Leadership

'21 Misses Become '22 Home Runs: Must Be The Season Of The Switch

Here's No. 4 in TBD's countdown of 10 trends that will change homebuilding forever: a game-change in measures of success.

Leadership

'21 Misses Become '22 Home Runs: Must Be The Season Of The Switch

Here's No. 4 in TBD's countdown of 10 trends that will change homebuilding forever: a game-change in measures of success.

December 16th, 2021
'21 Misses Become '22 Home Runs: Must Be The Season Of The Switch
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Homebuilding's Q4 public company earnings runway show kicks off serial C-suite accounts for a year that may go down on record as the generational housing boom year that might have been, ... if only things had been different.

They're chalking up Q4 and full-year variances against prior forecasts, mostly, to "a chain reaction" among external forces.

  • The fragility – particularly in a time of an extended global health paroxysm – of supply chains and logistics, and their impact on building a home.
  • The chronic-meets-acute human capacity mismatch and its impact on expense inputs.
  • A pre-existing condition of land-use constraint made worse as the pandemic slowed local jurisdictions' entitlement and permitting processes, and hyperbolic growth in magnet markets caused some to want to pause.
  • Input cost inflation caused by a combination of the three forces above and the crush of demand set in motion as natural demographics got the rocket fuel of both pandemic reaction and Federal government stimulus and monetary policy.

Rather than allow analysts and investors to dwell extensively on misses versus their earlier outlooks, strategists will lean heavily into a constructive 2022 scenario – for ongoing structural demand, for operational excellence, for a smoothed-out building products and materials supply channel, and for new technologies' ongoing impacts on both the cost-of-sales, the input efficiencies, and the homebuyer value proposition.

What better evidential support than this morning's Census Bureau release of Permits, Starts, and Completions data for November 2021, which clocked in seasonally adjusted housing starts at 1.68 million, an almost 12% sequential increase? Year-on-year comparisons show strong gains from a strong 2020, and a burst of momentum after a few lackluster months past.

Of especial note, nonetheless, Calculated Risk's Bill McBride calls out a double-edged sword benchmark in today's Census release:

Currently there are 752 thousand single family units under construction (SA). This is the highest level since March 2007.
For single family, most of these homes are already sold (Census counts sales when contract is signed). The reason there are so many homes is probably due to construction delays. Since most of these are already sold, it is unlikely this is “overbuilding”, or that this will impact prices.

When you match this units-under-construction back to commentary from the field, the pain and struggle in the figure comes through clearly. Many of these units "pushed" from 2021 completion dates, with unit gross margins penciled in months ago at one level, and are now elongated into 2022, with higher costs, and ever-tightening margins.

What's more, the impact of stalled, delayed, or molasses-slow start-to-completion processes on booking a forward-future order pipeline, and new community openings, and lot take-down volumes, and projected land investments spools up as a big opportunity cost for each unit that doesn't finish and settle on time.

Transformation Trend No. 4 – Measures of success

Assertion: As land constraint, workforce capacity constraint, and materials supply chain constraints become an ongoing force-factor on development and construction, success measures for individuals will focus on impact, more than on output.

What that means for builders today

For people – managers, supervisors, rank-and-file team members on the ground at both the subdivision job site level and in the local and divisional offices – the goal posts of success measurement have moved on them even as those completions, deliveries, and closings have hit snags they have no influence on or ability to manage.

This is one of those moments – even as the plausibility in the next two or three years of a 100,000-home year for a single homebuilder like D.R. Horton or Lennar is growing clearer – where the brightest of futures may weigh heaviest on those stuck trying to move the present to where it should be.

That's a people and leadership issue.

The Q4 talk-track among chief executives being what it will be, we still see the 2021 wrap as a pivot year into a next eight years that will game-change forever homebuilding and development business cultures.  

The uptake here:

  • Just-in-time, low-to-no inventory supply channel systems are, and will remain, vulnerable to health, climate, political turmoil, and labor exposures.
  • The present and future of livelihoods calls into question basic assumptions on household formations, incomes, and ultimate economic impacts.
  • Constraints on the land basis are tightening and headed into dynamics current real estate future valuation models may or may not accurately reflect.

As SLC Advisors principal and The Builder's Daily Dream Team contributor Scott Cox notes here:

It’s time we rethink how our businesses are managed and organized. We’re at a juncture. Before us stretches a long-run future of tighter land markets due to growing entitlement constraints and long-term skilled worker shortages. Land shortages in our active housing markets will likely lead to higher-priced, and at the same time, more standardized products.
Fewer communities to choose from for the buyer will mean less direct competition. In turn that probably means less need for highly-customized options if the overall value proposition is fair. Maybe like car dealers, we will have some very simple option packages and color schemes, and more often than not you’ll buy what is available “on the lot” (no pun intended). We already see more builders adopt this lower-variability model.
But I believe our thinking may have to go well beyond this to all aspects of our business – accounting, purchasing, sales and marketing, land acquisition, etc. The question will be, how do we do more with fewer people, either through technology, or process change/simplification?

A single-product standard with little to no variability is not, as Scott notes, a new idea. The theme and its variations are already out there, and getting traction.

What we're not seeing yet, though, are use-cases for how homebuilding businesses – albeit, necessarily new-home volume-driven – begin to evolve new core measures of success. This way, people whose unit-volume output, on time and on budget serves as the one and only benchmark of accomplishment when it comes to earning recognition, bonuses, and an opportunity for career growth, get to grow even if production, new sales, and settlements tread water during times of supply stress.

Here are 10 ideas for achievement KPIs that can impact sustainable profit, growth, and value creation outcomes that managers and supervisors might memorialize as structural performance measures. They can kindle new surges of heroics, lift morale, refresh focus, and re-energize resolve in the face of what's likely to continue to be a challenging operational environment based on what is already known, not even counting for what's still lurking around the next corner of challenge.

  • Celebrate the workaround ... measure the number and impact of your operational teams' ability to bring plan B, C, and D to bear on the day's, the week's or the quarter's array of issues.
  • Rally around epic customer care ... spotlight ones who make a practice of commitment and action to go beyond in listing, care, and service on a personal basis as an example to the organization's team members
  • Drive data to action ... Call out case examples of a team member(s) who apply available data that digitally threads to where value is most meaningful in design, finishes, floorplans, etc.
  • Reward teamwork ... the multiplier effect of inspiration, collaboration, motivation, and empowerment translates into a gift-that-keeps-0n-giving in the workplace and job site.
  • Incentivize micro improvements ... little fixes can add up, especially when they're looked at holistically, and become a cultural force-factor in your business.
  • Support learning ... upskill constantly, and leverage examples of individuals who do so instinctively, as an opportunity to inspire and empower others to fuse that with their day-jobs, to make their careers and your firm more resilient.
  • Expand partnerships ... develop and ignite power in pushing to partner with resources up, down, and around the current value chain to seed success today and opportunity tomorrow.
  • Empower fun ... humor's role and purpose on a team is incalculable, and should serve as a measure of success and achievement on a daily basis.
  • Lead to diversity ... expanding capability by adding people to the merit- and skill-based melting pot elevates both a firm and the business community in value among customers, team members, and investors.
  • Honor generosity ... those who give impact at scale, and motivate people around them to do what they'd never imagined they could nor would.

These 10 success measures – in a year where outcomes in unit sales, completions, and closings miss the mark – will lay the groundwork for hockey-stick years not only in 2022, but in the years to follow, as homebuilders evolve into the companies they'll be when the game has changed fundamentally.

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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.

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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.

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