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Housing Consolidation Trend to Continue
 While consolidation in the housing industry has been steadily increasing during the past decade and is a trend that is likely to continue in the foreseeable future, experts at NAHB’s Construction Forecast Conference on May 5 said this phenomenon remains limited to a small fraction of the nation’s home building firms.
“Between 1993 and 2005, the nation’s largest home building companies engaged in approximately 150 acquisitions. By comparison, the total number of single-family builders in the country is about 100,000. We are seeing the biggest fish trying to swallow other big fish,” said NAHB economist Gopal Ahluwalia.
A research study to be published next month by NAHB reveals some interesting developments in this area. Between 1989 and 2004, the market share of the nation’s 10 largest builders increased from 8.8% to 20.9%. By comparison, the share for builders ranked 11th to 60th remained remarkably stable during this period, in the low single-digits.
The average number of single-family closings for the top 10 builders (D.R. Horton, Pulte Homes, Lennar Corp., Centex Corp., KB Homes, Beazer Homes USA, The Ryland Group, Hovnanian Enterprises, M.D.C. Holdings and NVR) grew from 16,422 in 2000 to 25,138 last year. D.R. Horton led the way with 44,000 closings in 2004.
 “Consolidation is alive and well. By the end of 2010, there will be at least five super builders developing 80,000 to 100,000 homes each,” said Michael Kahn, whose firm, Michael P. Kahn & Associates, focuses on helping home building companies access equity and debt through public offerings and mergers and acquisitions.
Consolidation is taking place primarily among publicly-traded building companies and there is also some activity among large, privately-held builders.
Ahluwalia listed a number of reasons why the nation’s largest home building companies continue to seek out opportunities to expand even further:
- Geographic diversification in order to insulate against regional declines in housing
- Product diversification/expansion (first-time, move-up, upscale, age restricted, second home and condo)
- Acquisition and control of land supply
- Obtaining management talent
- Achieving a local market position/reputation
- Reaping advantage of size through volume discounts, capital costs and marketing advantages
- Gaining recognition on Wall Street through a higher level of growth and revenue
Firms that are being acquired by the industry giants include some publicly traded builders, though most are privately-held entities, according to Ahluwalia. He also said in order to qualify as a potential takeover candidate, these companies must produce a minimum of 200-plus units; have a large inventory of land, preferably in options; hold an established position in a large market area with significant growth potential; and possess management talent to be retained after the acquisition.
Echoing this theme, Kahn said that what makes a firm attractive is its size. “The bigger the better,” he said, noting that the minimum requirement is $30 million in gross revenues. “The universe of buyers is about 100 deep. Big builders are not interested in markets where there are less than 3,500 permits because you cannot get up a good head of steam.”
Kahn noted that the latest acquisition trends are centering around mid-rise and high-rise builders and that it certainly helps to have access to a “great lot pipeline.”
“A good management team and deep bench are also essential,” he said. “In 90% of the cases, buyers want the management team to stay in place at least three to five years. What changes after a closing? Very little. Companies basically operate the same as before, except now they have a lot more money to operate with.”
Photos by Morris Semiatin
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