Super Subs Are Back! They're Backed By Big Dollars, Top Talent
What does the re-emergence of super-subcontractors as capital-resourced, technologically evolved, and professionally managed gatekeepers of building capability mean in today's homebuilding landscape?
Google the four most dangerous words in finance, and you'll get 126 million hits or thereabouts. Of the most dangerous words, they'll mostly say:
This time is different."
So, let's look at the arc of opportunity in residential construction we see in the emergence – or rather, re-emergence – of the super-sub. A super-sub, many are already familiar, describe a stacking of several of the 25 or so construction trade teams – and access to their building materials and fabrication capacity – it takes to assemble a new house on a home lot.
A company like Las Vegas-based Steve Menzies' Focus Companies – whose multiple-scope portfolio of turnkey residential construction services includes concrete, rough framing, plumbing, electric, right through to fire sprinklers under one roof – is on an expansion fast-track both geographically and operationally.
As well, other more or less fully integrated construction trade and installation services platforms, combining old- and new-school construction expertise, evolved professional management, exponential technological and data capability, and, yes you guessed it, a boatload of capital looking for a way into the space, have taken on a world-domination profile in their strategic and business outlook.
Wait, did you say, super-subs?
The question, then, has to be "is this time different?"
Or rather, is it "deja vu all over again?"
The context here hinges on triangulating forces:
Super-subs are a thing now. Super-subs have been a thing in the past. And some of what super-subs stand for – integrating materials, fabrication, installation, and assembly capability – are core offerings of some of the pro dealer channel's bigtime players under the aegis of their installed services operations.
Here are three drivers of why super-subs have become a 2021 phenomenon with potential material – pun intended – impact on home construction in the years ahead. This plays especially in hot-housing activity markets, where geography – in the sense of windshield time – and volume converge.
- A builder's gotta build: homebuilders mostly don't do that – i.e. build. Rather they secure land, secure house designs, hire contractors, and market and sell completed vertical homes at a premium. Right now – think supply chain shock, labor constraint, and lot supply limits – builders need "capability" where they can get it, and super-subs, on paper, represent gate-keeper access to that capability.
- The labor cliff: People who "know-how" to build are an endangered species, and getting rarer, as a trickle of newcomers can't offset a stream of experienced, skilled skilled workers aging out. Super-subs – as it turns out – are magnets for reliable access to crews with track records of competence and quality. Alternatives for builders range from bleak to grim to existential.
- Follow the money: Wall Street and global investors deluge every nook and cranny of residential real estate and construction with yield-seeking capital, and have become a rocket-fuel of market, task, operational, technology, and plant investment capital.
Simply put, construction's circular narrative has come around to this.
Our subcontractors are making a boat load of money and they don’t want to lose control of that," says an homebuilding industry executive with several housing cycles of experience. "This happens every time we have an up cycle. Builders call the subcontractor trades 'partners,' but the deals are more often than not strictly transactional. So, at a time when the subs can command a lot of money for their products and services, they'll go for it. When the down cycle happens, the builders will crush them on prices."
Still, at the same time, the business thesis for fixing and resourcing the super-sub is compelling. Practically no one disagrees with the notion that if anyone were to start the home construction "building lifecycle" from scratch today, it would not look much as it does.
Strategists suggest that the biggest upside for super-subs – which show signs of evolving and coordinating a predesigned digital and real-world thread of resources and processes through time to deliver homes to homesites – would flow the technical skillsets and materials through a technological fabrication platform in a professionally-managed and well-capitalized facility infrastructure.
Super subs simplify the construction process, by being a one stop shopper for their builder customers," says Margaret Whelan, founder and ceo of Whelan Advisory LLC, a provider of investment banking and financial advisory services to owners and founders of land, home building and building products companies. "In doing so, they can increase the value and efficiency of the construction process, and reduce cost and time delays. Ultimately, this translates to better returns for the builders, and better value for the customers.
For now, a powerful tide of demand from volume-starved home builders and yield-crazy capital investment players are exerting heavy influence on both the opportunities and challenges of super-sub expansion.
We're hearing from our builder partners that on average they're holding order backlogs of about 33% – sold but not started – in the Las Vegas valley and beyond," says Menzies. "If we had an equity partner – which it looks promising – we'd go more fully into the St. George and Salt Lake markets in Utah, and we'd be making more inroads in California and Phoenix. I'm thinking about starting a lumber yard in 2022, and getting a truss plant up and running. There's lots of ways we'd be working our way into new markets with equity capital.
Our builder partners are pulling us into these opportunities."
And that's the rub, or at least part of it.
The question of whether this time's different forks into three correlated challenges around the burgeoning growth prospects for the super-subs.
- Fit to thrive, come what may – In the past, these multiple scoped subcontractors did well on the upswing in volumes, but coming off the peak into the downturns "they got eaten up by their overheads." They need more elastic, more bi-directional scalability, to work as sustainable, resilient pan-cycle businesses.
- Beyond the big builder – A related issue, for a future-proof business and operating model, super-subs need customer diversity, not just in new residential construction, but in commercial, i.e. multifamily, and possibly "after-market" opportunity, in which case they'd need to evolve customer support, customer care and service capabilities not currently in their wheelhouse.
- The endgame: people and tech – A design-thinking business model would elevate the architecture, engineering, construction, modular, prefabrication, componentization, industrialization, and transportation platform in such a way as to attract the highest level talent as well as the investment in both research and capital spending in rationalization of the building lifecycle. To some, that spells Katerra all over again.
Right now, a few super-subs are looking at blue-sky futures – and some big money players are banking on their coming to fruition.
If the builders can't get 'em started, they can't sell them," says Menzies. "We'll work our way into new markets, and see how we can serve them."
So, is this time different?