Building Industry Transformation

Needless to say, the current housing market meltdown is abnormal. Normal housing downturns are tied to national economic recessions. Our current housing market downturn is not only unique, it will be transformational.

It’s well known that California, especially Southern California often leads the country in trends. Not only did the hula hoop and Frisbee come from Southern California, but so did Construction Defect litigation. So too did the solution for Construction Defect Litigation – in the form of SB 800.

Southern California is leading the way in another transformation. This transformation is in many ways a result of globalization which is beginning to radically transform our industry. As globalization has gained momentum, it has transformed financial markets (home financing); it has transformed commodity pricing (for everything from copper to cement that increases home costs); it is about to transform labor costs as illegal immigrant labor will soon disappear.

Further, a green tide is washing over the land as Green Building is no longer a pipe dream of architects and urban planners, but is now washing over us, as California will next year adopt mandatory Green Building codes.

Builders and their companies will be transformed too! The Building Industry Association of San Diego is a microcosm of the transformational changes that will soon be taking place throughout the United States. The new President of the San Diego BIA epitomizes this transformation. Sherm Harmer is an urban builder, but was a single family home builder for most of his life. About ten years ago Sherm “went Urban”.

Our industry must look to Mr. Harmer as an example or paradigm and it must transform itself from being centered on the construction of 1 to 2 million single family homes per year to a builder of more attached housing; infill, condos, mid-rise, high-rise, town homes and the associated commercial and infrastructure that comes with residential.

This transformation will be painful for many companies. But now is the time to consider changing old patterns of business and thinking. The following are some things to consider in the face of this transformation.

Illegal Immigration: Illegal immigrants are leaving Arizona by the thousands as a new law has become effective January 1, 2008, which makes it illegal for employers to hire illegal’s without serious penalty. All Arizona employers must now use the Social Security Administrations e-verify system – and it works. All builders need to take heed and do what Arizona builders are now doing; make the adjustment now. It is difficult to gauge the effect this will have on the added cost of construction – but the cost of building a home will rise with the loss of cheap labor. NBN News , NY Times

Green Building: California, and the Nation, is going “Green” quickly. In April, 2009 California will adopt new mandatory Green Building Standards which will add approximately 2% to 7% to the cost of constructing a house. Start now to understand the new codes and incorporate them into your homes and communities. http://www.hcd.ca.gov/codes/shl/CGBC_ET_REV11-15-07.pdf , http://www.hcd.ca.gov/codes/shl/CGBC_ISOR_REV11-15-07.pdf

Buy Land or Entitled Projects Now: Its nearly impossible to tell when a market will hit its apex or nadir. But, it is fair to say that market conditions right now are as bad as they can get for homebuilders and sellers, but about as good as they get for finding deals. If you have dry powder, now is the time to use it.

Build Smaller: As land becomes scarcer and more difficult to develop it is smart to build smaller homes on smaller lots. The trend towards bigger homes is over – except maybe in China and India. In the future land costs will be rising along with the parcels shrinking – less land is a given especially along both the east and west coasts. Demand has changed too with the advent of more singles and less traditional families. With globalization the prices of all building materials will increase, significantly in some cases. Bottom line: the future of new home building is going to be about attached condos and less about single family homes.

Customer Service Staff: Customer Service and Community Liaison staff often end up on the chopping block in a housing downturn. With the advent of SB 800 and with new “higher” SIR’s you might want to re-consider this policy. You will need help servicing all of the many homes that you built in the past 10 years.

“Develop Your NEXT Exit Strategy Now": John Burns of John Burns Real Estate Consulting in his February 2008 e-newsletter recommends to “Develop a Top Ten List that will be the early indicators that you should restructure your balance sheet to be light on land and debt. Here are his favorites:

Affordability, as measured by his Housing Cycle Barometer, exceeds 6.0.
Total permits exceed the area’s historical average by more than 20%.
Three or more of your builder friends are buying corporate jets, buying lavish new corporate headquarters or hosting a corporate retreat in Hawaii or Cancun.
Two or more of your building friends buy land in a city you have never hear of.
High-rises begin sprouting up all over town.
"This time is different," according to someone who wants you to invest your money.
The person cutting your hair is buying homes as an investment
Market fundamentals are performing at or below average levels while appreciation accelerates.
The Wall Street Journal starts warning about home price bubble.
Market conditions are too good to be true.

