now past.

It strikes me that builders and developers are now in a grief process. Most [now are] in denial. Anger will start with layoffs and bank loan denials. A few are locked up in depression. Even fewer are in [an] acceptance [stage]. Acceptance, at this point could include hiring freezes, walking away from some earnest money, dramatically reducing starts."

Why This Small Single-Market M&A Deal Matters Now

What this all adds up to for the M&A context is a sharpened focus, but not a drop in interest, wherewithal, and opportunity.

More precisely specific needs, wants, and preferences, and desires will set the context for both sellers and buyers in a rapidly evolving and uncertain housing market. A privately financed homebuilder – all things being equal – will get to play on offense in the deal making only if the operation stands for a relatively assured strong local scale and market share opportunity for an acquirer, or because of a set of local economic benchmarks – i.e. household and job formations, corporate expansion, etc. – that differentiate the market from national trends; or lastly because of a secret-sauce skill-set on either the operations or local land front that suggests ongoing upside.

Reasons sellers may play on defense in the M&A as the complexion of the market gets rougher may include personally guaranteed loan exposure due to a slowdown in starts and sales, or a health issue, or some other timing urgency matter that triggers a need for an exit.

Buyers – of which there continue to be no shortage of strategic and financial acquisition players – are also playing the offense-vs.-defense mode differently now as well. Obviously, long-term strong growth opportunity – past whatever duration and depth the current slowdown winds up being – is the No. 1 motivator for players whose capital structures and strategic plans allow for a smoothed view of a 2020s decade that almost certainly will wind up as a historically robust period for new residential real estate and construction.

Further, since supply chains and labor capacity constraint continue to hamper on-the-ground predictability and manageability, another reason acquirers remain in an offense posture can be a deeper, more anchored local scale of capability, clout, etc., so that start-to-completion schedules and cost estimates can run closer to plan. In some cases, an acquisition of a rooted local or regional player can deliver that advantage to an acquirer, and in that case could command a premium.

On the defense side, potential acquirers may now need to bolster unit sales volume, revenue, and/or profitability that makes certain specific acquisitions appropriate – particularly as guidance benchmarks and misses start to impact ongoing investment appeal in the coming progression, particularly from Q4 2022 into the first and second calendar quarters of 2023.

Whether it's incremental unit sales, or the chance to bring on, integrate, and accelerate a highly profitable acquisition, bidders will be trolling for those kinds of quick-strike purchases as their own portfolios reveal strengths and/or weaknesses in the coming months.

Portfolio management strategies – ongoing for all organizations – can catalyze trades and trade-offs as acquiring organizations react and respond to conditions ahead.

The Grand Oak Builders deal is nothing if not a reminder of how deep the acquirer pool is right now. It includes 18 or so public homebuilding companies, multi-regional private homebuilders, adjacent market privates, roll-up buyers like Erickson's Grand Oak, privately held national companies like Clayton Homes, foreign-based companies, primarily hailing from Canada, Japan, China, etc., and now a raft of organizations whose capital investment troves include some of the biggest names on Wall Street, plowing into single-family built-to-rent development and construction.

While the focus may be sharper – on financial, geographic, operational, cultural, and customer segmentation fit – the essentials of deal making apply.

• trust
• timing
• ability to close

The stakes in getting a combination's i's dotted and t's crossed are elevated when the markets' moving parts move at an accelerated and unpredictable pace and trajectory. There's too much to lose for too many stakeholders when a deal fails to make it across the finish line.

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