It seems like only yesterday that the chief complaint of most custom builders was having too much work. “How’s business where you are?” we would ask our industry contacts. Almost wherever they happened to be, they would answer, “We’re out straight. We’ve got more work than we know what to do with.” Everyone knew that condition could not last forever, but the speed with which the bubble collapsed has been truly stunning. Custom builders, in general, are hurting far less than production and spec builders, but few would dispute that we are in a new era. And the smartest among them are not waiting for opportunity to come knocking; they are actively seeking new opportunities in a market that continues to evolve.
Minneapolis custom builder and remodeler Nick Smaby remembers his wakeup call. “We had kind of a seminal moment,” he says. “We lost a job that I thought should have been ours.” A competing bidder “just beat the pants off us. It had our name written all over it, and he beat us by something like $30,000.” In response to a more competitive environment, Smaby has invested in making his company more efficient, consulting with experts in lean management and kaizen, the Japanese management philosophy of continuous improvement. Smaby is making sure his subs get the message too. “We’ve had two ‘summit meetings,’” he says. “Each time, we’ve invited 30 to 35 of our subcontractors, suppliers, architects, real estate agents, and economists.” The purpose was to help participants orient to the new marketplace and evangelize for efficiency. “The overriding message was, this is a great time to sharpen your pencils and lower prices. You can only do that with subcontractors who have drunk the Kool-Aid,” Smaby says, and many of his have. “Our numbers have gone way down. It’s working in that regard.”
Naples, Fla., custom builder Randy Kurtz works in a state whose residential construction economy has been devastated by the mortgage crisis. But Kurtz’s company is thriving. “We’ve been in business for 25 years,” he says, “and this will probably be one of our top four or five years.” Part of the credit for that goes to some business trouble that came, fortuitously, in advance of the crash. “A few years ago, when the market was really good, I had a bad year,” he says. A client divorce held up one large project; other unpredicted delays put more pressure on his company. “I started to see the need to diversify,” says Kurtz, who didn’t have to look far to find a second stream of business. “Two years ago I started another company to take the work that we turn down,” mainly projects that don’t require the hands-on attention that he provides his primary clients, whose houses range from $5 million to $20 million in construction cost.
A second subsidiary focuses on major condominium remodels, a niche that remains strong for Kurtz even as the market for new condos is on life support. “We’re able to charge a lot higher margin [than on new homes],” he says, “and for the most part they’re six-month jobs.” A third division, Kurtz Concierge, offers the company’s existing clients services that range from airport pickup to full-bore estate management. Despite Florida’s real estate bust, Kurtz’s high-end trade has been largely unaffected—“We have a two-year backlog right now,” he says—but having multiple sources of business provides an extra measure of comfort in an unsettled time.
On Florida’s opposite coast, in Miami, Tom Murphy covers enough niches—custom homes, condominiums, hotels, commercial and industrial buildings, municipal projects—that he has been able to adapt to a changing market by rebalancing work among his four separate companies. Murphy has built thousands of condominium units, but he started to pull back on that segment about five years ago, sensing that the market was overheating. Suddenly, Murphy says, everyone and his uncle seemed to be a condo developer. “That tells you only one thing,” he says. “The next thing that’s going to happen is, it’s going to slow down.” And sure enough, “The condominium market fell off a cliff.” Other segments of the market, though, have taken up the slack. “Hospitality is very strong,” Murphy says, “especially the high-end hotels. Assisted living is good. Schools are down from two or three years ago, but still relatively active.”
And Murphy’s custom home company, Coastal Homes, is partying like it’s 2005, only more so. The company’s stock in trade is “ultra high-end” homes that run from 15,000 to 100,000 square feet. It is at the upper end of that spectrum that Murphy is seeing the most activity. “We’re doing a lot of 30,000-square-foot houses these days,” he says. “And that’s air conditioned.” (Open-air living spaces can add another 20,000 square feet.) “In those, I’ve never seen so much activity as in the last few years. We have five homes under construction in that range, three of which are over $50 million. That market’s on fire. Homes over $10 million, $20 million are the hottest thing.”
Compared with Miami, Jake Goldberg’s Chicago market is resolutely un-flashy and prides itself on its insulation from the excesses of the coastal regions. “The Midwest is a little less volatile,” says Goldberg, a custom builder who works primarily on in-town projects. “We don’t see dramatic swings.” Still, the current downturn has had a palpable effect. “I have the luxury of having work,” Goldberg says, “[But] a lot of our subs are slow.” Like other builders, Goldberg had long expected a slowdown of some kind. “It’s kind of a correction in the market. Things were out of whack for so long. It doesn’t come as a surprise to me.” Nor is the cooling off entirely a bad thing. “We appreciate the way things are now, as opposed to five years ago, as far as commanding attention and attentiveness from our subs and suppliers,” Goldberg says. With the exception of fuel, prices are dropping across the board.
But the positive conditions his own company is enjoying have not stopped Goldberg from perceiving a broader shift in the market. “I think things are different,” he says. “Especially if you refer to what we’re doing to the planet.” Believing that green building is an opportunity whose time has come, Goldberg is building an impressively sustainable in-town residence designed by the Chicago architectural firm Farr Associates. Drawing on the current state of the art in both active and passive energy systems, the house will have photovoltaic and hot-water solar panels, a thermal mass wall with a plenum vented by solar-powered fans, and a geothermal heat pump system that required the drilling of three 250-foot wells. On the energy front, Goldberg says, “It has pretty much everything but wind.” Basement cisterns will store filtered greywater for irrigation. “If the engineering works out,” Goldberg says, “it will be only the second home in the country that will be zero net energy and LEED Platinum.”
“From a business standpoint it’s not necessarily a winner for us,” Goldberg notes, “but it’s an example project for lay people and other architects. We’ve learned a lot about LEED requirements. We’re just enjoying learning and being part of it. And from a marketing perspective, we want to align with that. In Chicago, no one has a track record with [green building], because it’s all new.” But it won’t stay new for long, and if Goldberg’s reading of the market proves true, the expertise he is gaining on the project will be increasingly in demand. Someone is going to get out in front on urban green building in Chicago, he says. “It might as well be us.”
Do you see opportunities in this market? Tell the editors of CUSTOM HOME what’s on your mind. Send your comments and questions to Bruce Snider at bsnider@hanleywood.com.
