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The market share of the 10 largest public builders is expected to grow to as much as 30% during the next three to four years, but private smaller builders will have the advantage at the end of that period as Generation Y, a generation comparable in size to the baby boomers, enters the market in full force, according to industry analysts at NAHB's Fall Construction Forecast Conference in Washington, D.C. on Oct. 21.
Discussing the structure of the industry as it emerges from the downturn, Carl Reichardt, Jr., managing director and senior research analyst at Wells Fargo Securities, and David Goldberg, home building analyst at UBS Securities, said that if small builders can "stay lean until 2013," demographics will increase the "size of the demand pie" and the housing market will begin to fragment and provide them with more opportunities.
However, surviving until then will be difficult, and both Reichardt and Goldberg acknowledged that many small builders in business today may have a hard time hanging on during the next few critical years.
"Changing trends will favor smaller, more nimble builders," Goldberg said, citing one builder in the Northeast who has been able to weather the downturn by successfully changing his business from build-to-own to build-to-rent.
Other builders will survive by "shutting down and thinking about how to get back into the business" when the time is right, he said. "Being nimble is what it's all about. There will be opportunities, but builders will have to be very creative."
The big builders have survived, Reichardt said, because they were able to generate liquidity by monetizing land, selling in bulk, reducing their existing spec homes, laying off as much as 65% of their employees and shifting to smaller homes with fewer amenities aimed at first-time buyers using FHA financing.
While good for increasing market share during the near-term, Reichardt said these adjustments are unsustainable — primarily because big builders have established a large geographic footprint with many of their communities located in the most volatile housing markets in the country.
Surviving on smaller margins for the time being, big builders are coming to a crossroads, he said, where they will have to decide to grow, shrink or consolidate.
"Because fixed costs are so high, consolidation for the publics makes sense," Reichardt said, while noting that today's hyper-competition for customers and products among big builders is diluting their margins and returns.
Goldberg said that while size may help companies survive the next several years, it's an advantage that is "unlikely to be sustained." Instead, he said experienced smaller builders with roots in the community will be able to survive and prosper as the market changes and capital and land becomes available.
Consumer preferences will shift more to shorter commutes, urban environments and greener homes, he said, and smaller builders will be able to adapt more readily to these trends.
"This is a non-traditional manufacturing business. Each lot is different," Goldberg said. "Smaller companies usually adjust to these changes more effectively."
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