Although 2012 won’t have the upward trajectory we all have been waiting for, it is a year of prepping for 2013 in a bold, focused way. When the market does inevitably turn, companies that have been willing to rethink and retool their businesses will be the one ones who will lead a new industry forward.
If you mentioned the outlook for homebuilding in 2012 back in 2008, few would have predicted another year of “the Long Bottom.” All of the forecasts at the time of the crash assumed that things would be better in two years. Yet, now 2012 is upon us and not much has changed. In fact, the only consistent sustained trend seems to be macro-level turbulence. The old “laws of the cycle” have disappeared and we are stuck in a world where we have no reliable model of experience to help us navigate—the real estate reality version of “Lost.” Not withstanding the challenging economic news, savvy industry leaders see this as the year to position for opportunities that lie ahead.
We now have players whose size, scale and sophistication transcends the genre that we grew up with. In particular, the major REITs like Equity Residential, AvalonBay, Camden, UDR, and others, are able to invest in and deploy a level of corporate-wide initiatives, integrated approaches, technologies and strategies that could not be accomplished previously. They have raised the bar and transformed the entire industry which everyone must now compete in. This is seen in the development business, both for the REIT developers as well as the merchant builders. Wood Partners, Mill Creek, Hanover, Lincoln, Greystar and other national developers now play at a higher level in terms of design and finances. By bringing more resources to the table, they can win building sites, RFPs, and gain financial partners.
It’s these kind of strategies that have helped define today’s successful home building companies. They are equipped to compete in new and different ways shaping the activity that will take place in 2012. Bold action and departure from the norm have characterized the successful survivors and these companies will continue the process through 2012 to take advantage of opportunities in 2013. Take Orleans Homes, for example. George Casey became CEO of Orleans Homes as the company emerged from bankruptcy with new hedge fund owners. George updated me with, “We are a 93-year-old start up with cash flow. I look at the company as 93 years old and one year young.” George views 2012 as “the second chance; a time to become the prototype 21st century builder and neighborhood creator… a fabulous opportunity to really do something different!”
Orleans retooled the organization, brought in purchasing people and land people. They pulled significant cost out of building their product and that translated into huge cost savings. Importantly, they reduced cycle time by half, and will halve that again. And following a trend seen across the US, they are focused on underwriting appropriately and making small land plays first. In terms of product, they are looking at new innovations, such as “pet rooms”, multigenerational living solutions, and abandoning the cookie cutter house they have built for decades.
These are they kinds of things that builders need to do in order to succeed in this difficult market, because no one predicts a recovery for homebuilding any time soon. Steve Friedman, Ernst & Young’s National Director of Homebuilding Services, agreed: “The only good thing is that 2012 can be no worse than 2011.” “Confidence can’t get any worse. Settlements (closings) cannot get worse. We are still in the abyss looking up. It will get better, and when it does get better it will be phenomenally better.”
Friedman sees ground up, below the radar recovery. “It’s not in the press. Look at Phoenix and Vegas. It takes time before the anecdotal data becomes empirical.”
Friedman and Casey agreed that 2012 will continue to exhibit significant pent up demand. “Core demand is only 300,000 new sales per year not 600,000 [the norm before 2008],” Casey added. “There is pent up demand from Gen X’ers and Gen Y’ers who are still living at home. There are still job transfers and family changes...you can’t put a pause button on kids growing up and future aspirations. At some point, with confidence restored, this will all de-bundle the extra 300,000 households that are now going to rentals and parents’ basements.”
2012 will also buck the trend of companies consolidating. In fact, the surviving (and potentially thriving) builders will continue to revitalize and gear up to compete in the following ways:
Be even more market niche focused (the Trader Joe's of builders with customers “who get you and you get them.”) Continue utilizing research that’s outside-in versus the traditional inside-out thinking.
Strive for operational excellence and fine tune organizational efficiency. It’s the year to think smart, maximize technological resources and carefully measure productivity. Decrease cycle times, get to zero defects, and tweak a top of the line sales team.
Be great stewards of capital. With cheap debt gone, recognize that equity capital is fungible and focus on creating better Return on Capital. When it comes to capital, homebuilders are competing with the bond markets on a global level—something they’ve never had to do before, but will need to in the future.
Companies that have been willing to rethink and retool their businesses will be the ones who will lead a new industry forward.











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