Originally posted by builderonline.com | Chris Wood
Demand is up, costs are flattening, and pricing power is great. Can production and supply catch up?
It was as good a house as any to test out the market after the pandemic hit. Custom-built with insane views of Seattle and an easy drive into downtown Bellevue, but just far enough out to keep the urbanity at arm’s length. In every other way the house was like others JayMarc Homes was selling before 2020 happened: high end, high quality, and high ticket, with a location that hyped being both “in it” and “away from it all” at the same time. So in July, with the housing market rebounding out of a pandemic-induced pause, JayMarc listed the property with fingers crossed. The house sold that day for $4.8 million.
JayMarc CEO Marc Rousso credits lessons learned in the 2007 subprime mortgage crisis to his company’s navigation through the COVID-19 pandemic: Stay nimble, remain committed to operational excellence, and keep a lot of cash on hand. “We want to stay in a range of 20 to 30 homes a year so when cycles ebb and flow, we are never too exposed,” Rousso says. “We’ve found that if we stay at our pace, we avoid being positioned to lose everything.”
Pivoting to a virtual marketing campaign in the spring that offered custom home classes and seminars via Zoom didn’t hurt, either. “We ended up getting 20 or 30 people a week, and now we have just as many qualified leads who want to build a custom home with us,” Rousso notes. “It was the best interest in the worst of times, and in July the floodgates opened. We sold nine houses in 90 days to hit our goals for the year and gained 20 new clients in the process.”
Such was the summer of dreams for home builders across the country. Fitful dreams, to be sure, with losses and sacrifices not discounted, but with a victorious reemergence that has the industry poised for successes not seen since Ronald Reagan first took office. In March and April, builder confidence as measured by the NAHB/Wells Fargo Housing Market Index had hit an all-time low of 30. By November, confidence had rebounded to 90, a data series high for the index that goes back to the mid-1980s.
“It was a great year, and 2021 looks even better,” says NAHB chief economist Robert Dietz. “We expect the gains to continue based on the pace of new single-family sales, which continue to outrun the pace of single-family home starts. We could even benefit from a slowing in sales just to allow starts to increase and provide some equilibrium to the marketplace.”
With demand up, interest rates near rock bottom, and pricing power robust, the only things standing in the way of builders this year (absent more of the crazy-weird that colored 2020) are costs associated with the big Ls of lumber, land, and labor. But even there the pandemic may have pulled favor, enabling mills to recalibrate pricing with supply and adding tens of millions to the skilled and unskilled labor pools. Perhaps the big question for the year ahead is simply how fast can we build to meet near insatiable demand for single-family housing?
JayMarc Homes provides functional yet elegant designs in the Greater Seattle area, like this custom modern home on Mercer Island.
Single-Family is the New Multifamily
Even renters are headed for the suburbs, fueling investor interest in build-to-rent (BTR) communities as millennials age into household creation and the public at large takes advantage of shelter-in-place teleworking to ebb away from urban employment centers. In December, Mesa, Arizona–based Christopher Todd Communities set a BTR record with the $83 million sale of its 313-home Christopher Todd Communities at Stadium, the final component of a multi-community transaction that included 943 homes across five Christopher Todd Communities in the Greater Phoenix metro area.
“In those dedicated rental communities where we are building, there is a flee from garden-style apartment buildings where folks are no longer necessarily looking for the apartment experience or the density,” says Erik Heuser, executive vice president and chief corporate operations officer for Scottsdale, Arizona–based Taylor Morrison, BUILDER’s 2020 Builder of the Year and the exclusive builder of record for Christopher Todd Communities. “There, too, we want to build quickly and sell quickly. We think speed is an asset in the BTR market as long as the demand side from both consumers and investors remains very strong.”
Even deep within the apartment sector, the push is on for building assets that embrace a single-family neighborhood aesthetic and provide renters with an alternative to urban core properties that are comparatively higher in density and price per square foot.
“The pandemic has accelerated what was a gradual return to the suburbs as millennials married and started families,” says Richard Lara, president and CEO of RAAM Construction, a Pasadena, California–based builder specializing in suburban multifamily construction, which completed 28 units in 2020 and is forecasting increased growth to 121 units in 2021 and 214 units in 2022. “Demand is strong and we expect to see huge upswings across our suburban markets in the next few years, particularly for more affordable communities.”
Lara says the general pause in construction in spring 2020 allowed RAAM to amend its safety programs and train its team to keep workers safe and projects moving forward in the new normal. RAAM also used drones to obtain measurements, assist in quality control, and mark construction changes that affect project design. The firm also turned to GPS staff-tracking and project management apps to take photos of workers on-site as they sign in and out of construction jobs. “Technology has been invaluable to us in getting projects done on time and safely, and we continue to explore new tech to help us deliver for clients after the pandemic is over,” Lara says.
Back at Taylor Morrison, Heuser says the partnership with Christopher Todd Communities will likewise allow the builder and developer to explore the use of new technologies, designs, and finishes for new single-family homes destined for both the for-sale and for-rent markets.
