I recently spoke with a custom builder friend in Connecticut who, while his high-end market remains relatively active, is seeing a marked increase in competition. “Everyone who was a production builder is now a custom builder,” he said. “Everyone who was within 50 miles of this market is now in this market.” That conversation led to a CustomHomeOnline.com survey asking readers whether spec or production builders are poaching on their market—and whether they’re doing any poaching (the polite term is diversification) of their own. The results showed action in both directions. Of the 61 survey respondents, 27 reported seeing greater competition in their market from spec or production builders. Perhaps more indicative of stress in the custom home market, however, 42 said they were seeking work outside their accustomed niche, primarily in remodeling or commercial construction.
Tony Calvis says that his custom niche in Scottsdale, Ariz., is in no shape to attract spec or production builders looking for respite from the drought in their own markets. “No one’s coming here for that reason right now,” he says. And the only reason why they might come at all is to take advantage of opportunities that reflect hard times. “There are big builders coming in and buying up land,” Calvis says, “because land is pretty cheap.” He and partner Gary Wyant have a couple hundred houses under their belts as design/build custom builders, but this year is shaping up as a low point. “Our business is way down, that’s for sure.” Calvis says his company has always done remodels, “but only if the clients weren’t living in the house.” That translates as major renovations that his crews could approach much as they would a new house. With the Scottsdale new-home market in the doldrums, though, he has become less selective. “Right now we just want to keep our troops busy,” he says, “so if we can take on a remodel that may not be profitable, we’re going to do that. Let me try to sell something. That’s my problem right now.”
In an effort to goose the new-home market, the partners have held open houses, which have drawn “strong interest,” Calvis says. “But no one’s going to make a move until that magic moment when consumer confidence returns.” In years past, Calvis has called on a list of investors who could grease the skids for prospective move-up clients by buying their old houses, but that device has been no match for the apprehension gripping homeowners. “They’re just paralyzed,” he explains. “Before, there was an interest in moving up, but now there’s no interest in taking on any debt or extra expense.”
The situation on the coast of Rhode Island is less dire, reports custom builder David Baud. “The short term is OK, and the long term looks pretty good,” he says. Baud’s market is centered on wealthy vacation communities, where the market still has a pulse. “Property values have dropped some, but we’re still an affluent area. Most of the people we work for have good financial resources and good equity, or 100 percent equity,” he says. But work has become harder to find. “I’ve pretty much been out selling 25 hours to 30 hours a week,” Baud says. “I’ve got two jobs that I’m finishing up, and we normally have three to five, and they’re bigger than these.” Amid some of the worst economic news in memory, “We have to be sharp with our numbers. The margins are pretty tight.” He’s also keeping a tight rein on his subcontractors. “We’re doing our due diligence on our estimates and polishing up our presentations, making sure every dollar in that package is competitive and makes sense.”
Baud used to do twice as much business in new homes as in remodels; now the proportions have reversed. With values of existing homes in decline, one client who was planning to build a new house found that he could buy and remodel an older one for less money. “He didn’t want to build at a loss,” Baud says. As a result of the relatively active market here, he adds, “there are some Connecticut builders coming into our southern coast,” especially to the affluent Watch Hill area, which he describes as “a little pocket of the ultra-heavy hitters from Connecticut and New York.” And some small production builders are now getting into remodeling. “That production stuff is pretty much dead,” Baud reports. He’s also working to broaden his market, taking smaller remodels than he once would have, looking at light commercial projects, and calling on a wider circle of architects. “I’ve expanded my geographic area,” he says. “There are a lot of architects in this area who are not really far away that I’ve wanted to contact in the past.” Survival in a down market, Baud adds, “really comes down to having the right relationships and being in the right circles.”
For younger builders without a long track record or roster of contacts, the downturn has struck with greater force. “It’s been real hard on the young guys, who were pushing out on the edge,” says Omaha, Neb., builder Pat McNeil. He adds that many of his younger colleagues are leaving the construction business altogether in search of a steady paycheck. “I think people are looking for jobs,” he says. “There’s a lot of purging of guys who weren’t ready for this.”
McNeil, on the other hand, was ready —or as ready as one could be. “We’ve been diversified for 25 years,” says McNeil, who spreads his work among custom homes, remodeling projects, and commercial jobs. The goal is to use the out-of-phase business cycles of the different markets to even out the flow of work. “They typically don’t align, which is a godsend,” he says. Running true to form, the commercial sector, while down from its peak, has held up better than residential construction. On the residential side, McNeil’s work has shifted significantly from new homes to remodels. “The last two or three years, it’s been two or three [remodels] to one [new home]. It used to be 50–50.” Putting all that together, McNeil says, “We’re busy. We don’t have quite the same momentum that we had. We have a couple of big homes going, which we’re grateful for, but it’s not the backlog of the old days. We’re down, but we’re not out. And those who survive, I think, will be stronger for it.”
Those who survive may emerge with a renewed appreciation for remodeling. “When times were really flush, I wouldn’t have time to look at a remodel,” says custom builder Fran Colangelo. But remodeling is the only segment of Colangelo’s coastal North Carolina market that remains relatively active. “I’ve done four or five of them in the last couple of years,” he says—high-end projects near the beach that have kept his crews busy for extended periods. In an environment of falling home values, would-be move-up buyers—reluctant to sell their existing house at a loss—are opting to move up in place, as it were. “More people are remodeling than building new houses,” Colangelo adds. “It looks like a safer bet.”
Remodeling requires little adjustment from custom builders, many of whom have long done at least a portion of their work on existing houses. In contrast, Colangelo notes, “the commercial guys don’t have what it takes to do the hand-holding required to do that kind of job.” In 2007, he did three major remodels and one new house—and closed the year with a healthy profit. “It was because the margins are better on the remodels,” Colangelo explains. While he has not had to actively seek remodeling work, he says he “used to shun it and tell people I’m not interested. Now I tell my clients that I love remodels.”
What’s on your mind? The editors of CUSTOM HOME want to hear from you. Send your comments and questions to Bruce D. Snider at bsnider@hanleywood.com.
