Navigating The Margins: How Private Builders Can Get An Edge

For all comers in housing right now, the next decade looks swell, the next 12 to 24 months, not so much.

A lot of industry experts who assured us 10 months or a year ago that homebuilding and sales activity were headed to pre-pandemic "normalization" now assure us that the market bottom may be deeper than they'd forecast, but will be faster and stronger on the rebound than is typical.

Park all that in Missouri – i.e. "show me" – for a moment. Duration and severity – really – are unknowns. What's really likely – from all of what we do know, and see, and have been through before – is that the turbulence ahead will amount to "just another Thursday" for some firms and a death knell for more than a few.

Getting through the two-year time span and into the far more exuberant long-term horizon is every homebuilder's No. 1 challenge. By some estimates, as much as a quarter to a third of new market-rate single- and multifamily production could vanish during the 12 months ahead, and along with it a back-of-the-envelope $225 billion worth of new construction activity.

What with the disparities in capital access and patience that separate 20 or so publicly traded homebuilding enterprises from thousands of privately-held, mostly bank-debt financed operators, few doubt a "blood in the streets" scenario among private builders in a wildly unpredictable interim.

Despite relatively good behavior and more disciplined financial planning for the "rainy day," the simple math of what they owe and what they're paying to develop and build, and what they're able to sell – and for how much – has become a calculus of mostly trying to buy time. Many still have too much of their own present and future money hanging in the balance, and too little of other people's money to tide them over until better times.

Who'll stumble and who'll show staying power? The answers to those questions will create the plotline for homebuilding's next forward-grinding narrative of concentration and consolidation among fewer, larger enterprises.

What surprisingly came to light in the nuclear winter of the last housing crash, however, is a still largely under-appreciated competitive leveler. More likely in hindsight than now, we'll see this phenomenon at work on the ground through the near-term deep freeze that has seized hold of the market these days.

It's that when it comes to homebuilding operators' capacity to endure – even thrive – in a deep downturn, it's more than financial capital that counts. It's a secret-sauce deep well of trust and relationships capital that it's frequently locally or regionally based private homebuilding operators can draw on as a reserve to help weather the harsh elements of a market that has hit pause.

Without doubt, the biggest, most urgent priority for homebuilders and their teams, is what can help them sell a home in this environment," says Thomas Carpitella, ceo of homebuilding staffing and data advisor FTS. "Now a player like Lennar can bring its huge investment in data and technology to bear as it uses a Microsoft-powered 'Digits' platform to zero in on strike prices that match their homes with specific customers, and private homebuilders don't necessarily have the resources to bring that kind of technological firepower into play.

When Lennar can leverage this innovative marketing and pricing platform to keep constantly feeding its volume machine as it plans to do all the way through 2023, it can use that volume to extract cost concessions on its lots, its materials and products, and its construction trades to drive its own expenses down and continue to price its homes to market," Carpitella says. "That actually can give smaller, more agile players an opportunity.

What privately held operators with reputations that have built up trust among banks, land-sellers, local construction trades, and materials suppliers – not to mention homebuying customers – can do is leverage a culture of capability and innovation to counter-punch in the margins.  

A hallmark of strong independent private homebuilders in the Great Recession – some of whom did so well (i.e. Dream Finders Homes) that they're now multi-regional publics themselves – is their ability to re-negotiate win-win partnerships with vendors – lots, materials, and labor – that both save them money and create visibility for a steady volume through the lean, mean months of a housing recession. For obvious reasons, these construction, developer, financial, materials, and products partners' interests favor having a healthy array of homebuilding operators competing in as many market arenas as possible as a way to mark their own goods and services to market among multiple bidders rather than a single dominant player whose clout is unchecked by rivals.

This work falls under the umbrella of controlling what y0u can control," FTS' Carpitella says. "Nevermind that you don't have a huge multi-million budget to pour into data transformation the likes of Lennar. A lot of the 'innovation' privately-held companies can commit to and invest in does not cost a lot and it's more about their capability and their business culture that will end up giving them an edge on pricing, selling, and matching to customers. The right people in the right jobs can help shave percentage points off your GS&A, and keeping those people engaged and purpose-filled and having fun is something leaders can use this quieter – less frenetic – operational period to double-down on right now."

The past three to four months have sharpened focus on how 2023 will work, either as an existential crisis or a launching pad for the really good decade ahead.

Supply chains, cycle times, pricing, and selling," says Carpitella. "These are the pain points that have riddled the past year, and it looks like it's these that will define 2023. That means you really focus on your capability – which is as much culture as it is technical skills – during this slowdown, so that you can supercharge growth when business picks up. We're going to see in the next few months which firms have prepared and are building this kind of resiliency into their business, and which haven't."