“We intend to be a fast follower, and we feel good about the BTR platform as a test bed, particularly as it relates to health and wellness,” Heuser says. “From touchless faucets and appliances and smart thermostats to new surfaces, we’re looking forward to discovering what the customer values that we can execute on. It’s the tip of the iceberg leading all the way down to the zero-emissions home.”
Homes in Taylor Morrison’s Eave’s Bend, in the master plan of Artisan Lakes in Palmetto, Florida, include luxurious owner’s suites as well as flex space upgrades.
Distinguished by Design
Even as builders struggle to keep supply in pace with demand, how single-family homes should be designed and built is morphing to meet 21st century buyer expectations. Scottsdale–based Camelot Homes is a third-generation builder and one of the oldest family-owned companies in the state, but it departed from typical floor plan design to win the 2020 Gold Nugget award for best single-family detached home.
“I’m so tired of walking into every builder’s project and you can tell immediately where all the rooms are and what they are for,” says Camelot managing director Julie Hancock. “We all need to rethink what we can do in our price point to break the house apart and fuse form and function for a continual unfolding of the house as you walk through it. Buyers want experiential living and are responding to the experience of novelty after endlessly touring the same rectangular homes on the same rectangular lots.”
As city councils across Camelot markets have ironically shifted toward low-growth or zero-growth policies even as demand and supply remain off kilter, the builder is increasingly moving to unique infill spots for one-off builds or six- to 12-lot communities. “It can be exceptionally difficult to get new product rezoned, even if you are trying to apply under existing general plans,” Hancock says. “But the luxury of being a smaller company is adaptability to market opportunities that benefit new thinking in design and development.”
Even in established and traditional Midwest markets, home buyer expectations of both diversity in design and an accelerated, tech-enabled sales process have builders investing in process efficiencies, floor plan tweaks, and software. “Our volume in Chicago will always be lower, and we’re just now seeing the first pricing upticks in housing values that we have seen in five years,” says Jeff Benach, principal of Lexington Homes, which has moved to a 100% virtual marketing platform driven by Google search optimization and geotargeting. “We’re also aware of the shift to hyper-contemporary elevations, too, and internally the shift to open floor plan concepts, even if neo-traditional remains predominant in Chicagoland.”
Hancock likewise says marketing technology has accelerated in response to the COVID-19 pandemic, with 3D modeling and virtual reality enabling home buyers to be nurtured much further down the purchasing funnel before even setting foot on property. With 50% of buyers originating from out of state, the company is implementing a range of tools for prospecting, qualifying, and home tours. “We have seen a real take off in VR as a way to help qualify out-of-state buyers, and I think we will see more of that,” Hancock says. “Tech is changing so rapidly, and it’s an exciting time to be in the business from that standpoint.”
Courtesy Hakes Brothers
Back to Normal
Taylor Morrison was fortunate enough to have completed an entirely new website in Q4 of 2019, providing the big builder with a readiness to match opportunities as buyers reentered the market in earnest during the second half of 2020. “We’re getting 180,000 points of contact by way of the web, which is far and away our top lead source,” Heuser says, adding that prospects have gravitated to virtual floor plans and the ability to arrange self-guided model home tours online. “We’ve converted those leads to 12,600 appointments and have determined the online features have contributed to 14% of sales, so we’re looking for ways to advance those technologies further.”
With a 4.8-year supply of land on hand, Taylor Morrison is also well primed to adjust to development pricing and raw dirt for the foreseeable future. Although the pandemic put a pause on $325 million in land acquisitions, deal making returned in June as sellers take advantage of corresponding demand, a challenge facing builders both big and small for 2021.
“Lot prices are going up, period,” agrees Kimball Hakes, president of Las Cruces, New Mexico–based Hakes Brothers, which has leveraged the general acceleration of home sales to expand into El Paso and San Antonio, and finished with 500 closings in 2020 with another 730 closings planned for 2021. “San Antonio, in particular, has been great because there is a great trade base and the market has had the capacity for us. Clearly we’re in a period that just comes down to supply and demand, and supply right now can’t keep up. Rates are low, credit is plentiful, and people cooped up from the pandemic are realizing they want a better home. Business is tremendous.”
Thus far, builder exuberance has also been tempered by conservative business models, which, while slower to fill the demand void, are likely to prevent the overleveraging and overextensions that can collapse all too quickly in the face of unplanned social and economic events. “We’re excited about the next step,” says JayMarc’s Rousso. “Nothing is recession proof, so we will resist swinging for the fences and instead stick to the model of don’t get too far over the skis, keep cash in the bank, and avoid exposure. Even in an amazing market, you can stall out and go broke.”
If anything, pricing increases from the demand squeeze coupled with stricter housing policies may result in home builders going even farther beyond the suburbs in search of new land, new markets, and new opportunities as supply ramps back up to historic averages.
“We’re calling it the suburban shift and not an urban exit, which we think is an exaggeration,” says NAHB’s Dietz. “But there is enough change in demand that new construction is forming a relatively greater share of inventory in lower density areas. We are back on the trend line to get back to full single-family production, and to get there we’re literally moving to the areas where the streets have no name.”