To get on John Burns newsletter list you can e-mail John Burns at jbrec@realestateconsulting.com.

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Not only did the hula hoop and Frisbee come from Southern California, but so did Construction Defect litigation. So too did the solution for Construction Defect Litigation – in the form of SB 800. Southern California is leading the way in another transformation. This transformation is in many ways a result of globalization which is beginning to radically transform our industry. As globalization has gained momentum, it has transformed financial markets (home financing); it has transformed commodity pricing (for everything from copper to cement that increases home costs); it is about to transform labor costs as illegal immigrant labor will soon disappear. Further, a green tide is washing over the land as Green Building is no longer a pipe dream of architects and urban planners, but is now washing over us, as California will next year adopt mandatory Green Building codes. Builders and their companies will be transformed too! The Building Industry Association of San Diego is a microcosm of the transformational changes that will soon be taking place throughout the United States. The new President of the San Diego BIA epitomizes this transformation. Sherm Harmer is an urban builder, but was a single family home builder for most of his life. About ten years ago Sherm “went Urban”. Our industry must look to Mr. Harmer as an example or paradigm and it must transform itself from being centered on the construction of 1 to 2 million single family homes per year to a builder of more attached housing; infill, condos, mid-rise, high-rise, town homes and the associated commercial and infrastructure that comes with residential. This transformation will be painful for many companies. But now is the time to consider changing old patterns of business and thinking. The following are some things to consider in the face of this transformation. Illegal Immigration: Illegal immigrants are leaving Arizona by the thousands as a new law has become effective January 1, 2008, which makes it illegal for employers to hire illegal’s without serious penalty. All Arizona employers must now use the Social Security Administrations e-verify system – and it works. All builders need to take heed and do what Arizona builders are now doing; make the adjustment now. It is difficult to gauge the effect this will have on the added cost of construction – but the cost of building a home will rise with the loss of cheap labor. NBN News , NY Times Green Building: California, and the Nation, is going “Green” quickly. In April, 2009 California will adopt new mandatory Green Building Standards which will add approximately 2% to 7% to the cost of constructing a house. Start now to understand the new codes and incorporate them into your homes and communities. http://www.hcd.ca.gov/codes/shl/CGBC_ET_REV11-15-07.pdf , http://www.hcd.ca.gov/codes/shl/CGBC_ISOR_REV11-15-07.pdf Buy Land or Entitled Projects Now: Its nearly impossible to tell when a market will hit its apex or nadir. But, it is fair to say that market conditions right now are as bad as they can get for homebuilders and sellers, but about as good as they get for finding deals. If you have dry powder, now is the time to use it. Build Smaller: As land becomes scarcer and more difficult to develop it is smart to build smaller homes on smaller lots. The trend towards bigger homes is over – except maybe in China and India. In the future land costs will be rising along with the parcels shrinking – less land is a given especially along both the east and west coasts. Demand has changed too with the advent of more singles and less traditional families. With globalization the prices of all building materials will increase, significantly in some cases. Bottom line: the future of new home building is going to be about attached condos and less about single family homes. Customer Service Staff: Customer Service and Community Liaison staff often end up on the chopping block in a housing downturn. With the advent of SB 800 and with new “higher” SIR’s you might want to re-consider this policy. You will need help servicing all of the many homes that you built in the past 10 years. “Develop Your NEXT Exit Strategy Now": John Burns of John Burns Real Estate Consulting in his February 2008 e-newsletter recommends to “Develop a Top Ten List that will be the early indicators that you should restructure your balance sheet to be light on land and debt. Here are his favorites: Affordability, as measured by his Housing Cycle Barometer, exceeds 6.0. Total permits exceed the area’s historical average by more than 20%. Three or more of your builder friends are buying corporate jets, buying lavish new corporate headquarters or hosting a corporate retreat in Hawaii or Cancun. Two or more of your building friends buy land in a city you have never hear of. High-rises begin sprouting up all over town. "This time is different," according to someone who wants you to invest your money. The person cutting your hair is buying homes as an investment Market fundamentals are performing at or below average levels while appreciation accelerates. The Wall Street Journal starts warning about home price bubble. Market conditions are too good to be true. To get on John Burns newsletter list you can e-mail John Burns at jbrec@realestateconsulting.com. (Click Here to Return to Newsletter)