2016 predictions for home builders

"We could barely get framers to stay on our sites in Texas in May," the ceo of a multi-regional top 20-BUILDER 100-ranked private home building company told me recently. "These, days, they're taking us to lunch to try to get our business."

The learning here? Labor capacity dislocations, disruptions, mismatches, and asynchrony have not gone away, nor are they likely to recede as a time, money, and management energy suck in 2016, or 2017, or 2018. Especially, when you factor in almost inevitable climatic interference with modeled and projected timelines. Remove both workdays and workers from the equation and the cost and schedule implications change exponentially.

That's by way of saying no set of "predictions" for residential construction in 2016 would not at least touch off on the "labor" issue.

What we would predict however, is that just as that quote above suggests new insight as to the flow and timing of the challenge--concrete slab and framer shortages in the Spring, followed by the rough-finish trade shortages in mid-Summer, followed by the interior final finishing subcontractor crews in the late Summer and Fall--will allow for smarter planning and accommodation, and possibly a smoothing of the emergencies around this issue.

What we'd actually predict for 2016 is a decisive beginning of new disciplines, expertise, and practice that gets more to the heart of the labor capacity constraint issue. What that all comes down to is what price needs to be fairly paid for the accomplishment of a job.

One only need to revisit Barry B. LePatner's "Broken Buildings, Busted Budgets," and about 50 other authoritative treatises on home building over the past half century, not to mention experiencing how things work on real live job sites, to know that this has been a Holy Grail issue for decades.

The issue of "knowledge asymmetry," which removes free enterprise market dynamics as a competitive factor in construction by essentially ceding near-monopolistic pricing, timing, and quality control to bid-winner general contractors, subcontractors, etc., has worked to trap the construction world in inefficiency, failures, and self-destructive muscle memory.

Our key prediction for 2016 as regards the essential operation and business modeling for home building companies is that a combination of necessity, technology, and opportunity will create a flashpoint around brand new deal-making between "owners" and "construction labor forces." This notion is far from new. What may be different for 2016 is that need will spur greater willingness to work differently.

So, "shortages" and labor may gain greater clarity around sustainable price vs. value in scopes of work, as opposed to widely prevailing "mutable costs" that undermine partnership, true competition, and free market dynamics that could make residential construction a much healthier business community.

Here are a few other "predictions" we'd suggest for 2016, not because that 12-month period is so significant in and of itself, but because knowledge, money, commitment, necessity, and resources suggest that change is going to happen. Some of that change won't be welcome among organizations not known for anticipating and adapting to it.

First, let's look at the mergers and acquisition landscape. In sweeping terms, we believe the post-2000 quarter century will finally bring about vertically-integrated, consolidated, scaled organizations in the residential construction space. For the next 12 months, however, we see a more conservative mode with respect to the use of capital for asset acquisition, with a greater focus on monetization and inventory turns over the next 24 months. On the whole, we'd expect a quieter m&a deal flow, with two exceptions.

One, would be succession-planning as a motivation to sell. We've talked for some time about the relative age demographic factor in private home building company ownership, and know that a significant number of private players are patriarch-centric local or regional players who are seriously questioning their intestinal fortitude when it comes to weathering another cyclical downturn, however soon that comes. So, we will see deals resulting from sellers motivated by that specter, just as some of the big land tract transactions may be occur as "off-market" deals driven by a similar motivation or particular seller-buyer relationship.

The other big m&a motivator in 2016 will be opportunistic incremental volume, where big publics will spring as they see the new geography of jobs and economics play out in markets like Atlanta, Memphis, Florida, Huntsville, Ala., and some feisty Texas markets.

All told, we'd be surprised if there are 20 closed m&a deals in 2016, a big check up in the activity we'd seen in 2014 and the current year.

Next up, let's look again at a prediction in business models. Typically, and for the past few years, we might see entry-level (pricing), high-volume, production builders figuring out how to move up-market into the move-up and second-time move-up tiers to try to grab some of the early-mover, discretionary buyers who got the recovery going a couple of years ago. A handful of big builders modeled "active adult" strategies for the first time in years to avail of an opportunity expected to continue to build over the next five to 10 years.

Still, one of the more interesting notions we're seeing play out, albeit anecdotally, is an inverse of the starter home builder moving upmarket. Our 2016 prediction is that we're going to see smaller-volume custom home builders emerge as powerful, scaled lower-price, higher quality builders, which synchs with our sense that younger adult buyers' demands are not only for relative affordability, but "personalization" and quality at a level that not many typical big builders find to be their comfort zone. Opportunity will come to companies who have processes that can scale one-offs, accommodations, variations, and flexibility. Custom builders have that in their DNA, so it will be no surprise to see the volume and pace of some of those organizations looking mighty surprising.

Another operational prediction for 2016 will center around "vignettes." Just as the car industry and the computer industry sources "systems" that entail multiple manufacturers teaming up to produce entire, integrated complex hardware and interface solutions, we feel advances in production, processing, and sourcing will lead to home systems designed and manufactured and ready for real-time shipping, installation, and service to the sites.

Not a new notion, understandably. But as mentioned above, necessity, common sense, efficiency, and ultimately profitability, will lead leaders to a new trough of competitive advantage and opportunity. In 2016, we'll see kitchens, home comfort (HVAC etc.), and other collaborative vignette-systems take hold as a library of design and function options for home builders.

Two more areas where we see inflection points in 2016 for home building operations, whether it's small firms or large. One is the use of data in understanding customers. Technology-enabled customer insight--including capturing ongoing intelligence from your past and current customer knowledge base of people living in your homes and communities--is one of the most powerful areas where money is being left on the table, but necessity is rapidly changing that.

Lastly, culture. The prediction for 2016 is that culture in firms, large and small, will need to be less about talk, and more about action, less about a fixed state of organizational well-being, more about a dynamic intention to change, to adapt, to preserve ongoing access to those three most critical resources: land, capital, and customers.

BUILDER wishes you all the best in your planning for 2016, and your execution in those month ahead. The good news is, you don't have to get it all right right away. But beginning to change, beginning to want to change, is not optional.