What do you do when an 800-pound gorilla decides to play in your sandbox? That is the question facing an increasing number of custom home builders, as high-end production builders like Pennsylvania-based Toll Brothers cast a long shadow on a market that was once the exclusive province of custom builders. An Oct. 16, 2005, New York Times Magazine cover story on Toll Brothers underscored the challenge presented by the national-scale builders, focusing on their voracious appetite for land. Toll alone, it reported, controls some 80,000 buildable lots at any one time. Not all of the custom builders we spoke with for this story report any effect on their own business. But others, from Pennsylvania to Texas, tell a different story. And while all of them continue to thrive in the presence of big builders, some even turning that presence to their advantage, their experiences add up to a warning. Even builders who feel immune to competition from production outfits may already be influenced indirectly by their activities. And if history is a guide, they are well advised to stay on their toes.
George Michael, who does business in Bucks County, Pa., near the heart of Toll Brothers country, says that the hometown giant has not affected what he does. “I don’t really think it takes that much away from our custom building market,” he says. “I think the custom product is and always will be light years ahead of the production product.” But Michael’s history in business suggests a more complicated picture. Back in the 1990s, he was active in land development as well as building. “I probably had more land than any other single builder at one point. If you wanted to build a custom home you had to talk to me, because I had all the land.” But that has all changed. It doesn’t pay to go out into the countryside looking for subdividable parcels any more, he says. “Bob Toll has already bought the ground.” Now Michael builds $1 million to $1.5 million townhouses closer to the city, on sites too small and specialized to show up on Toll’s radar. “I do a lot of infill stuff,” he says—both residential and commercial—which allows him to avoid competing with Toll either for land or for clients. On reflection, Michael allows that Toll has had an influence on his business. “Yeah, it has; I’m more successful. It’s a hell of a lot more fun. It’s pushed me into a market that I much prefer.”
Lewis Barber’s market in Princeton, N.J., is surrounded by the handiwork of production builders: “Thousands and thousands of new homes in the last four years,” he says. “It was all farmland 20 years ago. It’s wall to wall developments now. We don’t even work out there; it’s like Mars.” Fortunately for Barber, whose custom home projects range from $1 million to upwards of $5 million, plenty of high-end clients share that view. “For us it’s never been busier,” he says, “the number of jobs and the quality of jobs. They’re all trophy jobs.” Far from feeling competition from production builders close by, Barber says, he benefits from the readily available comparison. When clients arrive hoping to get a custom home for $175 per square foot, Barber simply points toward the suburbs. “They know what that is,” he says, and it is definitely not what they’re looking for. “They’re looking at a $4,000 or $5,000 entry door system, not a metal front door. It’s helpful in educating them.” But perhaps even more important than the quality of the houses he builds, Barber points out, is the quality of the town in which he builds them. “[Princeton] has always been a community, and that’s what draws people. It’s a real community.” In recent years developers have begun to plan “town centers” into their subdivisions, but Barber’s clients aren’t convinced. “They create fake towns,” he says. “But community in a town is so much more than buildings and streets, and that’s what draws people to Princeton.” By carpeting the countryside with subdivisions that can’t match the authenticity of an established hometown, he says, the big builders may actually be chasing clients to his door.
Down in Bonita Springs, Fla., however, Barry Frey is feeling a bit more heat. Frey builds semi-custom houses in planned developments with builder programs, so he keeps a keen eye on the market for build-able lots. “We’ve started to see some [luxury production builders] come into the market,” Frey says. “Toll Brothers is one. They’ll absorb some land, suck some inventory out of the market.” Last year a local developer who controlled a large amount of land found himself in a financial pinch and sold out to Toll. “That [land] probably would have been available to custom builders if they hadn’t done that.” Frey isn’t afraid of going up against the big builders in construction quality and customer experience—“On a head-to-head basis, while they can be a little bit cheaper, they don’t offer the flexibility that we do,” he says—but if they control all the land, it’s game, set, match. While Frey does not sound anxious (in addition to his custom business, he built 1,100 units of entry-level houses last year), he readily acknowledges that the business is changing. “There are not that many pieces of land in play around here,” he says. He has enough custom lots in inventory for two to three years, but after that, “We’ll have to get creative. There are scattered-site opportunities. We’re probably going to be making some moves in six months to a year on that front.”
According to Austin, Texas, custom builder Brian Bailey, Frey’s experience is one that more and more custom builders will face in the near future. “[Production builders] are looking at other markets and they’re seeing that there’s money to be made in the custom home market,” he says. In the Austin area, “All the big boys are doing ‘build on your lot,’” adding in-house architectural services and targeting the traditional clientele of small custom builders. And they are doing it, he says, “with great marketing materials, great balance sheets, great systems.”
How should small builders respond when the gorilla eyes their lunchbox? First, Bailey says, by sharpening their game. “They have to be at the cutting edge of building sites, building technology, building systems. And they’ve got to become better businessmen.” Next, he advises, “Go somewhere where they won’t want to be eating out of your backyard.” Bailey, like many custom builders, has moved up-market, a natural choice in an era when the high end has surged ever higher. That has put him out of the production builders’ range, which tops out around $1 million. He also uses Austin’s rugged, hilly landscape as a strategic asset. “The lots that we build on here in the Austin area, there’s a lot more planning that has to go into them, because of the topography and the permits. In order to beat the production builders at their game, you’ve got to know what they’re willing to do and what they’re not willing to do. They don’t have the expertise to build on lots like that.” Custom building has always been a niche business, Bailey says. “What custom builders have to do is find a niche where they’re protected.” For now, Bailey feels safe in the niche he has carved out. But with big, smart, powerful companies on the prowl, he knows better than to let down his guard. “I just keep looking over my shoulder, because I don’t think they’re far off.”
