Homebuilding's Top 10 Trends In '24: No. 6 Private Builders' Infill Edge

Face it, global capital investment, global supply chains, and global technology capability amount to lopsided business advantages for homebuilding and development's biggest competitors as time goes on.

Most of the leading residential real estate development and construction trends for 2024 lean in favor of those enterprises with troves of opportunistic dry powder, patient owner-stakeholders, well-situated and well-hedged land, customer-segment, and product positions, and super-engaged team-focused organizations.

Money, time, and talent all appear to be on big public nationals' side vs. smaller, more local, privately-capitalized operators. This matters a lot in times of turbulence, uncertainty, economic weakening, and increasing household financial duress.

Still, one Next Big Thing in homebuilding for 2024 and at least 24-to-36 months beyond next year plays especially well to private, locally-connected firms with deep stores of reputational, trusted-relationships capital and solid real estate skills.

Salvaging "hairy" and broken- local deals, many of them too complicated, isolated, and unscalable to hit larger competitors' radars, but just big enough to keep local players's engines running with both volume and margin.

We wrote earlier that market Share Wars would rank high among the Top 10 homebuilding business community trends for 2024. This force tilts severely in favor of big public and multi-regional private homebuilder operators, who can tap smoothed, lower-cost capital resources, and national talent pools.

The upshot of this trend is that smaller local and multi-market private operators make up the hunting and feeding grounds for larger organizations to snatch share gains. The big nationals accomplish this either by beating smaller guys on product pricing, boxing them out of land positions by paying more, or cornering the markets for favored-nation deals on products and materials distribution as well as predictable access to local building trade contractors.

For all of that, smaller, local, private builders have one thing their mega rivals don't. A highly-esteemed strategic business leader puts it this way:

Public builders have every advantage, but one thing: Local leadership. Private builders typically are local organizations that are led by the owner of the company who has spent his or her entire life in that market. Public builders in smaller markets are led by inexperienced people from out of town or locals who have none of their own money in the business… The local knowledge and commitment to customers will succeed every time, or at least un until ego or 2nd generation siblings change the equation."

In fact, private homebuilders that either started up or persevered during the Great Financial Crisis turned out to be among of the more agile, nimble, and fast-growing firms. And some of them discovered their zone picking up complex real estate deals that original developers either walked away from or lost due to financial distress.

The natural question that arises is this: Where's the distress? Most residential developers and builders pretty well de-risked their balance sheets and lightened their land assets before Covid struck and well before the Fed started turning the screws on borrowing costs and money supply.

So if there aren't a lot of broken residential deals what is this Next Big Thing opportunity for local homebuilders to acquire tracts in urban and suburban infill areas that might be too small and too full of quirks and complexities for national players' interest and competitive jockeying?

Driving that kind of opportunity, of course, is not residential real estate distress as it was during the mid-aughts when homebuilders and developers got caught off-guard with too much land and too much debt.

This time around, it's the commercial real estate space where the opportunistic resets are greatest:

About $1.2 trillion of US commercial real estate debt was “potentially troubled” because of the slump in prices, advisory firm Newmark Group Inc. said in August. Vacancy rates for office buildings in major US cities were at records and landlords were walking away from some properties now worth less than their debt, handing them to their lenders."– Bloomberg [gift link]

Now, a lot of the attention to the commercial and office real estate comeuppance has focused on opportunities and big challenges for urban downtown office building retrofits and adaptive reuse development.

Even The White House got behind efforts to repurpose downtown urban commercial properties, with tax incentives and access to additional resources, but there are plenty of reasons, as Fast Company staffer Nate Berg notes, "Most empty office buildings are not turning into housing."

In the suburban infill peripheries, however, where corporate office parks and warehouses, and low-slung commercial structures – and their sprawling parking areas – are already standing, or planned for vertical development, a whole new opportunistic land acquisition and development position suddenly favors local competitors who can get "hairier" deals through re-zoning, replanning, and marketing as A-plus-plus residential locations.

I would also note the related issue of the rising share of starts allocable to teardown construction," Robert Dietz, chief economist for the National Association of Home Builders, adds. "Teardowns (one-for-one replacement builds) account for 9% of single-family starts in 2022. It will likely be higher in the 2023 data and rising more in the years ahead. This is a small builder market, and one that is not reflected in the sales data (it is reflected in permits and starts)."

It may be a lifeline for some of those private players who would otherwise feel boxed out of a future thanks to a combination of higher-for-longer capital costs and fiercer-than-ever big national competitors grinding for market share growth.