The Housing Chronicles Blog: Professional Builder magazine unveils the Giant 400

Monday, May 12, 2008

Professional Builder magazine unveils the Giant 400

The two largest national magazines serving the building industry -- Builder and Professional Builder -- both compile rankings of the largest builders in the U.S. each year, although their methodologies differ. Whereas Builder magazine ranks builders by closings and focuses mostly on the top 100 (as well as the 'next 100'), Professional Builder ranks their listing by revenue and expands it to the "Giant 400." Both surveys are released in May.

In the first of several articles, Senior Editor Bill Lurz discusses the state of the market for these 400 builders and what they're seeing ahead on the horizon:

When we ask builders, analysts and housing industry consultants what they think about the future, they seem to have radically different views. For instance, Colorado-based consultant Chuck Shinn believes recovery will bring drastically different housing products and new kinds of building companies.

Shinn says the public builders should be land developers or builders, but not both. He offers NVR's land-light business model as one alternative, then says the big builders can't see the wave of the future in community development because they are blind to anything that doesn't fit the demands of their production machines.

"We already have land developers taking market share by developing mixed-use projects that put many services within walking distance of homes," Shinn says. "People don't want to drive to Starbucks," he charges. "They want to walk." He believes successful communities in the future will blend commercial and retail space with a 60/40 mix of small-lot detached homes and high-density multifamily, with average prices settling some 30 percent lower than in most of today's developments.

He also believes large private builders, backed by big equity investment funds, will soon be a powerful force and that new technology will drive mass customization into every sales office.

San Francisco-based Wachovia Securities stock analyst Carl Reicardt endorses the wisdom of the largest builders taking lessons from NVR as a way to avoid another decade of extreme volatility... "The big public builders know Wall Street cares more about sustainability of growth than a high percentage of change in that rate over time. Wall Street rewards predictability," Reichardt says.

"When you put land in the home building equation as part of the profit center, you throw predictability right out the window.

"It sounds — now — like the other public builders want to reshape their companies to be more like NVR," he says. "But the cynics will tell you it's bull." As soon as the market turns, they will get right back into development, Reichardt charges.

"They can't give up that land margin. These guys are like drunks on a bender. NVR is all about becoming more efficient constructors of housing and getting rid of the risk and volatility associated with land. But these other builders will never do it."

Reichardt, however, has a different vision from Shinn's about the future of housing products. "I don't for a moment think we'll see the end of distant suburban subdivisions," he scoffs. "Even if gas goes to $9 a liter. ... What I don't understand is the beige boxes. Why does the design aesthetic have to be so bad?

"You can see the direction the next generation wants to move," Reichardt says, "and it's modern."

The Giant 400:

Professional Builder calculates the Giant 400 rankings by using a two-step process. First, the top 400 production building firms are ranked according to housing units closed in the previous calendar year (or the company's most recent fiscal year). This year, the 400th company closed 82 homes in 2007 (down from 115 last year). But since dollars — not units — are what builders put in the bank, we do another sort, by revenues, to finalize the rankings.

The editors of PB believe this two-step process is a better way to identify the true giants of housing rather than a one-step sort based on either revenues or units. Revenue, after all, is the way the world measures the size of any business. But down at the bottom of the list, we think true production builders should make it into the rankings at the expense of high-end, semi-custom builders with high average sale prices but few units.

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