Technology

Builders Lean Into Build For Rent Production To Move Inventory

Three issues right now for builders – as they look at BTR as a business pressure-relief valve that can keep feeding the cash-flow machine and absorb overheads – are customers, margins, and oh, one more, how long can this last?

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Mosaic

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Technology

Builders Lean Into Build For Rent Production To Move Inventory

Three issues right now for builders – as they look at BTR as a business pressure-relief valve that can keep feeding the cash-flow machine and absorb overheads – are customers, margins, and oh, one more, how long can this last?

Together with
October 6th, 2022
Builders Lean Into Build For Rent Production To Move Inventory
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It seems like only yesterday a homebuilding operator with some heft could turn a chunk of business over to vertical construction building-as-a-service – charging the same per unit as to a retail owner-occupier buyer – for single-family build-to-rent community developers.

Full price, without the bother of product and SKU variability, customer care, construction scheduling complexity, lot premiums, additional SG&A costs, and some intangibles on the headache front.

Pretty attractive opportunity, albeit not the business of delivering on the American Dream of homeownership homebuilders count as their bread-and-butter identity and stock-in-trade. It was fee-building on steroids, only with much better margins, and a sound way to de-risk going too long on land as uncertainty parked itself in the horizon.

That's now changed. Wall Street Journal staffer Will Parker reports this week.

Landlords get better prices for homes than owner-occupiers do. The discounts to estimated retail value are generally in the range of 10% to 15%, investors and brokers said.

Now, what was an attractive opportunity has devolved into an irresistible attraction, as homebuilding operators feel growing pressure to trade off at least some measures of profitability in exchange for a lighter burden of capital tied to new home inventory that may or may not be difficult to move in a timely way through the owner-occupier homebuyer channel.

Three issues right now for builders – as they look at BTR as a business pressure-relief valve that can keep feeding the cash-flow machine and absorb overheads – are customers, margins, and oh, one more, how long can this last?

The challenge with customers is a yin and yang phenomenon when a cycle pivots from rally to correction. During a rally, a homebuilding enterprise is producing and selling a). to an undersupplied market, and b). to more customers and would-be prospects than it can keep up with; its backlog of orders and its interest lists appear to be a dashboard of a firm future pipeline of customers.

During a correction, a market tends to inflect, from undersupplied to oversupplied. Now, a particular homebuilding enterprise's customer happens also to be a customer homebuilding enterprise B, C, D, and so on, also happen to be counting on as a customer. Meaning, there's a bunch of homebuilding firms all double-and-triple-and-quadruple-counting customers, who are playing the field for the best price and value offering.

When many or all the rival homebuilders in a market discover that their pipeline of future demand is actually at risk of being underpriced by another builder, mayhem can brew up fast.

The same dynamic goes with investor buyers, ones buying bulk for build-for-rent capability and communities in the market. Those buyers, decidedly different animals than they used to be before the end of the easy-money, dirt-cheap borrowing and investing costs days, have less equity to work with, and their cash-flow pro formas are under pressure.

This circles back to the second of the two big issues for homebuilding operators: Margins. Organizations had built them up to historically robust levels in the past 24 months, by both marketing to market in a dynamic demand surge and, some of them, by capturing some impressive cost of sales savings by pivoting to virtual shopping, selling, and click-to-order technologies. Even as direct costs spiralled through the roof, homebuyers clamored for every new product release the minute it would hit the inventory pipeline, and cheap mortgage rates permitted higher and higher input costs to get nested into manageable monthly payment programs.

Now those margins can and will undergo compression, deterioration, and ongoing pressure, particularly as builders pursue market-clearing efforts to move permitted and started homes under construction, and begin to reset a new-normal pace.

Discounts, land-deal exit expenses, added sales costs, and increased carrying costs for communities with slower absorption rates will all impact margins.

Better operators will naturally run-at lower commodities prices as they cascade through channels that have both improved supply chains and begun to price in weaker demand.

Too, slackening demand will even start to relieve some of the price pressure and costs of schedule delays do to skilled frontline trade crew availability.

Still, rotating those newly captured savings into the operation, and flowing them through the balance sheet will take time.

Which brings us to that third crucial issue. How long can one endure operating at a minimum viable profit margin that may test a variety of levels before establishing a floor?

The leadership challenge aligns with one Harvard Business Review contributor and Bain partner Michael Mankins, frames out this way:

The world has become increasingly unpredictable. It is no longer possible — nor appropriate — for leaders to equate strategy with “skating to where the puck is going to be.” Instead, they should think of strategy as a direction plus an initial set of steps, with flexibility built-in to enable the company to adapt as new information becomes available. Strategy-making, therefore, is about choosing the right direction and specifying the signposts to monitor in order to ascertain whether (and when) to adjust course. The bottom line: strategies must be dynamic and evergreen — just like the business environment on which they are intended to capitalize.

When it comes down to it, although BTR investors and developers may indeed serve as a pressure-relief valve for some homebuilders, it's only the builders that both protect their margins and drive value for the BTR customer that will be able to avail of the valve.

Overwhelmingly, the BTR sector is centered on strong relationships," says Ron Gonski, senior VP of Growth at Phoenix-based Mosaic. "Attracting top talent for these projects is key – and being understanding, consistent, easy to work with and quick to pay  goes a long way toward assembling a rock star network. A successful BTR community  demands 'the best of the best' in local trade partners who bring invaluable on-the-ground  experience, geographical expertise, strong trade relationships and, perhaps most importantly, an open mind. Having a people-first approach results in partners prioritizing new projects and opportunities with you.
Solid industry relationships become even more critical when you’re identifying the most important partner in your network: your general contractor. It can be overwhelming to build a national platform and establish a new GC in every market you enter. One solution is having a national residential general contractor platform. This tool gives builders the advantage of accessing a pre-screened contractor’s network across the country, eliminating months of searching and vetting."

The win-win – for a near-term turbulent time where owner-occupier buyers may be wavering in either monthly payment limbo or fear of overpaying in a declining market – will be to have BTR customers perceive an outsized value opportunity even as a homebuilder operator protects its margins.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

ABOUT

Residential construction made easy. As a tech-enabled general contractor for the residential development industry, Mosaic focuses on production-scale projects of all types, from single-family homes to horizontal apartments to other build-to-rent product types.

Website

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

ABOUT

Residential construction made easy. As a tech-enabled general contractor for the residential development industry, Mosaic focuses on production-scale projects of all types, from single-family homes to horizontal apartments to other build-to-rent product types.

Website

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